Insurance in Indonesia: Fortifying Futures for Indonesia’s Growth
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A. Legal Framework
The Financial Services Authority/Otoritas Jasa Keuangan (“OJK“) is an independent entity free of external interference 1 established under Law Number 21 of 2011 concerning the Financial Services Authority (“OJK Law”). Since December 31, 2012, the OJK has taken over the functions, duties and authorities of the Ministry of Finance and the Capital Market and Financial Institutions Supervisory Agency for regulating and supervising financial activities in the Capital Market, Insurance, Pension Funds, Financing Institutions, and Other Financial Institutions 2.
OJK is primarily responsible for the supervision and regulation in the insurance sector in Indonesia.
However, OJK may assign or delegate its authority to the Association of Insurance Enterprises/Asosiasi Usaha Perasuransian to supervise the insurance business industry in certain circumstances/aspects as follows: 3
- Development of ethical codes and guidelines for conduct (code of conduct).
- Formulation of risk profiles and mortality tables.
- The implementation and certification of agency appointments.
The insurance industry is primarily governed by:
- Law Number 40 of 2014 concerning Insurance as amended by Law Number 4 of 2023 on the Financial Sector Development and Reinforcement (P2SK) (“Insurance Law”);
- Government Regulation Number 14 of 2018 jo. Government Regulation Number 3 of 2020 concerning Foreign Ownership in Insurance Companies (“GR 3/2020”);
- Government Regulation Number 87 of 2019 concerning Joint Venture Insurance Companies;
- OJK Regulation (“POJK“) Number 23/POJK.05/2015 concerning Insurance Products and Insurance Product Marketing (“POJK 23/2015”);
- OJK Regulation (“POJK“) Number 23/POJK.05/2015 concerning Insurance Products and Insurance Product Marketing (“POJK 23/2015”);
- POJK Number 67/POJK.05/2016 concerning Licensing of Insurance Companies, Sharia Insurance Companies, Reinsurance Companies, and Sharia Reinsurance Companies;
- POJK Number 69/POJK.05/2016 concerning the Conduct of Business of Insurance Companies, Sharia Insurance Companies, Reinsurance Companies, and Sharia Reinsurance Companies (“POJK 69/2016”) (as lastly amended by Financial Services Authority Regulation Number 4/POJK.05/2021);
- POJK Number 73/POJK.05/2016 jo. Financial Services Authority Regulation Number 43/POJK.05/2019 concerning Good Corporate Governance for Insurance Companies;
- POJK Number 1/POJK.05/2018 concerning Financial Soundness for Joint Venture Insurance Companies;
- Circular Letter of the Financial Services Authority Number 10/SEOJK.05/2018 concerning Applications for Licensing, Approval, and Electronic Reporting for Insurance Companies, Sharia Insurance Companies, Reinsurance Companies, and Sharia Reinsurance Companies;
- Circular Letter of the Financial Services Authority Number 5/SEOJK.05/2022 concerning Investment-Linked Insurance Products (PAYDI).
The following are sanctions imposed by OJK on insurance companies that are found to violate the general provisions outlined under Insurance Law:4
- Written warning;
- Restriction of business activities, either partially or entirely;
- Prohibition from marketing insurance products or sharia insurance products for specific business lines;
- Revocation of business permits;
- Cancellation of registration statements of Insurance Brokers, Reinsurance Brokers, and Insurance Agents;
- Cancellation of registration statements of actuarial consultants, public accountants, appraisers, or other parties providing services to insurance companies;
- Revocation of approval for mediation institutions or associations;
- Administrative fines;
- Prohibition from becoming a major shareholder, controller, director, board member, or equivalent position in legal entities such as cooperatives or joint ventures, Sharia Supervisory Board, or executive positions under the board of directors in legal entities such as cooperatives or joint ventures in insurance companies.
In addition, OJK has also established several specific sanctions for insurance companies that violate provisions stipulated in several implementing regulations through various POJK. For instance, POJK 23/2015 prohibits adding clauses in insurance policies, which could lead to the perception that policyholders, insured parties, or participants are unable to pursue legal actions, resulting in the forced acceptance of claim rejection 5 and mis-selling practices by insurance company agents.6 Insurance companies proven to have violated the aforementioned provisions may incur administrative sanctions, such as: 7
- Written warning;
- Fines;
- Obligation for the board of directors or equivalent positions to undergo reassessment of their competence;
- Restriction of business activities; and/or
- Revocation of business license.
Another example of sanctions can be taken from financial health provisions set out under POJK Number 5 of 2023 concerning the Second Amendment of POJK Number 71/POJK.05/2016 concerning Financial Health of Insurance Companies and Reinsurance Companies (“POJK 5/2023”). In accordance with POJK 5/2023, insurance companies are obligated to, among other things, meet the financial health level requirements 8 and implement prudential principles in investment placement 9. For failure to do so, OJK may impose the following sanctions: 10
- Written warning; and/or
- Partial or full restriction of business activities.
B. Insurance Companies
The following types of insurance companies are regulated in Indonesian jurisdiction: 11
- Conventional Insurance
- General Insurance Companies, which provide compensation to policyholders or insured parties for losses, damages, incurred costs, loss of profits, or liabilities to third parties that may arise from uncertain events.12 These include (i) Health insurance and personal accident insurance, and (ii) Reinsurance for other general insurance company risks.
- Life Insurance Companies, which provide payments to policyholders, the insured, or other entitled parties in the event of death or survival, or other scheduled payments to policyholders, the insured, or other entitled parties, determined based on an agreement and fund management results, 13 such as annuities, health insurance, and personal accident insurance.
- Reinsurance Companies, which generally provide reinsurance services to insurers, guarantee providers, or other reinsurance companies in order to bear the risks they face. 14
- Sharia Insurance
This type of insurance operates exclusively based on Sharia principles, and typically fall into the following types :
- Sharia General Insurance Companies.
- Sharia Life Insurance Companies, including annuities based on Sharia principles, health insurance based on Sharia principles, and personal accident insurance based on Sharia principles.
- Sharia Reinsurance Companies.
- Insurance Broker
- Insurance brokerage firms are authorized to offer services in insurance or sharia insurance policy placement, to handle claims settlement, and to act on behalf of policyholders, the insured, or participants. 15
- Reinsurance brokerage firms are authorized to provide consultation and intermediation services in reinsurance or sharia reinsurance placement, to handle claims settlement, to act on behalf of insurance companies, sharia insurance companies, guarantee providers, sharia guarantee providers, reinsurance companies, or sharia reinsurance companies involved in reinsurance or sharia reinsurance placement. 16
- Insurance loss adjusters are authorized to provide claim assessment services and/or consultation regarding insurance subjects. 17
Foreign insurance subsidiaries are permitted to engage their business in Indonesia. According to Insurance Law, an insurance company can be owned by a foreign legal entity, given that the insurance company engages in a line of business similar to that of the holding company or similar to that of the holding company’s subsidiaries engaged in comparable insurance business. 18
GR 3/2020 provides additional clarification regarding the limitations on foreign legal entity ownership in insurance companies intending to engage in business activities in Indonesia, as detailed in Section B, Number 3 below.
C. The Insurance Contract
Typical insurance and reinsurance activities in Indonesia cover underwriting services or risk management, risk reassessment, marketing and distribution of insurance products, insurance consultancy services, and assessment of insurance or sharia-compliant insurance losses. 22
Additionally, the scope of insurance activities includes life and physical insurance, human health, legal liability, properties and services, as well as any other interests that may be lost, damaged, or reduced in value. 23
- Main obligations of the Insurer:
- To sign and deliver the policy to the insured; 24
- To refund the premium to the insured if the insurance is canceled or invalidated, provided that the insured has not borne the risk partially or entirely; 25
- Specifically for fire insurance, the insurer is obligated to disburse the necessary expenses for rebuilding as promised in the insurance policy. 26
- Main obligations of the Insured:
- To pay the premium to the insurer; 27
- To provide accurate information to the insurer regarding the insured object; 28
- To prevent or take measures to avoid events that may cause damage to the insured object. If the insurer can prove that the insured did not make efforts to prevent such detrimental events, the insurer can use that reason to not provide benefits or compensation or even to demand compensation from the insured. 29
In insurance policies, consumers obtain important protection that, at a minimum, includes: 30
- Coverage during the policy’s validity period;
- Explanation of the benefits promised by the insurance company;
- Procedures for premium or contribution payments;
- Timeframe or grace period for premium or contribution payments;
- The use of foreign currency exchange rates in the insurance policy if payments and benefits are related to the Indonesian Rupiah;
- The date considered as the moment when premium or contribution payments are received;
- The company’s policy regarding late premium or contribution payments;
- An incontestable period for long-term insurance products during which the insurance contract cannot be reviewed by the insurance company;
- Table of cash value for insurance products having cash values from life insurance companies;
- Calculation of insurance policy dividends or similar benefits for insurance products from life insurance companies that promise dividends;
- Termination clause for insurance coverage to be excercised by the company or policyholder, insured or participant, along with its terms and causes;
- Terms and procedures for filing claims, including relevant and necessary supporting evidence;
- Claims settlement and payment procedures;
- Dispute resolution clauses, including dispute settlement mechanisms in and outside the court and the selection of the dispute resolution venue;
- The reference language used in cases of disputes or differences of opinion in insurance policies is printed in 2 (two) or more languages.
For sharia insurance policies, several other coverages must also be included,as follows: 31
- The type of contract that will be used in the insurance agreement.
- The rights, obligations, and authorities of each party are based on the agreed-upon contract.
- The amount of contribution that will be allocated to the tabarru‘ fund, ujrah, and investment fund.
- The amount, timing, and method of profit-sharing for investments if the insurance product uses mudharabah or mudharabah musytarakah contracts.
- The allocation of underwriting surplus for the tabarru’ fund, participants’ fund, and/or the company’s fund.
- The provision of qardh (interest-free loan) by the company if the tabarru’ fund is insufficient to pay insurance benefits.
D. Claims
Insurance Law requires insurance companies to handle claims through a fast, simple, easily accessible, and fair process.32 The payment period for claims or benefits is determined in the insurance policy, which begins at the latest 30 (thirty) days from the agreement between the policyholder, insured, or participant and the insurance company. 33
OJK provides the following basic steps and procedures for filing an insurance claim: 34
- Incident causing financial loss
The event leading to financial loss aligns with the compensation or benefits stated in the insurance policy. - Reporting the claim to the insurance company
The claim can be made through the provided application or by contacting the official contact center of the insurance company via SMS, email, or phone. In practice, in Indonesia, customers would also report to the insurance agent who handles their insurance, to enable the agent to assist in the claim processing. - Insurers will request the required documentation
The required documentation includes written statements and other necessary documents, such as:- Insurance policy;
- Details of the loss;
- Photographs, and;
- Other supporting evidence.
- Complete documents will facilitate a smooth claim process.
- Insurers assess the claim submitted
After the claim is assessed and approved, the policyholder will receive compensation for the claim according to the agreed-upon value of the loss in the agreement or policy.
Under the Indonesian Civil Code/Kitab Undang-Undang Hukum Perdata (“KUHPer”), upon the demise of an individual, the heirs shall obtain ownership rights over the assets left by the deceased person. 35 Heirs can also file a lawsuit to acquire the inheritance from individuals who possess it. 36
Hence, in life insurance, the rightful heir of a deceased policyholder/insured party (the beneficiary) can claim insurance benefits, provided that the cause of death is covered under the policy. Indonesian Life Insurance Association/Asosiasi Asuransi Jiwa Indonesia (AAJI) provides practical guidelines on the life insurance claim procedures: 37
- The insurance company receives the claim no later than 90 days or 3 months following the demise of the policyholder.
- The claimant must complete the claim form provided by the insurance company and provide supporting documentation, which typically includes:
- The original copy of the insurance policy.
- The death claim form filled out by the beneficiary (a third party).
- The death certificate issued by a doctor.
- A legally authorized Certificate of Death from the relevant government authority.
- In cases of death caused by accidents, the Investigation Report/Berita Acara Pemeriksaan (BAP) from the police should be attached.
- If the insured passes away at home without medical attendance, a chronology of the events leading to the death, signed by the heirs, should be provided.
- A copy of the results of the medical examination previously undergone by the insured.
- Other necessary documents, as may be specified by the insurer.
- Insurers will verify the submitted documentation and decide on the claim.
Below are several reasons outlined in POJK 69/2016 that can lead to the rejection of an insurance claim by insurance companies:
- The risk is not covered within the insurance policy or reinsurance agreement; 38
- The insurance company has not received the premium payment within a maximum period of 1 (one) business day after the expiration of the timeframe stipulated in the policy. As a result, in this circumstance, the insurance company holds no responsibility for the settlement of claims or benefits arising. 39
According to the OJK, certain factors play an important role that insurance companies need to pay attention to in handling policy claims: 40
- Good Understanding of Insurance Policy: Through the help of insurance agents, insurance companies must ensure that policyholders fully understand what objects and events are covered in an insurance policy since only objects and events listed in an insurance policy can be insured.
- Active Policies Matter: Inactive insurance policies that are either expired or in a grace period owing to late premium payments could result in claim rejection.
- Waiting Period Awareness: Insurance companies should reject any claims that are submitted during the waiting period. Many policyholders tend to submit their claims prematurely.
- Complete Documentation: Insurance companies would reject any claims that are submitted without the presence of complete documentation.
- Trust Matters: Insurance companies must uphold honesty and transparency, starting from the offer and explanation to the handling process of insurance claims. Upholding trust is key in conducting insurance business activities.
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As a proud member of the Alliot Global Alliance, ADCO Law has released our first set of Insurance Comparative Guidelines. Our guidelines consist of an extensive examination of three different jurisdictions: Indonesia, the Philippines, and Japan.
From the types of insurance companies available and legal frameworks to the regulations that govern insurance contracts and claims, we want to provide valuable insight into how different approaches to insurance regulation can impact businesses and the overall economic landscape.
The Authors:
Alexandra Gerungan
Senior Partner, ADCO Law
alexandra.gerungan@adcolaw.com
Adinda Kartika Putri
Associate, ADCO Law
adinda.kartika@adcolaw.com
Disclaimer: The following article is intended for general informational purposes only and should not be interpreted as legal advice by ADCO Law, SKY Law, and Spring Partners, proud members of the Alliott Global Alliance (AGA). The viewpoints expressed herein do not represent the official legal stance of any of these firms. Consequently, the firms cannot be held accountable for any actions taken by individuals who use this article for purposes other than those for which it is intended.
For more information about AGA, please visit https://www.alliottglobal.com/
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