Since the start of 2013, the Otoritas Jasa Keuangan (OJK) has officially taken over full authority of the regulation of the Non-Bank Financial Institutions (NBFI) sector. Mr Dumoly Pardede, Deputy Commissioner for NBFIs, speaks about the transition made, as well as OJK’s priorities and plans going forward.
The establishment of the new super regulator marked a significant development in Indonesia. As an independent institution, OJK is charged with the mandate to regulate, supervise and investigate the financial services sector, leaving the central bank to solely concentrate on macro-prudential regulation.
Despite having just taken over, OJK has hit the ground running. “First of all, we are continuing all existing regulatory and supervisory activities, since OJK is a continuation of Bapepam-LK (Capital Market and Financial Institutions Supervisory Agency),” said Mr Pardede. At the same time, the regulator is conducting an overall review of its internal capacity and infrastructure, which include human resources, IT systems and operational procedures. Plans for short-term and long-term supervision are also in the pipeline.
Standardisation and levelling playing field
Legacy activities aside, OJK’s current top priority is to achieve the standardising of Indonesia’s industry practices – in insurance, pensions, finance companies and microfinance institutions – with international NBFI standards, said Mr Pardede.
However, he also said they are aware of the public demands for consumer protection and transparency in the insurance sector; whereas on the industry side, insurers have asked for a level playing field with the banking sector when the latter comes under OJK regulation next year.
Mr Pardede explained that any financial sector regulation needs to be approved by OJK’s nine commissioners. Among these nine commissioners, there are three executives who are in charge of the supervision of the capital markets, NBFIs and banking institutions.
He said the regulator is mindful of the need to have “standardisation, harmonisation and integration to make sure that all regulations across sectors are uniformly implemented to ensure a level playing field”.
Reviewing regulations
There are also plans to review some current regulations, one of which pertains to the insurance companies’ reporting of financial results. Reporting will be required on a monthly basis, as opposed to a quarterly basis previously. Another is the regulator’s intention to make some adjustments to regulations in relation to good corporate governance practices.
He said: “As many insurers now have many alliances and subsidiaries, we will now have to revise our corporate governance rules in insurance accordingly.”
Third, the adoption of international accounting standards is another regulation that will come under review. From opinions and feedback gathered from the industry, Mr Pardede said OJK is planning to “make some concessions” in the adoption of these accounting standards for certain companies in the industry.
The move is in consideration of the fact that local players in Indonesia require more preparation time and he emphasised that the concessions do not reflect the country’s reluctance to conform to international standards. Rather, he said: “We are adopting them, but there are certain accounting and reporting methodologies that we need to further deliberate on and discuss with industry professionals before any implementation.”
M&A dilemma?
Due to the tightening of regulations such as the increase in capital requirements, there have been many M&A activities taking place in the insurance market. And the regulator certainly is not against it. Mr Pardede said OJK will support any strategy or best practice that is beneficial to the industry, be it M&As or company listings, so long as it improves business efficiency and performance.
But while the market brims with potential and foreign players looking to enter the market through acquisitions or joint ventures, the Asosiasi Asuransi Umum Indonesia (AAUI), Indonesia’s general insurance association, had recently proposed to limit foreign ownership in joint-venture businesses in order to encourage the participation of local investors.
“OJK currently does not have any position on this issue,” said Mr Pardede, although he shared that local companies have expressed their support for the idea of reducing the 80-20 foreign ownership cap in joint ventures. He highlighted that this proposal would require further research and discussion at the parliamentary level as they would need to take political implications into account. Maintaining OJK’s commitment to protect the interests of the local financial sector, he said: “We will definitely consider the views of the local businesses when coming up with a plan of action.”
Task force to tackle unfair competition
Price competition in the non-life sector is heating up and the regulator also shared that it has plans to step in before the market overheats and impacts consumer welfare negatively.
It is currently engaged with the international community to formulate a mechanism which can set a fair and proper premium range. At the same time, OJK has also invited AAUI to set up a team – under the coordination of Mr Pardede – to research and propose change for the market, particularly in the areas of property, motor and catastrophe.
He expects to have a preliminary proposal drawn up and industry feedback gathered within three months of the team’s formation, following which the revised proposal will be put up to the Board of Commissioners for approval. “We are aiming for implementation within six months; the Board of Commissioners is pushing us to do this soon in lieu of the market situation,” said Mr Pardede.
Increasing insurance penetration
Also on OJK’s drawing board are plans to increase the country’s low insurance penetration rate. “We have come up with a financial inclusion strategy where we are engaging with the provincial authorities and communities,” said Mr Pardede.
He added: “If we continue to focus only on the Jakarta region and Java islands, then we will not be effective.” So, the regulator is now leading many projects to introduce insurance to small businesses and communities in the rural parts of Indonesia.
For example, it has issued “notes of understanding” to many parties around the country, which include university campuses and provinces, to facilitate spreading awareness among communities. By issuing these notes, it would help to create “financial inclusion deepening” – like a directive – to improve communication between the communities, local authorities and insurers, who will still step in to provide insurance cover, he said.
“Even though in the past there have been regulations stipulating that insurance cover was compulsory, it has not really been adhered to in the rural areas. So we are now working to improve coordination and adherence among the local authorities,” added Mr Pardede.
Funding
On the topic of funding, while there has yet to be a concrete decision, he shared that the government is seeking a balance to ensure that the OJK budget will not pose a huge burden on the industry, nor too much of a liability on government budget.
Hence, alternatives such as to have the budget partially funded by “deposit insurance agency premiums” have been put up for discussion, given that the insurance companies will be included in the deposit insurance scheme that was set up as a safeguard should any bank or insurer fail.
“Absolutely optimistic” on outlook
Finally, Mr Pardede expressed “absolute” optimism about the insurance industry. What many countries see as a challenge with regard to the low interest rates, he sees it as an opportunity and said insurance companies should invest as much as possible so as to “reap big gains when the market picks up in future”.
With many projects in progress, it is clear that OJK has not wasted any time since the transition of authority, and instead has seamlessly picked up where its predecessor left off. Confident of OJK’s upcoming plans, Mr Pardede said: “We now have the budget to finance our plans and strategy for insurance; previously we didn’t.”
However, he added that it was important not to rush things. “We are a big country. We cannot develop everything immediately. Things will still have to be done step by step,” he said.
Since the interview, OJK has recently announced that it will establish an insurance rating and statistics agency to determine the premium benchmark for the industry. The new agency is expected to begin operations in 2014.