A Financial Sector Assessment Programme carried out under the IMF has identified a significant number of shortfalls in the OJK's observance with the Insurance Core Principles.
Some deficiencies are due to the lack of effective group regulation and supervision of insurance groups. While OJK has implemented regulations related with risk management and group capital, intra-group transactions are not well taken into account and thus double gearing within the insurance entities and investment arbitrage between insurance entities and non-financial entities may be possible. Including a capital calculation for catastrophic risk and a framework for the imposition of capital add-ons can tighten the capital regime.
The Indonesian insurance sector is still vulnerable to a number of material risks. A number of insurers have failed in the last 10 years. After its establishment, OJK has taken prompt action in order to reduce the loss to policyholders by taking strong actions againt four insurers with material deficits. OJK has monitored the capital adequacy of insurers through its risk based supervision scheme.
The Indonesian insurance industry is exposed to significant catastrophic risk with domestic concentrations through mandatory reinsurance programmes. The low interest rate environment in advanced economies is also affecting the life insurance sector, as insurers have some underwriting denominated in the US dollar.
Conflict of goals
The FSAP mission identified that the laws need to be amended to enhance the clarity of legal protection and the primary objective of the supervisor. ICP requires that primary objective of supervisors should be the protection of policyholders. However, OJK has other objectives and particularly the objective of market development seems to have caused conflict with the objective of policyholder protection. Setting the protection of policyholders as the primary objective of OJK will enhance the operational independence of OJK.
The law also needs to provide clear and robust legal protection of OJK and its staff acting in good faith. Improvement of legal protection of OJK with clearer internal guidance for applying sanctions will help it to take more prompt and effective regulatory actions to problem insurers.
The mission recommends that OJK improve the effectiveness of supervision. Thematic reviews of reserving practices will encourage more conservative reserving. Close dialogue with the industry and clearer guidance on adequacy, independence and reporting lines of key control functions will improve the effectiveness of corporate governance and risk management of insurance groups significantly. OJK is encouraged to increase the expertise of its human resources, in particular, actuaries, and facilitate communication with industry participants which will assist the industry and OJK itself to transition smoothly from a compliance based culture to more risk based supervision.
OJK also needs to revise the “three strikes” approach to ensure timely supervisory actions. Given the possible high interconnectedness and contagion risks through conglomerates and domestic reinsurance programs, the authorities are encouraged to enhance macroprudential surveillance by integrating conglomerate analysis to identify possible contagion among conglomerates and sectors. There is a need for more focus on the regulation of insurance intermediaries and market conduct. OJK has made tremendous efforts to ensure efficiency and fairness in claims payment and complaints handling, which will continue to be important especially in the non-life sector. However, the rapidly increasing life insurance sector and complex unit-linked products make conduct regulations even more important. Enhanced disclosure requirements for intermediaries and close coordination with the insurance associations will improve the quality of intermediaries.
This assessment of insurance regulation in Indonesia was carried out as part of the 2016-17 FSAP.
Nevertheless, on the whole, insurance regulation and supervision have been improved since the establishment of OJK and the enactment of the new Insurance Law. OJK was established in 2011 as an independent and integrated regulator. Since the new Insurance Law became effective in October 2014, OJK has made significant regulatory reforms, by issuing a number of new regulations, introducing risk based supervision through the active usage of its supervisory powers including revocation of licenses, and by enhanced regulations for corporate governance and risk management.