Insurance Business Law of the Republic of Indonesia (Law No.2/1992)

1. Introduction

Law No.2 of 1992 on the Business of Insurance (the Insurance Law) provides the legal framework for the establishment, operation, supervision, and dissolution of insurance companies in Indonesia. Enacted shortly after the reform era began, the law aims to protect policyholders, ensure market stability, and promote the development of a sound insurance sector that can support economic growth.

2. Scope and Definitions

The Insurance Law defines the scope of insurance business as the underwriting of life, health, property, and other kinds of risk. Key definitions include:

• Policyholder: The person or entity that purchases an insurance contract.
• Assured: The person or entity whose interest is to be insured.
• Insurer: A company licensed by the Financial Services Authority (OJK) to conduct insurance activities.
• Reinsurance: The transfer of part of the risk from an insurer to another insurer.

3. Licensing and Capital Requirements

Article4 of the law requires any entity that wishes to conduct insurance business to obtain a license from the OJK. The licensing process involves:

1. Submission of a comprehensive business plan.
2. Proof of minimum paidup capital (IDR5billion for life insurers, IDR2billion for nonlife insurers, subject to periodic adjustments).
3. Demonstration of suitable corporate governance and riskmanagement systems.

Failure to maintain the required capital leads to supervisory action, which can range from a capital increase order to license suspension or revocation.

4. Corporate Governance

The law places a strong emphasis on governance to safeguard policyholder interests. Key provisions include:

• Board of Directors and Board of Commissioners must be composed of individuals with proven integrity and expertise.
• Conflicts of interest must be disclosed and managed.
• Annual general meetings (AGMs) are mandatory, and shareholders must receive audited financial statements.
• Internal audit and compliance units must be established.

5. Types of Insurance Business

Law No.2/1992 distinguishes between three main categories:

1. Life Insurance: Covers mortality risk, disability, and savings/investment products.
2. General (NonLife) Insurance: Covers property damage, liability, motor, marine, aviation, and other hazards.
3. Reinsurance: Allows insurers to share risk with other insurers domestically or abroad.

Each category may have specific regulatory rules, especially regarding reserving and solvency calculations.

6. Policyholder Protection

The law requires insurers to:

• Maintain a reserve fund sufficient to meet future claims.
• Provide clear, understandable policy terms and disclose all fees.
• Offer a grievance mechanism and cooperate with the OJKs consumerprotection unit.
• Submit periodic reports on claim payments, premiums collected, and solvency ratios.

In the event of insurer insolvency, the OJK may appoint a curator to manage the liquidation of assets and ensure orderly claim settlement.

7. Supervision and Enforcement

The Financial Services Authority (OJK) is the primary regulator. Its powers include:

• Conducting onsite inspections and audits.
• Issuing directives on riskbased capital, underwriting standards, and market conduct.
• Imposing administrative sanctions ranging from fines to suspension of business activities.
• Requiring corrective action plans for noncompliant insurers.

Noncompliance may also trigger criminal liability under the Indonesian Penal Code for fraud or misrepresentation.

8. CrossBorder Activities

Foreign insurers may operate in Indonesia through:

• Establishing a local subsidiary with a minimum capital of IDR15billion.
• Entering into a reinsurance agreement with an Indonesian insurer, subject to OJK approval.

The law requires that all foreignorigin risk be adequately backed by a local guarantor or a recognized reinsurance pool.

9. Recent Amendments and Complementary Regulations

Since 1992, several amendments and related regulations have refined the framework:

• Government Regulation No.69/2016: Introduces riskbased capital (RBC) standards.
• OJK Regulation No.31/POJK.05/2020: Sets detailed requirements for the disclosure of policy terms and the use of digital platforms.
• Law No.11/2020 on Job Creation (Omnibus Law): Simplifies licensing procedures and raises capital thresholds for certain lines of business.

These instruments aim to align the Indonesian insurance market with international best practices such as Solvency II.

10. Practical Implications for Stakeholders

For Insurers: Ongoing compliance monitoring, regular capital adequacy testing, and transparent reporting are essential to avoid regulatory sanctions.

For Investors: Understanding the capital structure, governance quality, and OJK ratings can inform riskadjusted investment decisions.

For Policyholders: Choose insurers that demonstrate strong solvency ratios and clear policy language; review the insurers claimhandling record.

For Legal Practitioners: Advising clients on licensing, crossborder reinsurance arrangements, and restructuring must consider both the statutory provisions and the latest OJK circulars.

11. Conclusion

Law No.2/1992 remains the cornerstone of Indonesias insurance regulatory regime. By mandating robust licensing, capital, and governance standards, it protects policyholders while fostering a competitive market. Continuous updates through OJK regulations and related statutes keep the framework aligned with global standards, ensuring the sector can support Indonesias broader economic development goals.

References

• Law No.2/1992 on the Business of Insurance (official Gazette).
• Financial Services Authority (OJK) www.ojk.go.id
• Government Regulation No.69/2016 on the Implementation of the Insurance Law.
• OJK Regulation No.31/POJK.05/2020 on Insurance Product Disclosure.
• Law No.11/2020 on Job Creation (Omnibus Law).