Self-Retention and Reinsurance Support of Insurance Companies

Financial Services Authority Regulation No. 14/POJK.05/2015 regarding Self-Retention and Domestic Reinsurance Support (“OJK Regulation”) was issued to establish a more comprehensive framework concerning self-retention and reinsurance support of insurance companies, which will replace on 1 January 2016 the previous legal framework concerning this matter under Head of Capital Market and Financial Services Supervisory Agency Regulation No. 11/BL/2012 regarding Reinsurance Support, Self-Retention Limit, and Format and Structure of Reinsurance Program Reports (“Bapepam-LK Regulation”).

As suggested by the title, the OJK Regulation is most relevant to insurance companies, covering conventional and sharia insurance, both life and general, and reinsurance companies (collectively referred to as “Insurance Companies”).[1]

Self-Retention

Insurance Companies must implement and maintain a self-retention limit based on their risk and loss profile. This requires Insurance Companies to make available a certain amount of capital for every risk that they undertake.[2]

The amount of capital varies between conventional and sharia Insurance Companies, and the business insurance line. These amounts are set forth under Appendix I of Financial Services Authority Circular Letter No. 31/SEOJK.05/2015 regarding Self-Retention Limit, Reinsurance Support Amount, and Reinsurance/Retrocession Program Report (“OJK Circular”).[3]

The figures are significantly different compared to those provided under the Bapepam-LK Regulation.[4]

Reinsurance Support

With respect to reinsurance support, the OJK Regulation sets out provisions on the following:

  1. Insurance support strategy;
  2. Insurance support for modest risks;
  3. Automatic reinsurance support; and
  4. Facultative reinsurance.

Insurance Support Strategy

Conventional and sharia insurance companies must establish an insurance support strategy. This insurance support strategy contains:[5]

  1. Reinsurance policies elaborating in detail diversification benefits and the capabilities of the respective reinsurance company;
  2. Framework in selecting and monitoring their reinsurance programs;
  3. Summary of the self-retention monitoring procedures and establishment process; and
  4. Person in charge of implementing and managing the reinsurance programs.

The reinsurance support strategy must be reported to the Financial Services Authority (Otoritas Jasa Keuangan “OJK”) on 15 January 2016, which is only to be submitted once. Subsequently, conventional and sharia insurance companies must report to the OJK every revision to the reinsurance support strategy within 10 business days.[6]

In developing their insurance support strategy, such as making revisions or additions, conventional and sharia insurance companies must consider a number of factors, including:[7]

  1. Profile of risks undertaken;
  2. Sufficiency of capital and access to additional capital;
  3. Violability of past claims and estimated claims;
  4. Profitability of each line of business;
  5. Level of retention appropriate for a conventional or sharia insurance company;
  6. Use of proportional and non-proportional reinsurance programs;
  7. Environmental factors, especially for areas prone to natural disasters;
  8. Capacity of automatic reinsurance;
  9. Optimization of quality, use, and cost of reinsurance;
  10. Possible effects if the domestic reinsurer covering for the company’s automatic reinsurance goes bankrupt;
  11. Ranking of the domestic reinsurers; and
  12. Reinsurance market conditions.

Although the OJK Regulation does not elaborate further regarding this reinsurance support strategy obligation, the exact same provisions on this matter was stipulated previously under the Bapepam-LK Regulation, which means that such should be familiar in practice for insurance companies.[8]

Insurance Support for Modest Risks

Newly stipulated provisions under the OJK Regulation that were previously not provided under the Bapepam-LK Regulation are regarding insurance support for modest risks.

Risks that are assumed as modest can be judged from the value of the insurance coverage or insured object, and are generally those undertaken in motor vehicle insurance, health insurance, personal accident insurance, credit insurance, death insurance, and suretyship. However, modest risks could also exist in other lines of business, such as liability insurance as regulated under Law No. 34 of 1964 regarding Mandatory Road Traffic Accident Insurance Fund.[9]

The OJK Regulation stipulates that conventional and sharia insurance companies must ensure that insurance coverage with modest risks must be entirely supported by domestic reinsurers, including for both automatic and facultative reinsurance support (both will be further elaborated below).[10]

This requirement is exempted for worldwide insurance products, and insurance products designed specifically for a multinational company. Life insurance companies, both conventional and sharia, are provided with an additional exemption: insurance products that are developed with the support of a foreign reinsurer. The support of a foreign reinsurer must be obtained within 4 years since the product’s development was reported to the OJK.[11]

Any claim for an exemption to this obligation must be reported to the OJK. Subsequently, the OJK will determine certain restrictions in obtaining foreign reinsurance for the respective insurance product.[12]

Automatic Reinsurance Support

Automatic reinsurance is an agreement between an insurer and reinsurer that obligates the insurer to cede risks to the reinsurer, and the reinsurer must accept all risks that fulfils the criteria established by the agreement. For example, an automatic reinsurance agreement may require an insurer to cede any homeowner policy with a dwelling limit of IDR 1 billion or more.

Insurance companies are required to have automatic reinsurance support, which must prioritize domestic reinsurance companies. Foreign automatic reinsurance support can only be obtained if domestic reinsurance companies are unavailable or unwilling, proof of which must be submitted to the OJK.[13]

Furthermore, foreign automatic reinsurance support must be provided by a reinsurer rated “BBB” or equivalent according to an internationally recognized rating company, such as A.M. Best, Fitch, Moody’s, and Standard & Poor’s. In case the foreign reinsurer is rated by more than 1 rating company, the lowest rating will be used.[14]

These provisions on foreign reinsurers and prioritizing domestic reinsurance companies also apply to facultative reinsurance support, which will be elaborated below.[15]

The minimum value of automatic reinsurance support from domestic reinsurers is 25 percent of the total automatic reinsurance capacity of each business insurance line or the amount set forth in Appendix II to the OJK Circular (table 2.A). The amounts vary between proportional[16] and non-proportional automatic reinsurance support,[17] and for each business insurance line.[18]

This automatic reinsurance support requirement is exempted if it cannot be obtained or is unnecessary, fulfilling any of the following conditions:[19]

  1. No reinsurer is willing to provide automatic reinsurance support because of certain characteristics of the risks;
  2. Insurance company is initiating a new business insurance line;
  3. Insurance product is for a specific policyholder for a comprehensive coverage based on request, which is not marketed to the general public; or
  4. Risks undertaken does not exceed the self-retention capacity of the respective insurance company.

Facultative Reinsurance

If automatic reinsurance support cannot be obtained or is insufficient, an insurance company must secure facultative insurance support.[20]

Unlike automatic reinsurance, facultative reinsurance does not oblige the insurer to cede the risks and the reinsurer is not required to accept the risks. Submission, acceptance and resulting agreement must be made for each individual risk that the insurance company is wishing to reinsure. In other words, the insurance company will negotiate an individual reinsurance agreement for every policy it will reinsure, which the reinsurer is not obligated to accept.

The minimum value of automatic reinsurance support from domestic reinsurers is 25 percent of the insurance coverage of each risk for every insurance business line or for the amount set forth in Appendix II to the OJK Circular (table 2.B). The amounts vary between proportional[21] and non-proportional automatic reinsurance support,[22] and the business insurance line.[23]

Previously the Bapepam-LK Regulation did not set out any provision concerning facultative reinsurance support.

Reporting Obligations

Insurance Companies must report to the OJK:[24]

  1. On 15 January of every year regarding their automatic reinsurance/retrocession program; and
  2. On 30 April of every year regarding their reinsurance placements.

The format and structure of these reports are provided under the OJK Circular.[25]

 


FOOTNOTES

[1] OJK Regulation, Art. 1 (2)

[2] OJK Regulation, Art. 2

[3] OJK Regulation, Art. 3 jo. OJK Circular, Ch. II, Par. 2

[4] Compare: Appendix I of the OJK Regulation, and Appendix II of the Bapepam-LK Regulation

[5] OJK Regulation, Art. 5

[6] OJK Regulation, Art. 4 (2), (3) and (4)

[7] OJK Regulation, Art. 6

[8] Bapepam-LK Regulation, Arts. 2, 3, and 4

[9] See: Official Elucidation of Article 7 of the OJK Regulation

[10] OJK Regulation, Art. 7; OJK Regulation, Official Elucidation, Art. 7

[11] OJK Regulation, Art. 8

[12] OJK Regulation, Art. 9

[13] OJK Regulation, Arts. 10 (1) and (2), 12, 13, 14, and 15

[14] OJK Regulation, Art. 25

[15] OJK Regulation, Arts. 18 (1) and (2), 19, 20, 21, 22, 25, and 26 (2)

[16] Under proportional reinsurance, a reinsurer will take a stated percentage of each policy that an insurer writes. The reinsurer will then receive the stated percentage of the premiums and pay the stated percentage of claims

[17] Under non-proportional reinsurance, the reinsurer only pays out if the total claims suffered by the insurer in a given period exceed a stated amount. For example, the stated amount is IDR 10 billion, and the non-proportional reinsurance is IDR 50 billion. If a loss of IDR 17 billion would occur, the insurer will bear IDR 10 billion, and recover IDR 7 billion from the reinsurer

[18] OJK Regulation, Art. 10 (3); OJK Regulation, Art. 10 (4) jo. OJK Circular, Ch. III, Par. 1

[19] OJK Regulation, Art. 17 (1)

[20] OJK Regulation, Art. 18 (1)

[21] Supra, n. 16

[22] Supra, n. 17

[23] OJK Regulation, Art. 18 (3); OJK Regulation, Art. 18 (4) jo. OJK Circular, Ch. III, Par. 2

[24] OJK Regulation, Arts. 31 (1), and 33 (1)

[25] OJK Regulation, Arts. 32, and 33 (2)


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