Following the Asian financial crisis of 1997 the Government of Indonesia, with the support of international financial institutions, has embarked upon the reform of its financial sector in order to alleviate the consequences of the crisis and initiate a long term reform program. According to a number of publications by the Asian Development Bank (ADB), which has been actively involved in the reform process, the regulatory and supervisory framework for the financial sector is inadequate, although steps are being taken to improve compliance with international standards, including Insurance Core Principles promulgated by the International Association of Insurance Supervisors. Under the Financial Governance and Social Security Reform (FGSSR) Program launched by the ADB in December 2002, the Government of Indonesia introduced a number of measures aimed at reinforcing supervision and regulation of the insurance sector. Specifically, the Ministry of Finance issued decrees on business conduct, auditing, solvency, and licensing of the insurance companies. As far as the establishment of the unified regulator is concerned, the 2006 ADB Country Strategy Plan for Indonesia for the period of 2006-2009 notes that the initial date for the establishment of the Financial Services Authority was postponed from 2003 to 2010. As the first step in the creation of the unified financial sector regulator, in November 2004, the Government of Indonesia merged the directorate for insurance and pensions under the Ministry of Finance with the capital market regulator, Bapepam, creating a non bank financial sector regulator called Bapepam LK. The supervision of the banking sector remained the responsibility of the Bank of Indonesia with a view to further merge the two regulators. In the 2006 Country Strategy Plan, the ADB reiterated its commitment to support the Indonesia's financial sector reform program, which was to be carried out through a second and third FGSSRs. One of the expected outcomes of these programs is to strengthen insurance supervision in line with international best practices.

General Overview

In the aftermath of the Asian financial crisis, international financial institutions led by the International Monetary Fund (IMF) provided a multi-donor rescue package to Indonesia, which was hit by the crisis more severely than other Southeast Asian countries, in order to alleviate the consequences of the crisis and to start a long-term reform process. The Asian Development Bank (ADB) has been actively involved in the effort by providing loans and rendering technical assistance. As indicated on the ADB website, "Indonesia is ADB's largest client for public sector loans, and its second largest recipient of technical assistance support." As described in the 2006 ADB report "Indonesia: Financial Governance and Social Security Reform Program," in 1998 the ADB developed the Financial Governance Reforms: Sector Development Program (FGRSDP), which aimed to restructure the banking sector, improve governance, and build a stronger legal and regulatory framework. By 2002, Indonesia had achieved a moderate recovery, with GDP growth of 2.9%. However, the report found that weaknesses remained that undermined higher growth potential. Citing "weak and uneven regulation and supervision capabilities" (p. 2), the report found that the financial sector was fragile and structurally unbalanced. The report called for strengthening the regulatory framework and supervisory capacity. This would "improve the stability of the financial sector so that it could effectively play its role in facilitating long-term economic growth" (p. 2). Realizing the need for further reforms, the Government of Indonesia requested the assistance of the ADB in developing the system of integrated regulation and supervision of the financial services sector. One of the objectives of the Financial Governance and Social Security Reform (FGSSR) Program launched by the ADB in December 2002 was to facilitate the establishment of the unified regulator and bring Indonesia closer to compliance with international standards for prudential regulation and supervision, including Insurance Core Principles promulgated by the International Association of Insurance Supervisors (IAIS). The reform and restructuring of the insurance sector constituted an integral part of the FGSSR.

At that time, insurance companies in Indonesia were supervised by the Directorate of Insurance under the Ministry of Finance (MoF). Historically, according to the 2006 ADB report, the insurance sector in Indonesia was characterized by inadequate capital and licensing requirements, lack of international competition, and high fragmentation. Under the FGSSR, the Government of Indonesia introduced a number of measures aimed at reinforcing the supervision and regulation of the insurance sector. Specifically, the MoF issued decrees on business conduct, auditing, solvency, and the licensing of insurance companies. In 2004, these degrees were supplemented by implementation guidelines. The ADB 2006 Country Strategy Plan set the initial date for establishing Indonesia's Financial Services Authority (Otoritas Jasa Keuangan, or OJK), which was postponed from 2003 to 2010. As the first step in the creation of the unified financial sector regulator, in November 2004, the Government of Indonesia merged the directorates for insurance and pensions under the Ministry of Finance with the capital market regulator - Bapepam -- creating a nonbank financial sector regulator: Bapepam LK. Supervision of the banking sector remained the responsibility of the Bank Indonesia (BI), with a view to further merge the two regulators.

In its 2006 Country Strategy Plan for Indonesia for the period of 2006-2009, the ADB reiterated its commitment to support the Indonesia's financial sector reform program, which was to be carried out through the second and third FGSSRs. The expected results of the second and third FGSSRs are as follows: "(1) a strong independent non-bank financial sector regulator overseeing capital markets, insurance, and pensions, (2) market development and products and services that range from fund management to insurance/leasing, (3) strengthened enforcement and surveillance across non-bank sectors, (4) accounting standards in line with international governance and transparency standards, (5) enhanced institutional capacity and investor awareness, (6) developed debt market, including government bond markets/market infrastructure/ secondary trading, (7) strengthened insurance sector through strengthened regulations regarding reserves, capital requirements, reinsurance, and investment management in line with international best practices, and (8) pension reforms and improved governance, institutional capacity, and financial management in pension funds" (pp. 210-211).

The 2006 ADB report "Indonesia: Financial Governance and Social Security Reform Program" notes that the insurance industry in Indonesia is small, fragmented and is characterized by a strong state interference in the sector. As of 2005, there were 157 insurance companies in Indonesia, with total assets of 2.9% of GDP, and 1.8% of gross premiums of GDP.

The Principles

ICP 1 Conditions for effective insurance supervision

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 2 Supervisory objectives

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 3 Supervisory authority

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Prior to 2004, insurance companies in Indonesia had been supervised by the Directorate of Insurance under the MoF. According to the 2006 ADB Country Strategy Plan for Indonesia, in November 2004, the Government of Indonesia merged the Directorate of Insurance with the capital market regulator -- Bapepam -- creating a nonblank financial sector regulator -- Bapepam LK. The supervision of the banking sector remained the responsibility of the Bank Indonesia with a view to further merge the two regulators. The report notes that Bapepam LK is under the MoF and thus does not have independence and flexibility in terms of its structure, staff, and employee's compensation. Nevertheless, there is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 4 Supervisory process

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 6 Licensing

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According to the 2006 ADB report on FGSSR, in Indonesia "historically... licensing requirements were loose" (p. 6), however, the MoF issued a decree on the licensing of insurance companies under FGSRR I. No further information as to Indonesia's compliance with this principle is publicly available.

ICP 7 Suitability of persons

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 9 Corporate governance

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 10 Internal control

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 11 Market analysis

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

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According to the 2006 ADB report "Indonesia: Financial Governance and Social Security Reform Program," the MoF issued a decree on audits of insurance companies. However, there is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 13 On-site inspection

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 14 Preventive and corrective measures

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 15 Enforcement or sanctions

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 16 Winding-up & exit from the market

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According to the 2006 ADB report "Indonesia: Financial Governance and Social Security Reform Program," the MoF issued a decree on financial solvency of insurance and reinsurance firms. However, there is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 17 Group-wide supervision

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 18 Risk assessment and management

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 19 Insurance activity

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 20 Liabilities

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 21 Investments

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 22 Derivatives and similar commitments

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 23 Capital adequacy and solvency

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According to the 2006 ADB report "Indonesia: Financial Governance and Social Security Reform Program," the MoF issued a decree on financial solvency of insurance and reinsurance firms. However, there is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 24 Intermediaries

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 25 Consumer protection

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 27 Fraud

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There is insufficient publicly available information as to Indonesia's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

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According to the 2006 World Bank report on the role of non-bank financial institutions, in May 2003 new requirements on money-laundering and financing of terrorism were introduced for insurance companies. No further publicly available information as to Indonesia's compliance with this principle is publicly available.