IMF published a report on the detailed assessment of observance (DAO) of Insurance Core Principles (ICPs) in Indonesia, as part of the Joint IMF-World Bank Financial Sector Assessment Program (FSAP) mission. The report highlights that insurance regulation and supervision have improved since the establishment of OJK n 2011 and the enactment of the new Insurance Law in October 2014. However, the assessment identified a significant number of shortfalls in observance with the ICPs. Out of the 26 ICPs, the assessment found that Indonesia Observed 6, Largely Observed 13, and Partially Observed 7 ICPs.
The report reveals that Indonesian insurance sector is still vulnerable to a number of material risks. A number of insurers have failed in the last 10 years. OJK has taken prompt action, after its establishment, to reduce the loss to policyholders by taking strong actions against four insurers with material deficits. OJK has monitored the capital adequacy of insurers through its risk-based supervision scheme. During the recent market turmoil in 2015, the solvency requirement was relaxed for nine months while introducing the temporary suspension of mark to market valuation rules. The Indonesian insurance industry is exposed to significant catastrophic risk with domestic concentrations through mandatory reinsurance programs. The low interest rate environment in advanced economies is also affecting the life insurance sector, as insurers have some underwriting denominated in USD.
Furthermore, the report states that some deficiencies are due to the lack of effective group regulation and supervision of insurance groups. The mission identified that the laws need to be amended to enhance the clarity of legal protection and the primary objective of the supervisor. Setting the protection of policyholders as the primary objective of OJK will enhance the operational independence of OJK. 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 also recommends that OJK should improve the effectiveness of supervision. Focus on the regulation of insurance intermediaries and market conduct should increase. Enhanced disclosure requirements for intermediaries and close coordination with insurance associations will improve the quality of intermediaries.
Related Link: Report on Assessment of ICPs
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