OJK Tightens Regulations on Unit-linked Insurance Products for Smaller Companies

Complex Product Requires Strong Financial Foundation

The Financial Services Authority (OJK) has emphasized that unit-linked insurance products, also known as investment-linked insurance (PAYDI), are considered complex financial instruments. Consequently, OJK's Head of Executive PPDP, Ogi Prastomiyono, stated that insurance companies marketing these products must possess a stronger financial foundation and robust risk management systems due to their long-term nature and exposure to market fluctuations.

Financial Capacity Concerns for Smaller Insurers

Ogi highlighted that life insurance companies categorized under Group 1 of the Insurance Company Group Based on Equity (KPPE 1) have relatively smaller equity. Therefore, OJK assesses that their financial resilience and risk management capacity are more limited. The regulatory body is concerned that these smaller insurers may not be adequately equipped to manage the risks associated with unit-linked products.

Upcoming Regulatory Measures

OJK is currently finalizing a draft Circular Letter (SEOJK) regarding the business activities and business lines of insurance/reinsurance companies and sharia insurance/reinsurance companies based on their equity grouping (KPPE). The upcoming regulation is expected to impose restrictions on the types of business lines that smaller insurers (KPPE 1) can engage in. Ogi mentioned that these restrictions aim to ensure that companies maintain consumer protection in line with their financial and managerial capabilities.

Existing Capital Requirements for Insurers

According to existing regulations (POJK), insurance companies in KPPE 1 are required to have a minimum capital of Rp500 billion for conventional insurance and Rp200 billion for sharia insurance. Reinsurance companies in the same category must have Rp1 trillion for conventional reinsurance and Rp400 billion for sharia reinsurance. Larger insurers (KPPE 2) have even higher capital requirements.

Industry Implications

The new regulations signify OJK's efforts to strengthen the insurance industry's financial stability while protecting consumers. By restricting the business activities of smaller insurers, OJK aims to prevent potential risks associated with complex products like unit-linked insurance. The finalization of the SEOJK and subsequent discussions with industry associations will be crucial in shaping the future regulatory landscape for Indonesia's insurance sector.