New OJK regulation on sharia spin-offs in the insurance sector

On 11 July 2023, Indonesia’s Financial Services Authority (OJK) issued Regulation No. 11 of 2023 on Spin-Off of Sharia Units of Insurance and Reinsurance Companies (OJK Reg 11/2023). 

The new regulation came into effect immediately and applies to all insurance and reinsurance companies operating in Indonesia. In essence, it extends the deadline for sharia spin-offs to 31 December 2026 and requires all insurance companies and reinsurance companies that have sharia units to submit their sharia spin-off plans for review by OJK before the end of 2023. 

The regulation also restated some of the concepts introduced under OJK Regulation No. 67 of 2016 on matters related to sharia spin-offs. A summary of the OJK’s new rules and approach is set out below.

1. OJK’s approach to spin-off license applications is elaborated in the regulation, including the key aspects to be covered in the spin-off application. Under Article 2 of the regulation, a spin-off plan must describe that the spin-off will “strengthen technology and human resources investment”. In practical terms, this will likely mean that a spin-off plan should not involve major redundancies, and ideally should envisage further investment in the spun-off sharia entity to ensure it is sustainable as a separate business.  
2. OJK has the authority to compel an existing insurance or reinsurance company to carry out a sharia spin-off. 
3. OJK’s position is that an insurance company failing to spin off its sharia unit by 31 December 2026 must return its sharia unit’s licence. This provides much-needed clarity for insurance companies intending to surrender their sharia unit licences for business reasons. 
4. The statutory period for sharia portfolio transfers is shortened from 12 months (under OJK Regulation No. 67 of 2016) to six. The six-month deadline commences on the date OJK issues its approval for the spin-off. 
5. A retained earnings stopper mechanism is introduced, requiring that a sharia unit’s retained earnings be used only to increase the unit’s equity. This consequently means that such retained earnings cannot be distributed as dividends to the company’s shareholders. 
6. There are clearer rules on the type of assets that may be transferred to a spun-off sharia entity, depending on the spin-off method used: (a) where the spun-off sharia entity is a newly established entity, the sharia portfolio transfer must include the sharia unit’s equity; and (b) where the spun-off sharia entity is an existing licensed entity, the sharia portfolio transfer will consist of tabarru funds and technical reserve (ujrah) of the transferred sharia portfolio. This welcome clarification confirms how the sharia portfolio should be valued (from both tax and accounting perspectives). 
7. OJK encourages sharia banks and other sharia financial institutions (such as multifinance companies) to prioritise using products and services that are underwritten by a spun-off sharia entity. 
8. OJK also has the authority to assess an insurance company controller’s fit and proper status if it fails to comply with the 31 December 2026 deadline for sharia unit spin-offs. 

Overall, the new regulation lays some helpful and necessary groundwork for sharia spin-offs in the coming years.