Circular Letter of the Financial Services Authority Number 10/SEOJK.05/2015 concerning Guidelines for Formation of Contribution Reserves and Methods for Calculation of Claim Reserves in Sharia Insurance or Sharia Reinsurance Business

To:

1. Sharia Insurance Companies;
2. Sharia Reinsurance Companies;
3. Insurance Companies with Sharia Units; and
4. Reinsurance Companies with Sharia Units;
   At their respective locations.

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 10/SEOJK.05/2015

CONCERNING
GUIDELINES FOR FORMATION OF CONTRIBUTION RESERVES AND METHODS FOR CALCULATION OF CLAIM RESERVES IN SHARIA INSURANCE OR SHARIA REINSURANCE BUSINESS

In relation to the mandate of Article 18 paragraph (7) of the Minister of Finance Regulation Number 11/PMK.010/2011 concerning Financial Health of Insurance and Reinsurance Business with Sharia Principles as amended by the Minister of Finance Regulation Number 228/PMK.010/2012, it is necessary to regulate guidelines for the formation of contribution reserves for products with a term of more than 1 (one) year whose policy terms and conditions cannot be renegotiated at each policy anniversary, and methods for calculating incurred but not reported (IBNR) claim reserves in general Sharia insurance business, life Sharia insurance business, and Sharia reinsurance business in this Circular Letter of the Financial Services Authority as follows:

I. GENERAL PROVISIONS

1. Company means a Sharia insurance company, a Sharia reinsurance company, an insurance company with a Sharia unit, and a reinsurance company with a Sharia unit.

2. Technical Reserve means contribution reserves for products with a term of more than 1 (one) year whose policy terms and conditions cannot be renegotiated at each policy anniversary, and incurred but not reported (incurred but not reported, hereinafter abbreviated as IBNR) claim reserves.

3. Tabarru’ Premium means a portion of the contribution allocated to the Tabarru’ fund.

4. Tabarru’ Fund means a collection of funds derived from participants' contributions, the mechanism of which is used in accordance with the agreed Tabarru’ contract.

II. CALCULATION OF TECHNICAL RESERVES

1. The calculation of Technical Reserves for general Sharia insurance business, life Sharia insurance business, and Sharia reinsurance business shall be performed by an actuary.

2. The calculation of Technical Reserves shall be subject to the following provisions:
   a. Using methods and assumptions that:

   1. are appropriate to the product characteristics and relevant risk profile;
   2. are consistent for various products within the same product group;
   3. are consistent for the same product between reporting dates of technical reserves;
   4. ensure recognition of liabilities that are fair and equitable for all policyholders;
   5. are appropriate to the benefits promised or guaranteed in the policy; and
   6. are in accordance with prevailing actuarial practice standards in Indonesia.
      b. The actuary provides justification for each assumption used.
      c. In the event of changes to methods and assumptions, the actuary must explain the reasons and impacts of such changes on the amount of Technical Reserves and the solvency level of the Tabarru’ Fund.
      d. The actuary performs adequate procedures to obtain assurance that:
   7. the quality of data presented by the Company is complete, accurate, and reliable.
   8. the central estimate/best estimate assumptions used by the Company are current and based on experience from the last 3 (three) to 5 (five) years.

III. FORMATION OF CONTRIBUTION RESERVES FOR PRODUCTS WITH A TERM OF MORE THAN 1 (ONE) YEAR WHOSE POLICY TERMS AND CONDITIONS CANNOT BE RENEGOTIATED AT EACH POLICY ANNIVERSARY

1. Calculation Method:
   a. Contribution reserves must take into account all future inflows and outflows of the Tabarru’ Fund using central estimate/best estimate assumptions plus margin for adverse deviation, with a confidence level of at least 75% (seventy-five percent) at the Company level. b. Inflows as referred to in letter a include:

   1. Tabarru’ Premiums; and
   2. reinsurance claim payments received from the reinsurer (claim recovery).
      c. Outflows as referred to in letter a include:
   3. all payments or reimbursements promised to be paid to participants or beneficiaries from the Tabarru’ Fund;
   4. profit-sharing payments from the investment of the Tabarru’ Fund to the Company in cases where the management of the Tabarru’ Fund investment uses the mudharabah or musharakah mutanaqisah contracts; and
   5. payment of reinsurance Tabarru’ Premiums.

2. Assumptions in the calculation of contribution reserves use central estimate/best estimate assumptions with the following provisions:
   a. Claim rate assumptions (mortality/morbidity/incidence rate for life insurance or morbidity/incidence rate for general insurance) use industry experience tables of insurance in Indonesia. b. Expense assumptions other than claim rate assumptions use the Company's most recent experience.
   c. Policy or participant lapse/surrender/reinstatement/withdrawal assumptions are based on the Company's most recent experience.
   d. Inflation assumptions use experience in Indonesia for at least the last 3 (three) years. e. Discount rate assumptions used must meet the following provisions:

   1. the highest discount rate is equal to the average yield of securities issued by the State of the Republic of Indonesia at the end of the year during the last 3 (three) years.
   2. the discount rate assumption as referred to in item 1) may be increased by at most 0.5% (zero point five percent).
   3. for policies denominated in Rupiah, securities issued by the State of the Republic of Indonesia as referred to in item 1) are benchmark series securities issued by the State of the Republic of Indonesia.
   4. for policies denominated in currencies other than Rupiah, securities issued by the State of the Republic of Indonesia as referred to in item 1) are securities denominated in United States Dollars.
   5. securities issued by the State of the Republic of Indonesia as referred to in item 1) are securities that have a remaining maturity period that matches/approximates the average remaining contract period of the Company's active (inforce) policies.

3. In the event the Company uses claim rate assumptions, expense assumptions other than claim rates, policy or participant lapse/surrender/reinstatement/withdrawal assumptions, and/or inflation assumptions other than those referred to in number 2 letters a through d, the actuary must explain that the assumptions used fairly reflect the Company's condition.

4. The total value of contribution reserves for policies in the same product group must not be less than zero.

5. For policies that provide return of Tabarru’ Premium if the participant withdraws before the insurance period ends, the amount of contribution reserve must not be less than the amount of Tabarru’ Premium to be returned to the participant.

IV. CALCULATION OF INCURRED BUT NOT REPORTED CLAIM RESERVES

1. The calculation of incurred but not reported (IBNR) claim reserves is calculated based on a fair estimate of claims that have occurred but not yet reported, using the claim ratio method or one of the triangle methods, including insurance loss adjuster service costs, minus claim expenses that will become part of the reinsurer's share.

2. What is meant by a fair estimate in the IBNR calculation as referred to in number 1 is the central estimate/best estimate.

V. OTHER PROVISIONS

Provisions regarding guidelines for the formation of contribution reserves and methods for calculating claim reserves shall be applied for the first time to:

1. Monthly financial reports ending on June 30, 2015;
2. Quarterly financial reports ending on June 30, 2015; and
3. Annual financial reports ending on December 31, 2014.

VI. TRANSITIONAL PROVISIONS

For annual financial reports ending on December 31, 2014, Companies may use the average discount rate assumption between the discount rate assumption used by the Company in the final report of 2013 and the discount rate assumption as referred to in Roman numeral III number 2 letter e item 1).

VII. CLOSING PROVISIONS

This Circular Letter of the Financial Services Authority shall come into force from the date of determination.

To ensure everyone knows, order the publication of this Circular Letter of the Financial Services Authority by placing it in the State Gazette of the Republic of Indonesia.

Determined in Jakarta on April 17, 2015

EXECUTIVE HEAD OF SUPERVISOR
OF INSURANCE, PENSION FUNDS,
FINANCING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS
FINANCIAL SERVICES AUTHORITY,
Signed,
FIRDAUS DJAELANI

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2015 NUMBER 32 DATED APRIL 21, 2015

Copy in accordance with the original
Director of Legal Affairs I
Legal Department,
Signed,
Sudarmaji