Guidelines for the Formation of Technical Provisions for Sharia Insurance and Reinsurance Companies

To:

1. Board of Directors of Sharia Insurance Companies;
2. Board of Directors of Sharia Reinsurance Companies;
3. Board of Directors of Insurance Companies with Sharia Units; and
4. Board of Directors of Reinsurance Companies with Sharia Units,

at your locations.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 28 /SEOJK.05/2017

REGARDING
GUIDELINES FOR THE FORMATION OF TECHNICAL PROVISIONS FOR SHARIA INSURANCE AND REINSURANCE COMPANIES

In relation to the mandate of Article 29 of the Financial Services Authority Regulation Number 72/POJK.05/2016 concerning the Financial Health of Sharia Insurance and Reinsurance Companies (State Gazette of the Republic of Indonesia Year 2016 Number 305, Additional State Gazette of the Republic of Indonesia Number 5995), it is necessary to regulate implementation provisions regarding guidelines for the formation of technical provisions for Sharia insurance and Sharia reinsurance companies in this Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS
In this Financial Services Authority Circular Letter, the following terms are meant:

1. Company means a Sharia insurance company, a Sharia reinsurance company, and a Sharia unit.
2. Sharia Insurance Company means a general Sharia insurance company and a life Sharia insurance company, as referred to in Law Number 40 of 2014 concerning Insurance.
3. Sharia Unit means a working unit at the head office of an insurance or reinsurance company that functions as the head office of offices outside the head office that conduct business based on Sharia principles.
4. Sharia General Insurance Company means a company that conducts risk management business based on Sharia principles to mutually assist and protect by providing compensation to participants or policyholders for losses, damages, costs arising, loss of profit, or legal liability to third parties that may be suffered by participants or policyholders due to the occurrence of uncertain events.
5. Sharia Life Insurance Company means a company that conducts risk management business based on Sharia principles to mutually assist and protect by providing payments based on the death or survival of participants, or other payments to participants or other entitled parties at certain times as regulated in the agreement, the amount of which has been determined and/or based on the results of fund management.
6. Sharia Reinsurance Company means a company that conducts risk management business based on Sharia principles for risks faced by Sharia Insurance Companies, Sharia guarantee companies, or other Sharia Reinsurance Companies, including Sharia Units of reinsurance companies.
7. Tabarru’ Fund is a collection of funds originating from contributions of policyholders or participants, the mechanism of whose use is in accordance with the Sharia insurance agreement or Sharia reinsurance agreement as referred to in Law Number 40 of 2014 concerning Insurance.
8. Tanahud Fund is a collection of funds originating from contributions of policyholders or participants of Sharia pension annuity programs, qardh from company funds, and/or Tanahud from reinsurance for Sharia pension annuity products, along with the results of their investment, the use of which is in accordance with the Sharia annuity agreement for pension programs or Sharia reinsurance agreement for Sharia annuity for pension programs.
9. Company Fund is a collection of funds managed by the Company, other than Tabarru’ Fund, Tanahud Fund, and participant investment funds.
10. Technical Provisions of Tabarru’ Fund and Tanahud Fund are funds set aside in Tabarru’ Fund and Tanahud Fund to meet obligations to policyholders or participants related to Tabarru’ Fund and Tanahud Fund.
11. Technical Provisions of Company Fund are funds set aside in Company Fund to meet costs to be incurred for the unexpired period or to be incurred in the future and/or benefits promised in the policy to be paid from Company Fund.
12. Tabarru’ and Tanahud Contributions are the portion of contributions allocated to Tabarru’ Fund and Tanahud Fund.
13. Insurance Products Linked to Investment, hereinafter referred to as PAYDI, are insurance products that provide at least death risk protection and provide benefits referring to the investment results of a fund specifically formed for the insurance product, whether stated in unit form or not.
14. Provision for Unearned Tabarru’ Contributions or Rights (unearned premium reserve), hereinafter abbreviated as PAKTYBMP, is a sum of funds that must be formed to represent the portion of contributions whose insurance period has not yet been lived.
15. Provision for Unexpired Risk (unexpired risk reserve), hereinafter abbreviated as PARYBD, is an estimate of claim payments that will occur during the future insurance period arising from policies active on the date of formation of technical provisions, including maintenance and claim handling costs for the remaining insurance period.

II. FORMATION OF TECHNICAL PROVISIONS

1. The formation of Technical Provisions for Tabarru’ Fund and Tanahud Fund for Companies includes the provision for Tabarru’ and Tanahud contributions, the provision for unearned Tabarru’ contributions, the provision for claims, and the provision for catastrophic risk (catastrophic reserve).

This copy is consistent with the original
Director of Law 1
Legal Department signed
Yuliana

2. The formation of Technical Provisions for Company Fund for Companies includes the provision for ujrah and the provision for PAYDI that provides guarantees on the principal investment.
3. The formation of Technical Provisions for Company Fund is calculated based on the guidelines for the formation of technical provisions as referred to in the Appendix which is an integral part of this Financial Services Authority Circular Letter.

III. CLOSING PROVISIONS

1. This Financial Services Authority Circular Letter shall take effect on July 1, 2017.
2. At the time this Financial Services Authority Circular Letter takes effect, Financial Services Authority Circular Letter Number 10/SEOJK.05/2015 concerning Guidelines for the Formation of Contribution Provisions and Methods for Calculating Claim Provisions in Sharia Insurance Business or Sharia Reinsurance Business is repealed and declared invalid.

Established in Jakarta on June 13, 2017
EXECUTIVE HEAD OF SUPERVISOR FOR
INSURANCE, PENSION FUNDS,
LENDING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS
FINANCIAL SERVICES AUTHORITY, signed
FIRDAUS DJAELANI

APPENDIX
FINANCIAL SERVICES AUTHORITY CIRCULAR LETTER
NUMBER 28 /SEOJK.05/2017
REGARDING
GUIDELINES FOR THE FORMATION OF TECHNICAL PROVISIONS FOR SHARIA INSURANCE AND REINSURANCE COMPANIES

GUIDELINES FOR THE FORMATION OF TECHNICAL PROVISIONS

I. GENERAL GUIDELINES FOR THE FORMATION OF TECHNICAL PROVISIONS

1. Companies are required to form technical provisions in accordance with methods and assumptions with the following provisions:
   a. in accordance with the characteristics of the product and relevant risk profile; b. consistent for various products within the same product group;
   c. consistent for the same product between technical provision reporting dates;
   d. ensuring the recognition of fair and equitable liabilities for all policyholders; e. in accordance with the benefits promised or guaranteed in the policy; and f. in accordance with actuarial practice standards applicable in Indonesia.
2. In the event of changes to the method and assumptions for the formation of technical provisions, the Company’s Actuary must explain the reasons and the impact of such changes on the amount of technical provisions and the solvency level of Tabarru’ Fund and Tanahud Fund as well as Company Fund.
3. In forming technical provisions, the appointed Company Actuary must conduct adequate procedures to obtain assurance that:
   a. the quality of data presented by the Company is complete, accurate, and reliable; and b. the central estimate or best estimate assumptions currently used by the Company are current and consider the Company’s experience/data from the last 3 (three) to 5 (five) years. If the Company’s experience is less than 3 (three) years, the Company may use industry experience/data from the last 3 (three) to 5 (five) years.
4. In forming technical provisions, the appointed Company Actuary must provide justification for the use of each assumption.

II. FORMATION OF TECHNICAL PROVISIONS FOR TABARRU’ FUND AND TANAHUD FUND
A. PROVISION FOR TABARRU’ AND TANAHUD CONTRIBUTIONS

1. Provision for Tabarru’ and Tanahud contributions for products with a term of more than 1 (one) year whose policy terms and conditions cannot be renewed (non-renewable) at each policy anniversary.
   Examples of related products include:
   a) unit link products whose contributions are converted into fund placement units and form a special fund whose policy terms cannot be renewed at each policy anniversary, where Tabarru’ is charged:

1. periodically with a fixed amount that cannot be renewed during the insurance period; or
2. in a lump sum;
   b) savings insurance products whose benefits are the accumulation of participant savings funds plus development results (this benefit is not contingent on an insured event), where Tabarru’ is charged:
3. periodically with a fixed amount that cannot be renewed during the insurance period; or
4. in a lump sum;
   c) traditional life insurance products such as term insurance, decreasing credit insurance, education insurance, whole life insurance, annuities; and d) property insurance products with an insurance period or term of more than 1 (one) year and contributions paid in a lump sum with policy terms and conditions that cannot be reviewed.

2. The formation of Tabarru’ and Tanahud contribution provisions must consider receipts and expenditures in Tabarru’ Fund and Tanahud Fund that may occur in the future using current central estimate or best estimate assumptions plus a margin for adverse deviation with a confidence level of at least 75% (seventy-five percent) at the Company level.
3. Receipts as referred to in item 2 include Tabarru’ and Tanahud Contributions.
4. Expenditures as referred to in item 2 include:
   a) all payments or compensation promised to be paid to participants or beneficiaries from Tabarru’ Fund and Tanahud Fund; and b) profit-sharing payments from the investment results of Tabarru’ Fund and Tanahud Fund to the Company in the event that the investment management of Tabarru’ Fund and Tanahud Fund uses mudharabah or mudharabah musytarakah contracts.
5. Receipts and expenditures as referred to in item 2 do not include:
   a) investment income receipts; b) receipts and expenditures from and to reinsurance; and c) receipts and expenditures from and to claim provisions.
6. Assumptions in calculating Tabarru’ and Tanahud contribution provisions use current central estimate/best estimate assumptions with the following provisions:
   a) the discount rate assumption used must meet the following provisions:

1. the discount rate assumption used in calculating provisions for contributions shall not exceed the average yield of securities issued by the State of the Republic of Indonesia over the last 1 (one) year, with an addition of at most 0.5% (zero point five percent) if necessary;
2. for policies denominated in Rupiah, the yield of securities as referred to in item 1) refers to the yield curve published by IBPA (Indonesian Bond Pricing Agency) for securities issued by the State of the Republic of Indonesia;
3. for policies denominated other than Rupiah, the yield of securities as referred to in item 1) refers to the yield curve published by IBPA (Indonesian Bond Pricing Agency) for securities issued by the State of the Republic of Indonesia denominated in US Dollars;
4. securities issued by the State of the Republic of Indonesia as referred to in item 1) are securities issued by the State of the Republic of Indonesia that have a remaining maturity period suitable or close to the calculated cash flows or close to the remaining contract period of the Company’s active (inforce) policies;
5. under certain conditions, the Executive Head of Supervisor for Insurance, Pension Funds, Lending Institutions, and Other Financial Service Institutions may establish different discount rate assumptions; and
6. the establishment of different discount rate assumptions as referred to in item 5) begins and ends through a notification letter from the Executive Head of Supervisor for Insurance, Pension Funds, Lending Institutions, and Other Financial Service Institutions to the Company;
   b) claim rate assumptions (mortality, morbidity, or incidence rate) use the Company’s current experience tables or the Indonesian insurance industry experience tables; c) investment profit-sharing assumptions for Tabarru’ Fund and Tanahud Fund use the Company’s current experience; d) policy or participant mutation assumptions (lapse, surrender, reinstatement, or withdrawal) use the Company’s current experience; and e) inflation assumptions use experience in Indonesia with an average inflation rate of at least the last 3 (three) years.

7. In the event that the Company uses claim rate assumptions, investment profit-sharing assumptions for Tabarru’ Fund and Tanahud Fund, policy or participant mutation assumptions, and/or inflation assumptions other than those referred to in item 6 letters b) through e), the Company’s Actuary must explain that the assumptions used fairly reflect the Company’s conditions.
8. The total value of Tabarru’ and Tanahud contribution provisions for policies in the same product group or business line must not be less than 0 (zero).
9. For policies that provide a return of Tabarru’ and Tanahud Contributions if the participant withdraws before the end of the insurance period, the amount of Tabarru’ and Tanahud contribution provisions must not be less than the amount of Tabarru’ and Tanahud Contributions to be returned to the participant.

B. PROVISION FOR UNPAID TABARRU’ CONTRIBUTIONS OR RIGHTS

1. The formation of provisions for unearned Tabarru’ contributions for products with a term of up to 1 (one) year or with a term of more than 1 (one) year whose policy terms and conditions can be renewed (renewable) at each policy anniversary is the largest amount between the calculation result of PAKTYBMP and the calculation result of PARYBD.
   Examples of related products include:
   a) investment products whose contributions are converted into fund placement units and form a special fund where Tabarru’ charged follows the risk profile (e.g., increasing with age) and can be renewed; b) savings insurance products whose benefits are the accumulation of participant savings funds plus development results (this benefit is not contingent on an insured event) where Tabarru’ charged follows the risk profile (e.g., increasing with age) and can be renewed; and c) annual life insurance, annual health insurance, annual property insurance.
2. PAKTYBMP is calculated based on the proportion of Tabarru’ contributions on a daily basis until the unexpired insurance period.
3. PARYBD is calculated with the following provisions:
   a) PARYBD is calculated for each business line or product with similar risk characteristics based on the average claim ratio over the last 3 (three) years multiplied by PAKTYBMP; b) the claim ratio as referred to in letter a) is calculated from claims paid plus the increase in claim provisions during the 1 (one) year period divided by earned Tabarru’ contributions during the same period; c) claims paid and the increase in claim provisions as referred to in letter b) are only claims that occurred during that 1 (one) year period; d) the average claim ratio is the sum of the claim ratios as referred to in letter b) over the last 3 (three) years divided by 3 (three); and e) earned Tabarru’ contributions as referred to in letter b) are Tabarru’ contributions during the 1 (one) year period plus the decrease in PAKTYBMP or minus the increase in PAKTYBMP during that period.

C. CLAIM PROVISIONS

1. The formation of claim provisions is calculated at least equal to the sum of:
   a. claim provisions in the process of settlement; b. claim provisions for claims that have occurred but are not yet reported (incurred but not reported or IBNR); and
   c. claim provisions for claims that have been approved and benefit payments are not made in a lump sum.
2. The value of claim provisions in the process of settlement as referred to in item 1 letter a) is the estimated claim value calculated at least based on the current central estimate or best estimate for claims that have occurred and been reported but are still in the process of settlement.
3. The value of claim provisions for claims that have occurred but are not yet reported (incurred but not reported or IBNR) as referred to in item 1 letter b) is the estimated claim value calculated based on the current central estimate or best estimate for claims that have occurred but are not yet reported using generally accepted actuarial estimation methods and considering claim reporting delay experience for at least the last 3 (three) years.
4. Claim provisions for claims that have been approved and benefit payments are not made in a lump sum as referred to in item 1 letter c) is the estimated claim value calculated based on the actuarial present value of approved claim payments that are still to be paid in the coming 1 (one) year.

D. PROVISION FOR CATASTROPHIC RISK (CATASTROPHIC RESERVE)

1. Catastrophic risk is the risk of loss arising from natural phenomena or pure accident risks that cause significant losses to the Company.
2. The provision for catastrophic risk is calculated based on the retained insurance benefit by considering the possibility of catastrophic risk occurrence.
3. The calculation of the provision for catastrophic risk is only conducted if:
   a. the Company does not reinsure catastrophic risks; and/or b. the reinsurance of catastrophic risks conducted by the Company is insufficient to cover the catastrophic risks faced.
4. In the event that the Company’s reinsurance of catastrophic risks is insufficient to cover the catastrophic risks faced, the catastrophic risk provision is calculated from the excess of catastrophic risks faced minus the reinsured catastrophic risks.

III. FORMATION OF TECHNICAL PROVISIONS FOR COMPANY FUND
A. UJRAH PROVISIONS

1. The formation of ujrah provisions with calculation methods:
   a. products with a term of up to 1 (one) year or with a term of more than 1 (one) year whose policy terms and conditions can be renewed (renewable) at each policy anniversary and do not promise other benefit payments from Company Fund, are calculated based on unearned ujrah, which is the proportion of ujrah for the unexpired period. The ujrah referred to is ujrah after deducting commissions paid to marketing channels in traditional insurance products or ujrah for basic insurance charges (charge of insurance) and rider insurance charges (charge of rider) in PAYDI. Examples of related products include:

1. ujrah received from unit link products whose amount can be renewed periodically (not fixed);
2. ujrah received from savings insurance products whose amount can be renewed periodically (not fixed); and
3. ujrah received from traditional insurance products with a term of at most 1 (one) year including annual life insurance and general Sharia insurance.
   b. products with a term of more than 1 (one) year whose policy terms and conditions cannot be renewed (non-renewable) at each policy anniversary and for products with a term of more than 1 (one) year whose policy terms and conditions can be renewed (renewable) and provide other benefits after a certain period paid from Company Fund are calculated using the following methods and assumptions:
4. ujrah provisions must consider all expected Company receipts and expenditures in the future using current central estimate/best estimate assumptions plus a margin for adverse deviation, with a confidence level of at least 75% (seventy-five percent) at the Company level;
5. receipts as referred to in item 1) include:
   a) Company ujrah; b) profit-sharing from investment results of Tabarru’ Fund and/or participant investment funds that are part of the Company; and c) other income to be received by the Company (example: administrative fees, other fees charged by the Company to policyholders or participants);
6. expenditures as referred to in item 1) include all costs to be incurred from Company Fund in maintaining insurance contracts plus expenditures for other benefit payments to be paid from Company Fund; and
7. assumptions used in forming ujrah provisions for products with a term of more than 1 (one) year whose policy terms and conditions cannot be renewed (non-renewable) at each policy anniversary and for products with a term of more than 1 (one) year whose policy terms and conditions can be renewed (renewable) and provide other benefits after a certain period paid from Company Fund follow the provisions as referred to in Roman II letter A item 6.
   Examples of related products include:
8. ujrah received from traditional life insurance products such as term insurance, decreasing credit insurance, term insurance with limited premium payment periods whose amount is fixed and cannot be changed;
9. ujrah received from term life insurance products with contribution return at the end of the insurance period taken from Company Fund; and
10. ujrah received from property insurance products with an insurance period of more than 1 year and contributions paid in a lump sum and not subject to review.

2. In the event that the Company uses expenditure assumptions as referred to in item 1 letter b item 1), policy or participant mutation assumptions, and/or inflation assumptions other than those referred to in Roman II letter A item 6, the Company’s Actuary must explain that the assumptions used fairly reflect the Company’s conditions.

This copy is consistent with the original.
Legal Director 1
Legal Department signed
Yuliana reflects the Company's condition fairly.
3. The total value of ujrah provisions must not be less than zero.

B. PROVISIONS FOR PAYDI THAT PROVIDE GUARANTEES ON INVESTMENT PRINCIPAL Provisions for PAYDI that are guaranteed are equal to the excess of the guaranteed principal over the accumulated assets of the guaranteed PAYDI.
Examples of related products include:

1. investment products whose contributions are converted into fund placement units and which have a guarantee on the investment principal for the fund placement allocated from paid contributions; and
2. savings insurance products whose benefits are the accumulation of contributions (benefits are not contingent on an insured event) and which form a special fund for provisions for the investment component and have a guarantee on the investment principal for contributions or funds for a certain period.

C. REINSURANCE ASSETS
In the event that the Company reinsures risks it underwrites, the reinsurance assets formed by the Company are calculated using the same methods and assumptions as the calculation for the formation of technical provisions as regulated in this Financial Services Authority Circular.

Determined in Jakarta on 13 June 2017
EXECUTIVE HEAD OF INSURANCE, PENSION FUNDS,
FINANCING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS SUPERVISOR FINANCIAL SERVICES AUTHORITY, signed FIRDAUS DJAELANI