Guidelines for the Formation of Technical Reserves for Insurance and Reinsurance Companies

To:

1. Board of Directors of Insurance Companies; and
2. Board of Directors of Reinsurance Companies,
   At your location.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 27 /SEOJK.05/2017 CONCERNING GUIDELINES FOR THE FORMATION OF TECHNICAL RESERVES FOR INSURANCE AND REINSURANCE COMPANIES

In accordance with the mandate of Article 22 of the Financial Services Authority Regulation Number 71/POJK.05/2016 concerning the Financial Health of Insurance and Reinsurance Companies (State Gazette of the Republic of Indonesia Year 2016 Number 304, Supplement to the State Gazette of the Republic of Indonesia Number 5994), it is necessary to regulate implementation provisions regarding guidelines for the formation of technical reserves for insurance and 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 defined:

1. Company means an insurance company and a reinsurance company.
2. Insurance Company means a general insurance company and a life insurance company as referred to in Law Number 40 of 2014 concerning Insurance.
3. General Insurance Company means a company conducting risk underwriting services that provides compensation to the insured or policyholder for losses, damages, costs arising, loss of profit, or legal liability to third parties, which may be suffered by the insured or policyholder due to the occurrence of an uncertain event.
4. Life Insurance Company means a company conducting risk mitigation services that provides payments to the policyholder, insured, or other entitled parties in the event the insured dies or remains alive, or other payments to the policyholder, insured, or other entitled parties at a certain time as regulated in the agreement, the amount of which has been established and/or is based on fund management results.
5. Reinsurance Company means a company conducting re-underwriting services against risks faced by Insurance Companies, guarantee companies, or other reinsurance companies.
6. Embedded Derived Benefits are future benefits promised by the Insurance Company to the insured or policyholder linked to a specific condition.
7. Non-binding Participation Feature Benefits are options provided by the Insurance Company to the insured or policyholder to obtain certain benefits with or without paying additional premiums.
8. Unearned Premium Reserve (CAPYBMP) is a fund that must be formed to represent the portion of premiums whose insurance period has not yet been completed.
9. Unexpired Risk Reserve (CARYBD) is an estimate of claim payments that will occur during the future coverage period arising from active policies at the date of technical reserve formation, including maintenance and claim handling costs for the remaining coverage period.
10. Investment-Linked Insurance Products (PAYDI) are insurance products that provide at least death risk protection and provide benefits referring to the investment results of a special fund pool formed for the insurance product, whether expressed in units or non-units.

II. FORMATION OF TECHNICAL RESERVES

1. The formation of technical reserves for Companies includes premium reserves, unearned premium reserves for products with a duration of up to 1 (one) year or with a duration of more than 1 (one) year whose policy terms and conditions are renewable every policy anniversary, reserves for PAYDI, claim reserves, and catastrophic risk reserves.
2. The formation of technical reserves for Companies is calculated based on the technical reserve formation guidelines as referred to in the Appendix, which is an integral part of this Financial Services Authority Circular Letter.

III. OTHER PROVISIONS

This Financial Services Authority Circular Letter does not apply to the financial reports of Insurance and Reinsurance Companies with Sharia principles or the Sharia units of Insurance and Reinsurance Companies.

IV. CLOSING PROVISIONS

1. This Financial Services Authority Circular Letter takes effect on July 1, 2017.
2. Upon the taking effect of this Financial Services Authority Circular Letter, the Capital Market Supervisory Board and Financial Institutions Chairman Regulation Number PER-09/BL/2012 concerning Guidelines for the Formation of Technical Reserves for Insurance and Reinsurance Companies is revoked and declared invalid.

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

APPENDIX
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 27 /SEOJK.05/2017 CONCERNING GUIDELINES FOR THE FORMATION OF TECHNICAL RESERVES FOR INSURANCE AND REINSURANCE COMPANIES

TECHNICAL RESERVE FORMATION GUIDELINES

I. GENERAL GUIDELINES FOR TECHNICAL RESERVE FORMATION

1. Companies are required to form technical reserves according to 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 reserve reporting dates;
   d. ensuring fair and equitable liability recognition 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 methods and assumptions for technical reserve formation, the Company’s appointed Actuary must explain the reasons and impacts of such changes on the amount of technical reserves and the Company’s solvency level.

3. In forming technical reserves, the Company’s appointed 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 latest central estimate or best estimate assumptions 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 reserves, the Company’s appointed Actuary must provide justification for the use of each assumption.

II. PREMIUM RESERVES

1. Technical reserves in the form of premium reserves are premium reserves derived from products other than PAYDI, consisting of:
   a. products with a duration of more than 1 (one) year whose policy terms and conditions are not renewable every policy anniversary (non-renewable).
   Examples of related products include:

1. traditional life insurance products such as term insurance, decreasing credit insurance, education insurance, whole life insurance, annuities;
2. term life insurance products with premium refund at the end of the coverage period;
3. loss insurance products with coverage of more than 1 (one) year with premium paid in a lump sum and policy terms that cannot be reviewed; and
4. dual-purpose insurance products where the cash value is calculated as the accumulation of premiums and the maturity benefit is equal to the cash value; and
   b. products with a duration of more than 1 (one) year whose policy terms and conditions are renewable every policy anniversary and provide other benefits after a certain period.
   Examples of related products include:
5. products promising premium accumulation at a certain interest rate with additional benefits besides insurance protection;
6. products promising other benefit payments or bonuses if no claims are made every certain period.

2. The formation of technical reserves in the form of premium reserves as referred to in paragraph 1 letters a and b must consider future receipts and expenditures using the latest central estimate or best estimate assumptions plus a margin for adverse deviation (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 paragraph 2 include:
   a. premium income, based on gross premiums, including extra premiums due to additional medical risk, occupational risk, and other risks; b. premium income from Embedded Derived Benefits;
   c. premium income from Non-binding Participation Feature Benefits; and
   d. other income directly related to insurance contracts.

4. Expenditures as referred to in paragraph 2 include:
   a. main insurance benefits; b. Embedded Derived Benefits;
   c. Non-binding Participation Feature Benefits;
   d. marketing costs; e. policy issuance costs; f. policy maintenance costs; and g. taxes except income tax.

5. Receipts and expenditures as referred to in paragraph 2 do not include:
   a. investment income; b. receipts and expenditures from and to re-underwriting; and
   c. receipts and expenditures from and to claim reserves.

6. Assumptions in calculating technical reserves use the latest central estimate/best estimate assumptions with the following provisions:
   a. discount rate assumptions must meet the following provisions:

1. the discount rate assumption used in calculating premium reserves must not exceed the average yield of securities issued by the Republic of Indonesia over the last 1 (one) year, with an additional maximum of 0.5% (zero point five percent) if necessary;
2. the discount rate assumption for policies denominated in rupiah, the yield of securities as referred to in paragraph 1) refers to the yield curve published by the IBPA (Indonesia Bond Pricing Agency) for securities issued by the Republic of Indonesia;
3. for policies denominated in currencies other than rupiah, the yield of securities as referred to in paragraph 1) refers to the yield curve published by the IBPA (Indonesia Bond Pricing Agency) for securities issued by the Republic of Indonesia denominated in US dollars;
4. securities issued by the Republic of Indonesia as referred to in paragraph 1) are securities issued by the Republic of Indonesia that have a remaining maturity date suitable or close to the calculated cash flows or close to the remaining insurance contract period of the Company’s active policies (inforce);
5. under certain conditions, the Executive Head of 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 paragraph 5) begins and ends through a notification letter from the Executive Head of Insurance, Pension Funds, Lending Institutions, and Other Financial Service Institutions to the Company;
   b. cost assumptions use the Company’s latest experience/data consisting of fixed and variable costs linked to the number of active policies or participants (in force), premium billing, claim submission, premium amount, and policy or participant sum insured;
   c. claim rate assumptions (mortality, morbidity, or incidence rate) use the Company’s or Indonesian insurance industry’s latest experience tables;
   d. policy or participant mutation assumptions (lapse, surrender, reinstatement, or withdrawal) use the Company’s latest experience; and e. inflation assumptions use Indonesian experience with an average inflation rate of at least the last 3 (three) years.

7. In the event the Company uses cost assumptions, claim rate assumptions, policy/participant mutation assumptions, and/or inflation assumptions other than those referred to in paragraph 6 letters b through e, the Company’s Actuary must explain that the assumptions used fairly reflect the Company’s conditions.

8. The total premium reserve value for policies in the same product group or business line must not be less than 0 (zero).

9. In the event the total premium reserves formed are smaller than the total cash value or premium refund promised when the policy is cancelled/surrendered, the Company must increase the premium reserve value to at least the cash value or premium refund amount.

III. UNEARNED PREMIUM RESERVES (CAPYBMP)

1. The formation of CAPYBMP for products with a duration of up to 1 (one) year or with a duration of more than 1 (one) year whose policy terms and conditions are renewable every policy anniversary is the greater of the CAPYBMP calculation result or the CARYBD calculation result.
   Examples of related products include annual term life insurance, annual health insurance, and annual loss insurance.

2. CAPYBMP is calculated based on the proportion of gross premiums on a daily basis for the unexpired insurance period.

3. Gross premiums as referred to in paragraph 2 are gross premiums after deducting direct commissions.

4. Direct commissions as referred to in paragraph 3 considered in forming CAPYBMP are actual commissions paid by the Company.

5. Direct commissions as referred to in paragraph 3 considered in forming CAPYBMP are:
   a. maximum 25% (twenty-five percent) of gross premiums for motor vehicle classes; b. maximum 15% (fifteen percent) of gross premiums for property classes; or
   c. a certain percentage of gross premiums other than in letters a and b, calculated based on the Company’s experience.

6. CARYBD is calculated with the following provisions:
   a. CARYBD 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 CAPYBMP; b. the claim ratio as referred to in letter a is calculated from claims paid plus the increase in claim reserves over a 1 (one) year period divided by gross earned premium during the same period;
   c. claims paid and the increase in claim reserves as referred to in letter b are only claims occurring within 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); e. gross earned premium as referred to in letter b is gross premiums over a 1 (one) year period plus the decrease in CAPYBMP or minus the increase in CAPYBMP during that period; and f. gross premiums as referred to in letter e are gross premiums as referred to in paragraph 3.

7. The CAPYBMP value for each policy must not be less than 0 (zero).

8. In the event the total CAPYBMP or CARYBD formed is smaller than the promised premium refund value, the Company must increase the reported reserve value to at least the total promised premium refund value.

IV. PAYDI RESERVES

1. PAYDI reserves are premium reserves derived from PAYDI, consisting of:
   a. non-guaranteed PAYDI fund accumulation reserves, equal to the fair value of accumulated PAYDI assets at the date of technical reserve formation.
   Examples of related products include:

1. investment products where premiums are converted into fund placement units and a special fund is formed for investment reserves without any guarantee of investment development rate on premiums or funds; and
2. savings insurance products where benefits are premium accumulation (benefits not contingent on an insured event) and a special fund is formed for investment reserves without any guarantee of investment development rate on premiums or funds.
   b. investment element reserves for guaranteed PAYDI, equal to the positive difference between the fund return liability value and the fair value of accumulated guaranteed PAYDI assets up to the date of technical reserve formation. Examples of related products include:
3. investment products where premiums are converted into fund placement units and a special fund is formed for investment reserves with a guarantee of investment development rate on premiums or funds for a certain period; and
4. savings insurance products where benefits are premium accumulation (benefits not contingent on an insured event) and a special fund is formed for investment reserves with a guarantee of investment development rate on premiums or funds for a certain period.
   c. PAYDI protection element reserves and other promised PAYDI benefits with the following criteria:
5. products whose policy terms and conditions are renewable every policy anniversary and do not promise other benefits after a certain period:
   The Company must calculate CAPYBMP and CARYBD on insurance charges (charge of insurance) and additional protection charges (charge of rider) levied.
   Provisions regarding CAPYBMP and CARYBD follow the CAPYBMP provisions as referred to in Section III.
   Examples of related products include:
   a) investment products where premiums are converted into fund placement units and a special fund is formed for insurance charges (charge of insurance) and additional protection charges (charge of rider) levied according to risk profiles (e.g., increasing with age) and are renewable; and b) savings or universal life insurance products where benefits are premium accumulation (benefits not dependent on the occurrence of covered risks) and a special fund is formed for insurance charges levied specifically and sized according to risk profiles and are renewable.
6. products whose policy terms and conditions are not renewable every policy anniversary (non-renewable) and/or promise other benefits after a certain period:
   a) The Company must calculate reserves based on the latest central estimate or best estimate of expenditures (including insurance claims, riders, maintenance costs, acquisition costs, and bonuses) and receipts (including unallocated premiums, insurance charges, riders, administrative fees, and other explicitly levied fees) that may occur in the future plus a margin for adverse deviation with a confidence level of at least 75% (seventy-five percent) at the Company level; and b) assumptions used in forming reserves for PAYDI protection elements and other promised PAYDI benefits whose policy terms and conditions are not renewable every policy anniversary (non-renewable) and/or promise other benefits after a certain period follow the provisions as referred to in Section II paragraph 6. Examples of related products include:
   a) investment products where premiums are converted into fund placement units and a special fund is formed for insurance charges (charge of insurance) and additional protection charges (charge of rider) and administrative fees levied at a fixed rate and are not renewable, or are level or lump-sum fees; b) investment products where premiums are converted into fund placement units and a special fund is formed with bonuses given if the policyholder is active (not lapsed or premium holiday) until a certain period; c) savings or universal life insurance products where benefits are premium accumulation (benefits not contingent on an insured event) and a special fund is formed for insurance charges not levied specifically; and d) savings or universal life insurance products where benefits are premium accumulation (benefits not contingent on an insured event) and a special fund is formed for insurance charges levied specifically and are fixed and not renewable, or are level or lump-sum fees.

2. The time period used to estimate expenditures and receipts as referred to in paragraph 1 letter c paragraph 2) letter a refers to the contract period as stated in the policy provisions.

3. The PAYDI reserve value for each policy as referred to in paragraph 1 letters a through c must each not be less than 0 (zero).

4. In the event the total PAYDI reserves formed are smaller than the promised accumulated fund benefit value, the Company must increase the PAYDI reserve value to at least the promised accumulated fund benefit value at the date of technical reserve formation.

5. PAYDI fund accumulation reserves as referred to in paragraph 1 letter a are not considered in determining the solvency level.

V. CLAIM RESERVES

1. Technical reserves in the form of claim reserves must be calculated at least as the sum of:
   a. claim reserves in the settlement process; b. incurred but not reported (IBNR) claim reserves; and
   c. claim reserves for approved claims and benefit payments that are not lump-sum.

2. The value of claim reserves in the settlement process as referred to in paragraph 1 letter a is the estimated claim value calculated at least based on the latest central estimate or best estimate of claims that have occurred and been reported but are still in the settlement process, including insurance loss adjuster service costs, legal settlement costs, and other costs related to claim settlement.

3. The value of incurred but not reported (IBNR) claim reserves as referred to in paragraph 1 letter b is the estimated claim value calculated based on the latest central estimate or best estimate of claims that have occurred but not yet reported using generally accepted actuarial estimation methods and considering claim reporting delay experience of at least the last 3 (three) years, including estimated service costs

insurance loss assessors and other costs related to the settlement of such claims.
4. In the event that the reserve for claims in the process of settlement as referred to in item 1 letter a cannot be estimated, the amount reserved is the average percentage of paid claims against the sum insured for the same business line in the last fiscal year multiplied by the sum insured of such claim.
5. The claim reserve 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 calculated as the actuarial present value of approved claim payments that are still to be paid within a period of 1 (one) year in the future.

VI. RESERVE FOR CATASTROPHIC RISKS (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 reserve for catastrophic risks is calculated based on the retained insurance benefits, taking into account the possibility of catastrophic risks occurring.
3. The calculation of the reserve for catastrophic risks is only conducted when:
   a) The Company does not reinsure catastrophic risks; and/or b) The reinsurance of catastrophic risks undertaken by the Company is insufficient to cover the catastrophic risks faced.
4. In the event that the reinsurance of catastrophic risks undertaken by the Company is insufficient to cover the catastrophic risks faced, the catastrophic risk reserve is calculated from the difference in value that is insufficient to cover such catastrophic risks.

VII. REINSURANCE ASSETS
In the event that the Company reinsures risks it underwrites, the reinsurance assets formed by the Company are calculated with

This copy is consistent with the original
Legal Director 1
Legal Department signed
Yuliana methods and assumptions the same as the calculation for the formation of technical reserves as regulated in this Circular Letter of the Financial Services Authority.
Determined in Jakarta on the date of June 13, 2017 EXECUTIVE HEAD OF SUPERVISOR OF INSURANCE, PENSION FUNDS, FINANCING INSTITUTIONS, AND OTHER FINANCIAL SERVICE INSTITUTIONS FINANCIAL SERVICES AUTHORITY, signed FIRDAUS DJAELANI