Frontier for takaful: Making space for a growing segment

In the world’s most populous Muslim nation where over 85% of the population ascribes to the faith, Indonesia’s sharia-compliant insurance segment (takaful) remains marginal at a mere 3.9% of industry assets in 2012, according to a June 2013 report by rating agency Fitch. While proportionately small compared to neighbouring countries like Malaysia and Brunei Darussalam, the market has grown rapidly since the first takaful underwriter – Malaysian-backed Syarikat Takaful – launched in 1994. The entrance of more foreign insurers attracted by one of the fastest-growing frontier markets for takaful should drive product innovation and diversification of distribution. Expected regulatory reform, details of which remain uncertain, should also encourage consolidation and raise standards. “According to government data, there are about 120 insurance companies in Indonesia which will require $100bn in capital in the coming years. Therefore, some consolidation may be taking place in the short-term,” Slamet Riyadi, the president director of Jasaraharja Putera, told OBG.

Rapid Growth

The segment’s growth since 2005 has been over double the industry average, with a compound annual growth of 35% from 2005 to 2010, according to accountancy Ernst & Young. Gross takaful premiums grew nearly 10-fold in the five years to 2011 (the latest year for which audited figures are available), reaching Rp4.97trn ($497m), according to the Indonesia Islamic Insurance Association (AASI). Meanwhile, takaful underwriters’ combined assets grew more than fivefold from 2007 to 2012, from Rp1.9trn ($190m) to Rp11.4trn ($1.14bn), according to data from the Ministry of Finance.

While still small relative to the size of Indonesia’s insurance market, the segment’s premiums overtook those of Saudi Arabia and the UAE in 2010, according to SwissRe, the world’s second-largest reinsurer. AASI forecast in May 2013 full-year growth of 35-40%, while Fitch expects takaful’s share of the insurance market to double to 7.9% by 2018. “We see strong potential for growth in takaful as the market expands to mid- and lower-income segments of the population,” Indra Tan, senior vice-president of corporate planning and risk management at Tokio Marine Life, told OBG. The segment remains under-penetrated despite the rapid expansion in the number of underwriters, ranging from fully-fledged takaful underwriters to dedicated windows operated by conventional insurers.

Market Structure

Both the Life Insurance Association of Indonesia and the non-life General Insurance Association of Indonesia explain the rapid recent growth as driven by the expansion in underwriting capacity in the segment. The number of underwriters offering takaful products has grown from 30 in 2006 to 43 by 2013, alongside three reinsurers’ dedicated windows. Only five of these are fully-fledged takaful underwriters, however: three in life and two in non-life.

The remainder are conventional underwriters operating dedicated windows, segregating their sharia-compliant business by a Chinese wall. In line with rules for the conventional market, underwriters must segregate their non-life business (umum) from their life (known as family takaful, or keluarga).

Malaysian underwriters have led the charge since 1994, when Takaful Malaysia, a unit of Bank Islam Malaysia, the only publicly listed takaful underwriter in that country, launched Syarikat Takaful Indonesia (STI), in which it maintains a 56% stake as of 2013. The holding operates a subsidiary each in family and general takaful underwriters. Its partnership with the 3000-branch Bank Muamalat, the second-largest sharia-compliant and oldest lender in Indonesia, has driven the underwriter to the top position among takaful players, even though its contribution to the Malaysian group’s revenue remains below 15%. The group hopes to drive this to over 20% by 2015. As a means of encouraging cooperation with its bancassurance partner, STI plans to sell a 19% stake to Bank Muamalat in 2014, raising its total shareholding to 25%. A second leading Malaysian underwriter, Great Eastern Takaful, launched its Indonesian operations in 2011 through a bancassurance deal with the 400-branch OCBC Bank. With encouraging growth, the number of underwriters operating successful takaful windows has multiplied, led by foreign joint ventures like Allianz, AXA, Prudential, Sun Life and others. AXA’s joint venture with Bank Mandiri in marketing takaful products since 2003 has been particularly successful given the wide reach of Mandiri Syariah, the largest sharia-compliant bank with over 700 branches.

Products & Channels

The majority of products sold thus far have followed the wakala model, where premium is split between an administrator fee and a policyholder fund to settle claims and share excess proceeds. The policyholder funds are placed in a mudaraba structure where funds are placed on a risk-and profit-sharing basis. In the family (life) segment, which accounts for roughly 90% of takaful sales, according to Tokio Marine Life estimates, trends have mirrored those in conventional products where unit-linked takaful has gained a commanding share of the market.

The rapid growth in sharia-compliant banking has generated spin-off effects for takaful products sold through bank partnerships. Allianz aims to double its market share in takaful by 2018 by capitalising on its bancassurance relation with HSBC’s sharia-compliant division HSBC Amanah, as does Sun Life through its joint venture with CIMB Bank Niaga. This greater emphasis on bank distribution is supporting the gradual shift from simple takaful protection plans to a diversified array of financial planning instruments. In the past three years the portfolio of takaful products available on the market has broadened to unit-linked policies, annuities, dedicated policies for women, child protection and health riders. Allianz has also led the way in marketing smaller-premium takaful products, rolling out a takaful credit policy, with monthly premiums as low as Rp3000 ($0.30), through 66 microfinance institutions and rural banks with which it partners. AIG has also rolled out takaful micro-policies for health and personal accident in 2012, partnering with Bank Muamalat’s nonprofit microfinance subsidiary Baitulmaal Muamalat.


While the array of sharia-compliant financial instruments has expanded significantly in recent years, with the launch of sharia bonds by Bank Indonesia in September 2007, there have been more bond issues by sharia banks, and the Jakarta Islamic Index was established in 2002, which in turn attracted a number of sharia-compliant mutual funds. Yet while the types of Islamic investment instruments has multiplied, if not always in sufficient size to meet demand, domestic retakaful capacity remains constrained. Three of the four domestic reinsurers operate re-takaful windows, with NasionalRe dominating the general segment and ReIndo covering most family re-takaful.

Significant retakaful capacity is available regionally, mainly through the Malaysian offshore financial centre of Labuan and Singapore. Since 1997 Asean Retakaful International, a unit of Takaful Malaysia, has led Labuan’s development as a major retakaful centre globally. The regulator, the Financial Services Authority, has long held that takaful risk ceded to reinsurers should first be ceded onshore before seeking capacity offshore. The Council of Indonesian Ulama, however, has maintained that risk should be ceded offshore if domestic re-takaful capacity is insufficient, rather than ceding risk to conventional reinsurers domestically.

Regulatory Reform

The segment has flourished under a relatively laissez-faire approach by the regulator. Although authorities have not adopted as proactive an approach as Malaysia, where takaful policies are subsidised for broader adoption, underwriters thus far have not been forced to spin off this business as standalone companies. Although capital requirements for conventional insurers were raised to Rp70bn ($7m) in 2012, the lower Rp50bn ($5m) was maintained for standalone takaful operators and will only rise to Rp75bn ($7.5m) in 2014, when conventional underwriters will need to comply with a new Rp100bn ($10bn) requirement. While standalone takaful underwriters will need to raise additional equity to comply in 2014, with players like STI already announcing plans for additional equity issues, more far-reaching reform is included in the proposed Insurance Business Act in front of the House of Representatives in 2013. Although it is unclear whether the bill will be enacted before the 2014 elections, a key provision will require underwriters to spin off separate takaful underwriters within three years of the bill’s enactment. This is far faster than Bank Indonesia’s requirement for banks to spin off sharia windows within 15 years or once their assets exceed 50% of the balance sheet. While it is uncertain when the new rules will be enacted, some players like Manulife have already announced their intent of spinning off their takaful business as a separate subsidiary.

Despite the nascent stages of takaful’s development in Indonesia, the market presents strong fundamental prospects for growth given the country’s large Muslim population, increasingly diverse product offering and new distribution channels. The regulator will need to strike a balance between the priorities of domesticating takaful risk and supporting the sector’s development, as well as the integrity of the takaful value chain.


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The Report: Indonesia 2014

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