Erwin Noekman – (Re)Takaful Practitioner
When in Rome, act like a Roman. The phrase would also applicable when we were in Indonesia. So called, we must have a local wisdom when do trade in Indonesia. Takaful may not be too familiar if you ask a man on the street, rather they called it “sharia insurance”. As well as, “sharia bank” which refers to Islamic bank.
With huge and potential market, Indonesia cannot be overlooked nor underestimated. As a unique market, there are several issues in Indonesia (re)takaful industry which may change the current landscape. The first to be discussed is current market structure, then environment due to regulations change, capacity, market openness and also the spin-off.
Firstly let us see the (re)takaful market in Indonesia. Prior to 2003, there were only 2 full fledge takaful operators in Indonesia. After the regulator gave permission for (re)insurance companies utilises their takaful windows, Indonesia recorded a tremendous growth in terms of numbers of players as well as contributions.
Time after time, regulators introduced laws and regulations to govern the market. One of the action where (re)takaful operators in Indonesia used to have mudharaba scheme on their aqad (insurance contract), but later, regulator only permitted the usage of wakala on insurance scheme in Indonesia.
As we can see from below table, the number of operators had grown almost triple from 18 to become 49 by the end of 2014. It shows that the market is very potential and still attractive. Even in family takaful, the top player dominated by windows from joint-ventures insurance companies. Whilst in general takaful, top player also dominated from windows of captive companies.
The gross contribution of all (re)takaful operators in Indonesia also recorded a fantastic growth over a decade. In total, there were more than ten times from the initial productions. This leads us to the conclusion that the market is still huge and potentials are there.
Over years, there were time when takaful operators faced good time and hard time. For general takaful, the year of 2012 was a golden moment when most operators benefits from leverage on down-payment system on ijarah (sharia based leasing). The figure at that time was recorded almost double at that time. At the other end, 2014 was a challenging year for top operators, where they produced smaller figure on their books. Not many operators closed their books with positive growth last year. It is believed that takaful, as compliments products of Islamic bank, were heavily affected by the shrinkage of their portfolio. Two largest Islamic banks in Indonesia were put on hold and internally consolidated rather than disbursed their funds.
It was heard, that in near future, regulator would try to re-apply this leverage system to encourage (general) takaful market share. For this, I personally see act can be treated as positive as well as negative. It certainly will boost the contribution of (general) takaful, as what happen back in 2012. On the other side, this may only be a short-time treatment. If later, the leverage to be lifted, then the contribution may decline again.
Indonesia had introduced new law with regards to (re)takaful industry. The Insurance Act No. 40 year 2014 brought huge changes in insurance industry in Indonesia, especially in (Re)takaful, which carries both challenges and opportunities. The Act itself requires derivatives, ie Rule of Financial Statutory Authority (POJK). These are now being discussed between regulator and all stakeholders.
The Act itself equalised the position of (re)takaful operators and (re)insurance companies in every article. The previous Insurance Act No.2 year 1992, had not mentioned anything about (re)takaful in any sense. Therefore, the new Act, gives assurance for any (re)takaful operators in running their business properly.
Another classic issue with regards to (re)takaful in Indonesia is capacity. They may be at least two major issues on this one. Firstly is it really lack of capacity for retakaful in Indonesia. Secondly, is the risk or the subject matter or the terms requested is neither really acceptable nor suitable for takaful operator to provide.
There have been discussions among operators to set up so called capacity building and working together as partners in setting up a consortium. Most of takaful operators agree to have this kind of co-operation rather than letting the business goes to conventional market.
In macro perspective, Indonesian insurance industry contributes negative capital outflow for the nation. It was estimated the figure in 2014 reached IDR 15 trillion, whilst back in early 2000 the figure was only IDR 200 billion. These figures were contributed from reinsurance premiums paid to overseas ones.
Related to the above, regulator plans to limit the usage of overseas reinsurance to counter the negative outflow. This plan would also apply to (re)takaful. Hypothetically, there should be small number of retakaful contribution payable to overseas retakaful. But due to, so called the scarcity of retakaful covers in domestic market, this will be another challenge for local retakaful operators to be more creative in seeing this potential.
The above plan may contradict with the coming ASEAN Economic Community in which will take place by the end of this year. The market openness, may allow retakaful operators from neighbouring country, especially from Malaysia to tap the market. It may be good to have talents from other background to colour the market. But it would also generate another potential capital outflow for the nation.
Last but not least, the Act mandated that any (re)takaful windows must be spun-off from their parent (conventional (re)insurance). It is stipulated that by ten years time or when the total fund of tabarru consist more than half of all insurance assets. My personal opinion on this article would be on the first one rather than the latter one. Until now, none of the takaful windows in Indonesia contribute more than 10% from their consolidated balance sheet. I see this will last until the next five to ten years.
It is believed at least two takaful windows had shown their interest to spin-off in near future. If this happens, this will even bring more attractive competition in the market. On the other side, there was also thoughts from the Government to have a state-owned takaful operator, as to their plan to set up a state-owned Islamic bank in Indonesia. The more the merrier.
Well, would it be realise or not, guess this will be an interesting one to see the market dynamic and its opportunities.