Most insurance firms are progressing slowly and struggling to spin off SBUs in the short term due to high capital requirements and operating expenses, while the implications for profitability and financial viability are unclear. In the long run, however, the takaful sector could benefit from rising sector capitalization and as more insurers prioritize takaful.
The regulations are mainly driven by sharia requirements and could affect takaful firms’ operating and credit profiles. Despite the pressures, takaful sector’s performance is expected to remain steady in 2021-2022.
Industry Development - To support the transition, the Indonesian House of Representatives in 2020 approved the 7th ASEAN Framework Agreement on Services (AFAS) protocol, which aims to partner ASEAN general sharia insurers with domestic players under the spin-off programme. Fitch expects the partnerships to not only provide capital inflow from ASEAN insurers to support the spin-offs in the long term, but will also provide the necessary know-how.
The government has also exempted new sharia entities from the 80% limit on foreign ownership, and has allowed certain services to be shared between the new takaful firm and the original insurer for up to three years, subject to the Financial Services Authority’s (OJK) approval. This would help reduce operating expenses of the new takaful firms. However, evidence of capital inflow from ASEAN insurers has so far been limited.
Life insurers with SBUs would not benefit from the AFAS protocol, which applies only to non-life insurers. Some insurers with small SBUs may close their takaful business.
Sharia Business Units - dominate the Indonesian takaful market numerically, with 42 takaful and three retakaful windows at end-July 2021, compared with 13 full-fledged takaful companies and one retakaful company. More than 70% of all takaful operators are required to spin off their SBUs by the 2024 deadline, but only about five have done so since 2014, including PT Asuransi Jasindo Syariah, PT Asuransi Askrida Syariah, PT Asuransi Jiwa Syariah Bumiputera and PT Reasuransi Syariah Indonesia. In 2019, Zurich Insurance Group acquired 80% of PT Asuransi Adira Dinamika Tbk, and the latter shifted its sharia portfolio to PT Zurich General Takaful Indonesia.
Failure to spin-off the SBUs by October 2024 would lead to OJK revoking the business licences of the sharia units. OJK asked insurers to submit spin-off plans for their Islamic insurance units by 17 October 2020, with revisions allowed till 17 October 2021. The spin-off plans will include insurers' decisions on whether to separate their SBUs or transfer existing portfolios to full-fledged sharia insurers and seek to withdraw their SBU licences.
Takaful Growth - The Indonesian takaful sector continues to grow, with contributions reaching 8.7% of domestic insurance gross premiums in 6M21 (6M20: 6.5%), due to the economic recovery, rising government support, accelerating digitalisation and increasing awareness. The sector's long-term growth potential remains high because Indonesia has the world's largest Muslim population while the insurance penetration rate was only 1.9% in 2020.
However, for the new takaful companies to thrive and the sector to continue growing, several structural constraints need to be addressed. These include developing an Islamic finance ecosystem that supports takaful operators, attracting adequate capital, strengthening the regulatory framework, providing additional incentives for takaful operators, introducing new products, raising awareness of insurance products and of Islamic finance in particular, and developing human capital.
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