Indonesia: Extending spin-off deadline will boost development of takaful
Source: Middle East Insurance Review | Nov 2023
The extension of a deadline and incentives provided by new rules on spin-off requirements for conventional insurers’ takaful windows will support the development of Indonesia’s takaful sector in the long term said Fitch Ratings in a recent release.
The new rules will strengthen the business profiles of both conventional (re)insurers and (re)takaful operators by allowing them to focus on their competitive positioning and support the growth of the sector, said the rating agency.
Indonesia’s Financial Services Authority (OJK) issued the new regulation in July 2023, which outlined the extension of a deadline and requirements for the spin-off of the shariah business units (SBUs) of (re)insurers. These rules replaced the previous regulation issued in 2016. The deadline to spin off takaful windows has been extended to December 2026 from October 2024.
Conventional (re)insurers that have not spun off their takaful windows are required to submit amendments to their spin-off plans by 31 December 2023. Insurers will need to decide whether to separate their SBUs or transfer existing portfolios to full-fledged shariah insurers and seek to withdraw their SBU licences.
Conventional (re)insurers, especially those that transfer shariah portfolios to full-fledged takaful companies, will benefit from having to only focus on their non-takaful businesses.
However, the new rules shorten the timeline for (re)insurers to complete the transition to full-fledged (re)takaful companies after obtaining approval from OJK to only six months from 12 months. The minimum equity requirement for spun-off takaful and retakaful companies will remain at IDR50bn ($3.18m) and IDR100bn, respectively. The minimum paid-up capital for newly established (re)takaful companies will also remain at IDR100bn and IDR175bn, respectively.
The new regulation also allows spun-off takaful companies and conventional insurers under common owners to benefit from business synergies, which will support the development of shariah businesses. In addition, the regulation requires (re)insurers to prioritise takaful products to fulfil the protection needs of shariah financial services. Fitch said that these incentives will strengthen the business profiles of spun-off (re)takaful companies while also increasing the number of fully-fledged takaful companies and contributing to takaful sector growth in the long term. M