Indonesia: New capital requirements for takaful operators to shape sector's dynamics
Source: Middle East Insurance Review | Mar 2024
The new equity requirements for Indonesia’s takaful and retakaful sector will encourage healthy competition and spur consolidation, said Fitch Ratings, with some weaker operators likely to fall short of the requirements.
In a report titled ‘Indonesia Takaful Dashboard 2024’, Fitch forecasts the sector’s contributions to grow by 5%-10% in 2024, supported by Indonesia’s position as the sixth largest takaful market globally and the potential from its low insurance penetration rate, halal businesses and takaful window spin-offs. This is despite multiple challenges including the new requirements, the population’s low financial literacy in shariah products (9% in 2022), volatile profitability, distribution channel gaps and the sector’s small capital base.
Almost half the companies will have to raise capital to meet the requirement by end-2026 based on their latest equity levels, and almost two-thirds of them by end-2028, as capital generated through growth is unlikely to be sufficient. The takaful sector’s market share shrank to 8.2% in 4M2023, from 9.4% in 4M2022, mainly due to lower contributions from life sharia (family takaful).
Fitch expects the Indonesian Financial Services Authority’s (OJK) spin-off requirements to encourage takaful companies to optimise their business development potential, even as they benefit from less competition amid the stringent requirements. Over 70% of (re)takaful windows will be spun off by end-2026, while the remaining 30% will transfer their sharia portfolios to full-fledged (re)takaful companies.
The capital requirements will rise to IDR100bn ($6.4m) and IDR200bn for takaful and retakaful companies, respectively, from IDR50n and IDR100bn at end-2026. By end-2028, they will rise to IDR200bn for takaful and IDR400bn for retakaful, for those offering simple takaful products. Companies that offer a full range of takaful products will be required to have at least IDR500bn for takaful and IDR1tn for retakaful. M