Indonesia’s takaful sector continues to expand on growing awareness and demand for takaful products, government support, easing of COVID-19 movement restrictions and a recovering economy, Fitch Ratings said in a recent report titled ‘Indonesia Takaful Dashboard: 2022’.
Fitch report noted that takaful contribution’s market share reached 9% of the country’s overall insurance market in the first 11 months of 2021 (11M20: 7%). The strong rise was caused by a 41% y-o-y increase in family takaful products, while conventional life insurance expanded by only 3%. However, the family takaful sector booked losses of IDR1.7tn ($118m) in 11M21, on a 68% increase in claims, mainly related to COVID-19. The increase was larger than life insurance’s 31% rise in claims.
The report said that the long-term growth potential is positive, reflecting Indonesia having the largest Muslim population globally, government support, low insurance penetration (2020: 3.2%), growing awareness and economic recovery.
Fitch expects takaful operators to maintain sufficient capitalisation in light of business expansion through the economic recovery and the upcoming ASEAN Framework Agreement on Services, while also managing claims and strengthening takaful capacity amid the pandemic.
Challenges
Most insurers are struggling to spin off their shariah business units (SBUs) in the short term because of high capital requirements and operating expenses. Only one SBU was spun off in 2021, and another is in the process of being separated, with 44 insurance companies to follow up on the Shariah Unit Separation Work Plan in 2024. The introduction of PSAK 74 – Indonesia’s equivalent of IFRS17 – is another challenge for takaful operators, including insurers intending to spin-off their SBUs. M