Indonesia: Long-term challenges for takaful sector amid growing market share
Source: Middle East Insurance Review | Mar 2023
The takaful sector’s contribution in Indonesia will grow by 5%-10% in 2023, further supported by the developing Islamic finance ecosystem; however, long-term challenges persist due to very low awareness of and demand for takaful products, Fitch Ratings forecast in a recent commentary.
The sector gained market share, at 9% of the insurance market in 11M 2022 from 8% in 11M 2021, stemming from rising demand for takaful products. Indonesia is the fifth-largest takaful market globally with total assets of $3bn. Nevertheless, further growth may be challenging as the population’s financial literacy in shariah products was only 4%, based on the 2019 OJK National Survey on Financial Literacy and Inclusion. Other constraints include the distribution channel gap, small capital base of the sector and the limited range of takaful products.
The commentary said that life shariah (family takaful) sector reported profits of IDR1.7tn ($100m) in 11M 2022, from a loss of IDR1.7tn in 11M 2021, due to fewer COVID-related claims and bolstered by favourable investment yields. General shariah (general takaful), however, booked an IDR38bn loss from increased claims. “We view prudent underwriting as crucial, to curtail volatility in takaful operators’ profitability while maintaining sound capitalisation against a rise in claims,” Fitch said.
Only about six takaful operators have become full-fledged takaful providers since 2014 due to high capital requirements and operating expenses, although over 70% of all operators are required to spin off their shariah business units (SBUs) by the 2024 deadline. Takaful operators, including insurers that intend to spin off their SBUs, continue facing uncertainty due to lack of guidance in implementing PSAK 74 – Indonesia’s equivalent of IFRS 17. PSAK 74 will be effective on 1 January 2025. M