The Takaful companies in Indonesia can be divided into three categories: fully-fledged Takaful companies, Takaful divisions, and Islamic reinsurance divisions. Presently, there are five fully-fledged Takaful companies, 35 Islamic divisions and three Islamic reinsurance divisions.
Total managed assets by Indonesia’s Takaful industry (including reinsurance) in 2010 amounted to IDR4.6 trillion (US$500 million), an increase of 52.36% from 2009. These total assets only represent 2.05% of the total industry. Although the market share is still small, the growth of Takaful is still faster than the total insurance industry. The growth of the Takaful industry over the last four years was approximately 49.3% per year compared to the industry’s growth of 24% per year.
By the end of 2011, it is predicted that the total assets of the Takaful companies in Indonesia will reach IDR6 trillion (US$650 million). Furthermore, in 2012 the Indonesian Takaful Association predicts that the market share of Takaful will reach 5%.
The high growth of Takaful, can pose advantages to the country in several ways: including the development of the Indonesian Islamic finance industry and economy; high economic growth; and the establishment of new Islamic banks and Islamic financial institutions.
However there still exist some challenges to the Takaful industry despite the growth: such as a lack of awareness due to minimum funding and low budgets; a lack of quality marketers; bad servicing of clients; lack of human resources; and the fact that the target market is the middle to low income bracket and there are no innovative products to offer.
If the Takaful industry wants to increase its market share, it must create a very intensive synergy with the Islamic banking industry. Moreover the central bank, Bank Indonesia, targets that assets of Islamic banks in 2012 will reach IDR203 trillion (US$ 23 billion), growing at a rate of 45% compared to 2011.
The synergy between a Takaful company and an Islamic bank in Indonesia can be divided into synergies in bank funding, bank financing and bancassurance.
Synergy in bank funding
Takaful companies are constrained in their investment opportunities. The most common investment is in Islamic time deposits. In 2010, IDR3.4 trillion (US$375 million) of Takaful total investments, 65.65% or IDR2.26 trillion (US$250 million) was in time deposits. The other investments are mutual funds (11.87%), Islamic bonds and medium-term notes (10.13%), Islamic sovereign bonds (5.85%) and others.
It can be concluded that Takaful companies still believe in investing in Islamic banks. This is because the Islamic banking time deposits can generate higher returns among other investment instruments. But that is not the only reason. There is also a political reason which is just like a “win-win solution”. It means that, in a contract of agreement, the Takaful company has to place some investment funds in that Islamic bank and the investment instrument that is used is termed as time deposits. It is in time deposits, because the Takaful fund will be held for a period of time.
The Islamic bank can also be the payment point to pay the premiums of the Takaful company. The Takaful customer can use the Islamic bank’s facilities to pay the insurance premiums. To support this service, some Islamic banks do provide some electronic payment services such as the automatic teller machine, sms banking, electronic banking and virtual accounts.
The collaboration between a Takaful company and an Islamic bank in terms of bank funding may not only be in the placement of investment funds. The Takaful company can offer insurance products to cover the savings and time deposits of customers. Depositors are at risk of earning lesser profits or losing investments if the bank incurs a loss in the financing business. Islamic banks need Takaful to provide a sense of safety and protection to small depositors and increase the confidence of depositors in the Islamic banking system.
To increase the potential in bank funding, the investment manager in the Takaful company must invest the fund in a safe Islamic bank which could give high returns while collaborating with the Islamic bank to offer innovative products to attract customers.
Synergy in bank financing
Islamic bank financing could either be for business banking or consumer banking. The Islamic bank needs Takaful as a mitigation risk and the legal requirement of a financing. In case of business financing, the Islamic bank uses general insurance. The general insurance covers against loss of the underlying assets financed by Islamic banking contracts and the customer’s collateral against damage as a result of collision, fire, vandalism, stealing, or other accidents, or against natural causes, such as flood, storm, or other disasters.
In the case of consumer financing, the Islamic banks uses general insurance, life insurance and employment insurance. Life Takaful is required to cover the risk in the event of death or disability of the customer and fired insurance is to cover the risk if the customer is fired from his workplace and doesn’t have a source of payment.
Takaful which covers the customer and the underlying asset in an Islamic bank’s financing also generates a fee-based income for the Islamic bank. The Islamic bank receives an incentive, called the marketing fee.
Islamic bancassurance is an Islamic banking service that serve as an insurance product giving protection and investment products to fulfill the long-term financial customer’s needs. Bancassurance does however account for a significant portion of sales offering an attractive and cost effective distribution channel, especially for personal lines. In turn, an Islamic bank generates cross-selling opportunities by bundling Islamic insurance with other financial products and generates fee-based income.
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Islamic banks forming or acquiring Islamic insurance subsidiaries. For example, Bank Muamalat Indonesia, which is one of the stockholders of Syarikat Takaful Indonesia.
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Collaboration between an Islamic bank and a Takaful company where both parties co-design the products and the bank is responsible for marketing and distribution. An example is where Bank Syariah Mandiri and Syarikat Takaful Indonesia collaborated to design an education insurance offering as a co-branded product.
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A Takaful company acts as the product designer and the Islamic bank acts as a marketer and distributor. The Takaful product can either be branded as its own or the banks’ product. An example is the partnerships between AIA Group Indonesia Insurance and HSBC Amanah.
To leverage the potential of bancassurance, Islamic banks as well as Takaful companies need to invest in developing dedicated sales teams. There is also a need to design customized long-term investment-linked savings and pension products for bancassurance customers. Moreover, Takaful companies and Islamic banks need to invest in technology to deliver high customer standards thereby increasing customer retention.
Tony Hidayat is a researcher at Bank BRI Syariah. He can be contacted at
[email protected]
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