Islamic insurance products, commonly known as takaful, are mutually beneficial coverage policies that cater specifically to Muslim communities looking for Shariah-compliant savings, investment and protection solutions. Takaful policyholders contribute their premiums to a collective pool managed by an Islamic insurer or bank. Funds are then used to pay off claims and any excess is returned to members sans interest. Indonesia, with a Muslim population exceeding 213 million, has proven to be one of the fastest growing takaful markets in the world, with sales expanding by 48 percent to IDR4.5 trillion (US$490 million) in 2010. While Malaysia still remains ahead of Indonesia’s market output for now, with a Muslim population of only 17 million, their Islamic insurance prospects in the long term are not quite as attractive.
Etiqa Insurance, a joint venture between Maybank and Ageas International, has been amongst the most prominent Malaysian takaful providers in expressing these sentiments as of late. In recent interviews, Etiqa officials have clearly earmarked Indonesia as the most likely destination of any upcoming acquisition activity, with the country expected to become part of insurer’s regional portfolio no later than 2013. Founded by a merger between Malaysia National Insurance and Takaful Nasional in 2007, Etiqa has been at the forefront of the Islamic insurance industry in Malaysia and could become the first company to exceed MYR2 billion (US$650 million) in annual takaful contributions this year. The company currently leads the domestic market with an estimated 45 percent share of the market and has also worked to set up takaful insurance operations in Brunei, Pakistan and Singapore over the past few years.
After gaining almost half of the takaful market share in Malaysia it has become important for Etiqa to balance its Islamic insurance business through further acquisitions going forward, both locally and overseas. Indonesia offers the most pronounced business potential for takaful insurance products in the region due to its predominantly Muslim population and rising income levels. Etiqa’s expansion plans in Indonesia will be helped by their ties to Maybank, who have an established presence in the country. Maybank owns a full-fledged Islamic bank (Maybank Indocorp) and a commercial bank (Internasional Indonesia) in Indonesia. Through their affiliation with Maybank, Etiqa thus gains an extensive regional distribution network, which will surely assist sales of their bancassurance and takaful insurance products going forward.
Syarikat Takaful Malaysia, the country’s second largest Islamic insurance provider, has already made the move into Indonesia and expects the country to generate at least half of its profits and revenue base within the next five to seven years. The company’s Indonesian takaful operations have begun to rebound following a corporate restructuring effort in 2011 and account for roughly 5 percent of their revenue base at present. According to their annual report released last month, Syarikat Takaful Malaysia’s pre-tax profits grew by 55 percent during 2011 to MYR101.4 million (US$33.6 million), surpassing the MYR100 million (US$32.6 million) profit threshold for the first time since the company was founded in 1984. In order to maintain this considerable growth momentum going forward the insurer will need Indonesia to match or even improve upon performance of its home market. Company officials expect sales momentum in Indonesia to pick up in particular over the next one in two years, following moves made by the country’s regulator to clean up the Islamic finance market by abolishing ‘Islamic windows,’ or conventional insurers selling takaful services without a license. Addressing this issue should improve domestic Islamic finance business practices through the establishment of dedicated takaful companies.
Islamic insurance and banking will be critical to the development of Southeast Asian economies going forward. Muslims account for over 85 percent of Indonesia’s population of 248 million and 61 percent of the 29 million people living in Malaysia. The Malaysian Takaful Association (MTA) expects the country’s Islamic insurance sector to continue to grow, develop and improve upon its meagre 10 percent market penetration in 2012 due to rising income levels, still untapped rural customer bases and Malaysia’s strong micro and macroeconomic fundamentals. The further development of the Indonesian national economy should also benefit Malaysia’s takaful sector, as more insurers set up operations next door to tap into increased domestic demand. The MTA is working to draft a new risk-based financial framework, which should further aid the development of the domestic Islamic insurance sector by raising capital adequacy standards in line with other insurance segments and fixing previously insufficient investment instruments. These new guidelines, expected to come into effect within the next 2 years, together with the Malaysian government’s Financial Sector Blueprint (2011-2020), are also expected to drive the takaful industry onwards by promoting access to other financial services sectors and introducing best international practices to the market.
The global takaful industry currently accounts for only around one percent of the total international insurance market but this will likely soon change as highly populated, upwardly-mobile Muslim markets like Indonesia, Malaysia, Saudi Arabia and the UAE begin to spend more on insurance, investment and savings policies. Ernst and Young LLP estimated in their World Takaful Report last July that customers would contribute over US$12 billion to Islamic insurance policies in 2011, a 32 percent increase from a year earlier. Key takaful markets are often characterized by their low insurance penetration rates and high economic growth forecast rates. Major foreign insurers are now taking note of the huge business potential from this new type of insurance.