KUALA LUMPUR Feb 17 Companies selling Islamic insurance (takaful) in Indonesia are boosting agent numbers and product ranges ahead of a new rule that will require them to be run independently.
Indonesia, the world's fastest-growing market for takaful, is dominated by takaful "windows" which allow insurers to offer Islamic and conventional products side by side. A new law requiring takaful firms to be spun off into stand-alone businesses is expected this year.
"We are encouraging pockets of our agency to focus on the takaful side, so when the spin-off comes, we will already have a distribution in place," Bert Paterson, who heads Sun Life Financial Indonesia, a unit of Canada's third-largest life insurer, said in a telephone interview.
Sun Life, which manages global assets of $590 billion, saw 7 percent of its earnings come from Asia in 2012.
The Indonesian unit grew its distribution network by nearly half to 7,100 agents last year and over 90 percent have been trained to sell takaful products. More agents are branching out into Indonesia's rural areas, moving beyond markets already crowded with conventional players.
"A significant part of our growth has come from leaders opening up offices in towns outside their natural catchment area. It's good for them as entrepreneurs, and good for us to increase our footprint," Paterson said.
Takaful firms have also begun to explore new streams of revenue in market segments that remain relatively untapped. In August last year, Sun Life launched a product that helps Muslims save for their pilgrimages to Mecca.
"We want to play in fields where other people are not," said Abdul Mulki, head of sharia business for PT Ansuransi Bangun Askrida, one of the country's largest takaful windows. The company recently entered medical malpractice insurance, which is sold to doctors and offered, the firm says, by only one competitor in Indonesia.
Operating costs are expected to triple when the takaful business is spun off. "We need to double our premiums to 200 billion rupiah ($17.1 million) and this will count on new business. We have profit margins of 35 percent but the spin-off will have extremely high costs. To maintain the margins, we need to double the premium," said Mulki.
Unlike conventional insurance, takaful is based on the concept of mutuality; a takaful operator sets up a fund to oversee and manage pools of money contributed by policy holders.
As of December 2012, there were five full-fledged takaful firms in Indonesia and 37 sharia units of conventional insurers. The spin-off legislation is expected to set minimum capital requirements for takaful operators, which could oblige some smaller ones to close.
"I think shareholders are going to have to make some very strategic calls," Paterson said. "Not all of them have the critical mass to justify a spin-off, so we'll see consolidation and opportunities to acquire portfolios of business."
Indonesia, with the world's biggest Muslim population, is potentially a rapid growth market for takaful. It accounted for 24 percent of the Association of Southeast Asian Nations' gross takaful contributions in 2012, compared to Malaysia's 71 percent, a report by Ernst and Young showed.
Poor consumer awareness of services, a shortage of human capital and the lack of regulatory clarity are obstacles for the industry in Indonesia.
"The business prospects in Indonesia are huge, but the problem in Indonesia is that they are busy reading what can and cannot be done in terms of sharia," said Mulki.
Indonesian takaful firms also struggle to achieve yields from investment as they are limited to investing 20 percent of their funds in more liquid and developed Islamic finance markets such as Malaysia.
"The majority of takaful companies still invest onshore, as foreign fund managers rarely go into Indonesia to offer offshore products, so we are not familiar with the options," Abdul Chalik, head of sharia for Allianz Life Indonesia, told Reuters.
"Indonesia has said it wants to be an Islamic finance hub to rival its neighbor. The government has to bring in a range of measures to develop the Islamic finance market in general - when that happens you'll see exponential growth on the takaful side," said Paterson. (Additional reporting by Bernardo Vizcaino in Sydney; Editing by Andrew Torchia)