The shariah insurance market in Indonesia faces three major challenges, and they involve demand, supply and the ecosystem, according to the head of the Centre for Sharia Economics & Business (PEBS) of the Faculty of Economics and Business (FEB) at the University of Indonesia (UI), Rahmatina Awaliah Kas.
Ms Rahmatina was speaking at a seminar held last week by the PEBS on the topic "Strengthening the Ecosystem and Regulation of Indonesian Shariah Economics and Finance to Enter the Organization for Economic Cooperation and Development (OECD).
Challenges
She said that on the demand side, problems included low financial literacy and inclusion, low purchasing power of the community for insurance products, and the low sustainability of takaful contributions over the long term.
On the supply side, the issues include difficulty in meeting minimum capital requirements by shariah insurance companies formed from spinning off takaful windows. The inadequate capital risks financial pressure on takaful operators and the difficulty of competing with conventional insurers. Other issues are limited retakaful capacity, the lack of product differentiation, limited distribution channels and the shortage of shariah insurance experts.
Problems with the ecosystem include restrictions on shariah investment instruments and returns. Regulations related to foreign investment and foreign ownership also hamper the growth of the insurance industry in Indonesia.
Ms Rahmatina pointed out that Indonesia has been one of eight OECD candidates since February 2024. Indonesia is currently in the process of obtaining OECD membership status. However, various indicators show that there are still restrictions on market openness in the takaful sector which are not in line with OECD principles.
Changes recommended
She raised several proposals to help the shariah insurance market meet OECD standards. The recommendations include reviewing shariah insurance regulations, strengthening the capital position of takaful companies and boosting shariah industry human resources. It is also necessary to increase the attractiveness of investments in the sector by relaxing foreign ownership rules.
The takaful sector has the potential to grow. The overall insurance industry penetration rate in Indonesia in 2024 was 2.84%. In comparison, the penetration rate of the shariah insurance industry was only 0.14%.