Sharia insurance thriving, premium grows by 40% annually
Fitri Wulandari, The Jakarta Post, Jakarta
Sharia insurance has gained in popularity here over the past several years, prompting conventional insurance firms to explore opportunities in this new sector.
"The trend now is for conventional insurance companies to turn into sharia insurance companies," Muhammad Syakir Sula, the chairman of the Association of Sharia Industry, told The Jakarta Post on the sidelines of last week's National Convention of Islamic Economic Experts.
The number of sharia insurance firms in the country has grown from two just two years ago to 20 at present.
The premiums collected by sharia insurance companies still pales in comparison to traditional insurance firms, accounting for only 1 percent of the Rp 22.5 trillion collected by the insurance industry in 2002.
But sharia insurance premiums have grown at a whopping 40 percent annually over the past two years, compared to the average 25 percent premium growth booked by conventional insurance firms, according to Syakir, who is also marketing director of sharia insurance firm Takaful Indonesia, the country's first sharia insurance firm.
Like sharia banks, sharia insurance firms operate according to Islamic principles, including not charging interest to borrowers or policyholders, instead employing profit sharing.
M. Zubair, the association's secretary-general, said the growing sharia insurance sector had received a boost from the thriving sharia banks. This relates to the practice of sharia insurance firms requiring policyholders to pay their premiums at sharia banks. With conventional insurance firms, policyholders pay their premium directly to the insurance companies.
According to data from Bank Indonesia, as of December 2003, sharia banks' total assets stood at Rp 7.86 trillion, or 0.69 percent of the total national banking assets. This is expected to grow to 1 percent by the end of this year and 5 percent by 2011.
Sharia banks' investments stood at Rp 5.73 trillion, or 0.66 percent of national banking investments.
"We are optimistic the premiums of sharia insurance will grow to 5 percent of the total national insurance premiums within five years," Zubair said.
Zubair said sharia insurance firms served customers, particularly Muslims, who wanted to invest and follow the rules of their religion at the same time.
Indonesia has the largest Muslim population in the world, with Muslims making up nearly 90 percent of the population of 203 million.
Syakir said people were also interested in sharia insurance because it protected against the negative spread and lower interest rates suffered by many conventional firms.
The central bank has been aggressively cutting its benchmark interest rate over the past year to push banks to lower their lending rates for the corporate sector. The lower benchmark rate has pushed down the rates on bank time deposits.
Many life insurance firms, which invest in these time deposits, now find that the returns they promised policyholders are higher than the interest revenue from the deposits.
"Such a thing would not happen in sharia insurance because we share the profits with policyholders," Syakir explained.
Insurance expert Angger P. Yuwono said the movement of conventional insurance companies into sharia insurance was spurred by the need to diversify their products.
"Sharia insurance can supplement insurance products so that companies are able to reach a wider market," Angger, who also sits on the advisory board of the Indonesia Life Insurance Association, told the Post.
Angger said some life insurance companies had become insolvent due to the mismanagement of their investments. However, he denied that this was mainly because of investing in bank deposits, saying the proportion of investments in time deposit was down to 30 percent from 90 percent 10 years ago.
"Sharia insurance is an opportunity to penetrate a market where the majority of people are Muslims. It will grow but will not be booming," Angger said.