Indonesia Shariah Insurance Growth Attracts AIG

Indonesia’s Islamic insurance industry is expanding three times as fast as Malaysia’s, prompting American International Group Inc. and Sun Life Financial Inc. to seek a broader presence in the nation.

AIG is considering offering Shariah-compliant reinsurance, known as retakaful, in Indonesia in two years, the company’s Malaysia Chief Executive Officer Antony Lee said in a March 6 interview in Kuala Lumpur. The initiative would complement an Islamic insurance business it started in the Southeast Asian nation in 2010 and speed up Indonesia’s industry, which grew 34 percent to a record 22 trillion rupiah ($1.7 billion) in 2014, outpacing the 9 percent expansion to $6.1 billion in Malaysia.

The pace of growth shows the nation with the world’s biggest Muslim population is making some progress in catching up with the market leader Malaysia. Ernst & Young LLP forecasts the global Islamic insurance industry will expand to $20 billion by 2017, from an estimated $14 billion last year.

“Now that the takaful companies are showing great interest to increase their activities and offer new products in Indonesia, that shows good signs that there’s demand for Shariah-compliant insurance,” Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd., said by e-mail Wednesday. “The growth will be much faster once the market starts to understand the takaful principle.”

Insurance Solutions

PT Sun Life Financial Indonesia will add to its 35 outlets in the country, while Reinsurer PT Reasuransi Internasional Indonesia plans to make all its branches fully Shariah-compliant. Spreading insurance risk among finance companies will reduce the operational risks and encourage industry growth, according to a Jakarta-based business association.

Takaful is based on mutual assistance, where policy holders contribute a sum of money to a common pool managed by a company. The funds are used to pay for claims and any excess is returned to customers.

The Indonesian unit of AIG offers both Islamic and non-Shariah-compliant services in the country. Its total insurance assets rose 8.3 percent from a year earlier in 2014 to 1.2 trillion rupiah, according to its financial statements, which don’t give separate breakdowns.

“People are saying they’d like to have retakaful solutions,” AIG Malaysia’s Lee said. “We always want to make sure we build something stable and solid and not to run before we can walk.”

‘Move Fast’

Reasuransi Internasional Indonesia plans to become fully Shariah-compliant after a series of mergers are approved by the Financial Services Authority, President Director Adi Pramana said at a press briefing in Jakarta on March 3. Islamic insurance assets will likely exceed 5 percent of the industry total in Indonesia over the next few years, from 3.9 percent at the end of 2014, said Pramana.

“Shariah reinsurance is a real need that hasn’t been widely addressed,” Riawan Amin, chairman of the supervisory board at the Islamic Banking Association in Jakarta, said by phone March 10. “The pioneers who move fast to fulfill this demand would benefit greatly considering the industry’s rapid growth.”

Indonesia’s Financial Services Authority holds bazaars across the country to boost awareness of Islamic finance. It’s pushing for Shariah-compliant insurance and retakaful services offered from booths at regular banks to become independent units and wants to expand the local Islamic reinsurance industry to stop funds flowing offshore.

‘Service Quality’

As Islamic insurance becomes more prominent and more people take it up, that should increase demand for bonds that comply with the religion’s ban on interest as insurers try to match liabilities with their investments.

Global sales of the debt, known as sukuk, have dropped 60 percent to $3.6 billion in 2015 from a year earlier, the worst start to a year since 2010, data compiled by Bloomberg show. Offerings reached $46.3 billion in 2014 and a record $46.8 billion in 2012.

“Having more Shariah reinsurers would further increase the capacity of national Islamic insurers,” Srikandi Utami, head of Islamic services at Sun Life Financial Indonesia, a unit of Canada’s third-biggest insurer, said by e-mail March 10. “There also needs to be an improvement in operational and service quality.”

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