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MARKET ASSESSMENT ON MICROTAKAFUL IN INDONESIA
Presented by on behalf of
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ACKNOWLEDGMENT
This market assessment was commissioned by the Deutsche Gesellschaft für Internationale Zusammenarbeit Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia program (GIZ RFPI Asia), funded by the German Federal Ministry for Economic Cooperation and Development (BMZ). Its completion is made possible by the support of the Otoritas Jasa Keuangan (OJK, Financial Services Authority) of Indonesia and the Asosiasi Asuransi Syariah Indonesia (Indonesia Syariah Insurance Association). GIZ RFPI Asia expresses its gratitude to colleagues from OJK and AASI who were instrumental in the design, implementation and evaluation of the results of this assessment. Further contact details: GIZ RFPI Asia Dr. Antonis Malagardis Program Director Insurance Commission Complex 1071 U.N. Avenue, Ermita, Manila Philippines 1000 Telephone: +63 2 353 1044 -45 E-mail: [email protected] OJK Mr. Moch. Muchlasin Directorate of ShariahShariah Non-Bank Financial Institutions Sumitro Joyohadikusumo Building 13FL, Jl. Lapangan Banteng Timur 2-4 Jakarta Pusat 10710 Telephone: +61 21-3858001 ext 21330 E-mail: [email protected] AASI Ms. Srikandi Utami (Vice Chairperson) Graha Takaful Indonesia, Tower A, Fl. 2 Jl. Mampang Prapatan Kingdom No.100 South Jakarta 12970 Telephone: +62-21 5289 0000 E-mail: [email protected]
PREPARED BY:
Mr. Nick Thornton (freelance consultant) and Ms. Hajah Zuriah Abdul Rahman AFC Consultants International GmbH (AFC) Dottendorfer Str. 82, 53129 Bonn, Germany Telephone: +49 – 228 – 98 57 9 – 0 E-mail: [email protected] Web: www.afci.de For any further information please contact at AFC: Mr Johannes Buschmeier Telephone: +49 – 228 – 98 57 9 – 0 E-mail: [email protected] Mr Marcel Pape Telephone +49 – 228 – 98 57 9 – 74 Email: [email protected]
Jakarta, September 2014
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TABLE OF CONTENTS
ACRONYMS ......................................................................................................................... iv
1 INTRODUCTION ........................................................................................................... 1
1.1 Background 1
1.2 Objectives of assessment 2
1.3 Market Survey Methodology 2
2 THE RISK PROFILES OF LOW-INCOME INDONESIAN MUSLIMS ............................ 3
2.1 Sources of risks 3
2.2 Risk coverage needs 4
3 UNDERSTANDING AND PERCEPTIONS OF TAKAFUL ............................................. 5
4 CREATING AWARENESS AND EDUCATING THE MARKET ..................................... 6
5 THE POTENTIAL MARKET FOR MICROTAKAFUL .................................................... 8
5.1 Strength of the microtakaful business in Indonesia 10
6 THE MICROTAKAFUL SUPPLY CHAIN ..................................................................... 12
6.1 Microtakaful providers 12
6.2 Microtakaful distribution channels 13
6.3 Partnership arrangements 14
7 MICROTAKAFUL PRODUCTS: FEATURES AND ISSUES ....................................... 17
7.1 Potential microtakaful product features 20
8 THE REGULATORY ENVIRONMENT FOR MICROTAKAFUL MARKET DEVELOPMENT ......................................................................................................... 22
8.1 Prevailing regulatory issues 22
8.2 Considerations for the regulatory framework 24
8.3 Industry perspectives on regulatory improvement needs 26
8.4 Financial literacy and consumer protection 27
9 SUMMARY AND CONCLUSIONS .............................................................................. 28
10 STRATEGIC RECOMMENDATIONS.......................................................................... 29
10.1 The Microtakaful market 29
10.2 Microtakaful business model 29
10.3 The distribution channel 29
10.4 Human resource plan 30
10.5 Regulatory framework 30
Appendix A: Summary of Interview with Potential Microtakaful Clients ...................... 31
Appendix B: List of Retakaful Operators Worldwide .................................................... 36
Appendix C: Questionnaire for field staff ...................................................................... 37
Appendix D: Questionnaire for Shariah insurance entities .......................................... 39
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LIST OF TABLES
Table 1: Takaful vs Conventional Insurance ........................................................................... 1
Table 2: Ranking of Perceived Risks ...................................................................................... 3
Table 3: Demographic profile of microtakaful target market in Indonesia ................................ 9
Table 4: Full-fledged Takaful operators ................................................................................ 12
Table 5: Summary of Microtakaful Products Features, Delivery Channel in 8 Countries ....... 16
Table 6: Existing microtakaful products offered in Indonesia ................................................ 18
Table 7: Proposed microtakaful product features.................................................................. 20
LIST OF BOXES
Box 1: Profile of a typical “micro” policyholder ......................................................................... 9
Box 2: Reasons for the interest in microtakaful – It can generate profits ............................... 11
Box 3: Takaful Standards ..................................................................................................... 22
Box 4: Challenges of providing microtakaful to the poor ....................................................... 24
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ACRONYMS
AAOFI Accounting and Auditing Organization for Islamic Financial Institutions
AASI Asosiasi Asuransi Syariah Indonesia (Indonesia Syariah Insurance Association)
BMT Baitul Maal wat Tamil (Islamic Cooperative)
BPR Bank Perkreditan Rakyat (Rural Bank)
BPRS Bank Pembiayaan Rakyat Syariah (Islamic Rural Bank)
BPS Badan Pusat Statistik (Central Bureau of Statistics)
BTM Baitul Tamwil Muhammadiyah (Muhammadiyah Islamic Cooperative)
CSR Corporate Social Responsibility
ESCC Economic Syariah Committee Center
FGD Focus Group Discussion
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
IDR Indonesian Rupiah
IFSB Islamic Financial Services Board
IMFI Islamic Microfinance Institution
LKM Lembaga Keuangan Mikro (Microfinance Organization)
MFI Microfinance Institution
MI Microinsurance
OJK Otoritas Jasa Keuangan (Financial Services Authority)
PA Personal Accident
RFPI Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia)
UPK Unit Pengelola Keuangan (Financial Administrative Unit)
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1 INTRODUCTION
1.1 Background
In many Islamic countries, significant portions of the population live in poverty and lack the access to financial services, such as insurance, that will help prevent the further worsening of their economic situations. In such countries as Indonesia, the creation of a microtakaful market, an appropriate market for insurance that is compliant with Islamic laws and that will cater to the low-income sector, is a need that is slowly gaining attention and priority. But while initial efforts have led to the development and offer of some microtakaful products, the pace of development needs speed and the approach needs concerted collaboration between the government and the insurance industry. The current situation needs to be understood to inform the future progress of the microtakaful market.
As a country with the largest Muslim population in the world, Indonesia has a vast untapped takaful market potential. In 2011, gross premiums of total Islamic insurance or takaful were reported to be less than 5% of total insurance market premiums. Despite the low market share, Indonesia is one of the world’s fastest-growing takaful markets. Based on preliminary industry estimates, gross premiums in the takaful industry were reported to have grown almost tenfold from IDR 498.9bn in 2006 to IDR 4.97tn in 2011 (Fitch Rating, 2013).
Takaful is defined as an insurance which is Shariah compliant and offered as an alternative to Muslims and non-Muslims alike who prefer to be covered by a product which is both ethical and in line with the Islamic religious teachings. Microtakaful, on the other hand are takaful products that are tailor-made in terms of policy size, (which are usually small), limited coverage, small contribution amounts, and flexible mode of payment to cater to the low income and poor who have some risk priorities but could not afford the mainstream takaful products offered in the market. Microtakaful products are crafted to meet the special needs of the economically challenged members of the society or market segment to enable their financial inclusivity and to provide a risk management solution that fits their needs.
Table 1 provides basic differences between takaful and conventional insurance. The fundamental difference lies in the contract signed between the parties. While takaful is based on the charitable nature of a risk sharing contract with the addition of other supplementary contracts, mudharabah and wakala, insurance on the other hand, is based on the buying and selling of the contract itself.
Table 1: Takaful vs Conventional Insurance
Takaful Conventional Insurance
A form of risk sharing arrangement among participants
A form of risk transfer arrangement from policyholder to insurance company
Contribution is a donation (tabarru’) Contribution is premium or price paid for a service, called protection
It is a charitable contract with other multiple contracts [(mudharabah (profit sharing and wakalah agency contract)] – Tabarru’at
It is a buying and selling contract – Mu’awadat
Takaful Fund belongs to the participants Insurance Fund belongs to the insurance company
Takaful Company acts as a custodian of the takaful fund
Insurance company is the owner of the insurance fund
Surplus is available and mudharabah contract will be distributed to participants
Surplus if available belongs to the insurance company
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1.2 Objectives of assessment
This report highlights the results of a market assessment on microtakaful in Indonesia, conducted to contribute to the improvement of the regulatory and supervisory conditions for the effective development of a microtakaful market that offers protection to the low-income Indonesians. The market assessment also aims to serve as a basis for the development of appropriate microtakaful products and business models by the members of the Asosiasi Asuransi Syariah Indonesia (Indonesia Syariah Insurance Association).
The assessment analyzed the existing and potential demand for microtakaful through the documentation of the socio-cultural, economic and demographic profiles, payment modes and frequency and product preferences of low-income respondents. The supply side of the market was also assessed, examining the supply chain that includes takaful operators, distribution channels and other relevant networks and support institutions. Moreover, the assessment describes the existing regulatory environment within which the market operates and the initiatives taken by the Otoritas Jasa Keuangan (OJK, Financial Services Authority) to promote the market for microtakaful, particularly through financial literacy and consumer awareness.
1.3 Market Survey Methodology
The microtakaful survey was qualitative in nature and primarily used Focus Group Discussions (FGDs) and interviews in addition to a secondary research review. FGDs also employed both individual and group risk ranking exercises. In total, 13 FGDs were facilitated in four (4) provinces and in DKI Jakarta, consisting of seven (7) mixed gender groups, three (3) groups of men only, and three (3) groups of only women. Interviews with potential microtakaful clients were conducted in an additional two (2) provinces and consisted of 22 non-in depth interviews, four (4) in-depth interviews, and three (3) group interviews. In order to benefit from the insights of those working directly with the low-income segment, the assessment also conducted 25 interviews with staff from microfinance institutions (MFIs) and cooperatives, and one (1) interview with a community leader. For additional information and triangulation, a short questionnaire was given to the staff of the MFIs and cooperatives visited. To gather industry data, the assessment team met with the Financial Services Authority (OJK), conducted 11 interviews with insurance professionals, had a small group discussion with Indonesia Syariah Insurance Association (AASI) members, and sent a questionnaire to all members of AASI.
The assessment tried to capture the thoughts and attitudes concerning microtakaful from the low-income Muslim population as defined in the Grand Design for Microinsurance published by OJK as those with an income of less than IDR 2.5 million per month. In particular, perspectives were gathered from low-income Muslims from conventional and Islamic MFIs, community groups not connected with MFIs or cooperatives, and those in the farming trade. Locations of the FGDs were determined based on the most recent BPS population and poverty data. Determining factors included the total Muslim population, total number of poor (BPS definition of poverty), percentage of poor, and population density. The primary focus on MFIs for FGDs and interviews was due to four reasons 1) MFIs have traditionally been a partner in piloting microinsurance products around the world and represent a natural distribution channel for microinsurance, 2) there are MFIs in Indonesia which are currently partnering with Takaful providers 3) the opportunity to compare the responses of low-income Muslims participating in Islamic MFIs with those participating in conventional MFIs, and 4) facilitate the efficient gathering of groups of members for discussion.
Questionnaires for field staff were adapted from the research of Martin Hintz (2009, pp. 251-253) and questionnaires for AASI were adapted from the research of Anja Erlbeck (2010, pp. 71-76).
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2 THE RISK PROFILES OF LOW-INCOME INDONESIAN MUSLIMS
2.1 Sources of risks
Reiterating the results of past microinsurance surveys in Indonesia, this assessment identified illness and education expenses as the two main life events that determine the vulnerability of the poor to risks. Other factors that impact their risk vulnerability include daily living expenses, need for business capital/lump sums of money, occurrence of accidents and death.
In contrast to past surveys, though, natural disasters were not identified as a major risk event or a common problem among those surveyed. While natural disasters were mentioned, they never made it high in the ranking of most burdensome problems.
Table 2 below shows the results of three ranking methodologies for the risks that were perceived to have the greatest impact on the low-income sector.
Table 2: Ranking of Perceived Risks
Ranking Method Ranking of Risks/Problems
Ranking with cards
1. Illness
2. Education expenses
3. Business Capital / Lump sums of money
4. Living Expenses
5. Death
6. Accident
7. Retirement
8. Motorcycle upkeep
9. House
10. Haji/Umroh
11. Business
12. Lebaran (Religious Holiday)
13. Social Pressures
14. Poor Education Facilities
15. Debt
16. Livestock
Ranking by hand
1. Illness
2. Education expenses
3. Accident
4. Death & Fire (Business related)
Group ranking by discussion
1. Illness
2. Education expenses
3. Living Expenses
4. Business Capital / Lump sums of money
5. Accident
6. Death
7. Cost of Livestock
8. Business
9. Failed Harvest
10. Death of Livestock
11. Social Pressures
12. Motor Cycle (Upkeep)
13. House Rent (rising cost of)
Expanding on the explanation of the items in Table 2 and using the actual transcribed information from the FGDs responses, some of these were categorized as risks, for e.g., ownership of house was associated with loss due to any perils, business refers to loss of assets that form part of the business inventory (e.g. motorcycle used to transport customers for a fee, house used as manufacturing outlets, etc.). On the other hand, social pressures are those costs associated with death e.g. expenses incurred by family for cultural events that are deemed necessary to be carried out during the passing of a member of the community (e.g. tahlil). Poor education facilities was used to describe the FGDs’ concern on the bad condition of the education facilities in their community which bothered their children’s ability to obtain a good education. Education expenses were used to describe the participants’ concerns to finance their children’s education. Livestock are usually risks associated with death of their animals used for farming or sold for their meat and milk, while cost of livestock is referring to the cost of caring for raising the livestock such as concentrate or grass during the dry season medicine. The category “House” in the
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individual ranking refers to the rent itself and the desire to protect the house from natural disaster, fire, or from thievery. House rent (in the group ranking) refers to the rising cost of rent, not necessarily for those that had businesses in their home. Some of the FGD participants were employed outside the home, and thus an increase in rent didn’t cause a threat to loss of income, but a higher expense of rental which poses a risk to most of the FGDs because these buildings served simultaneously as their dwellings and business premises, hence the loss of income seemed real due to the direct dependency on these units.
2.2 Risk coverage needs
The majority of the surveyed participants indicated their willingness to participate in a microinsurance program that provides health insurance, a finding that is similar to the results of market surveys undertaken in Bangladesh and Peru (Ahmed, M. 2013; Iravantchi, S. 2012).
Demand for risk coverage of illness, accident, and death is common globally. However, what is distinct in the Indonesian market from the survey is the indication that the market felt the need to have coverage for education. This could be explained in the context of the demographic profile of the rural and urban poor, where 70 percent of basic needs in household were met by women and they make 60 percent of purchasing decision while 84 percent controlled their family’s money (Jakarta Post, April, 20, 2014). This is especially true from the FGDs of the female respondents where 9 out of 10 women interviewed say education is important for their children.
Deductions made from the market survey also indicated that they gave a priority ranking which is considerably so much higher than the other risks (health insurance: 25; education: 18 while the other risks ranged between 1-9). To a certain extent this explains their seriousness in wanting these two products for their families.
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3 UNDERSTANDING AND PERCEPTIONS OF TAKAFUL
Many of the assessment participants were not aware of takaful or Shariah-compliant insurance. Even so, after receiving some information about it, most of them expressed positive perception of takaful though they had never heard of it before. As Muslims, they assume that it is better to use takaful rather than conventional insurance, but would like to know more about it first prior to deciding to purchase.
Those that had heard of takaful usually knew one of two things about it:
It is Halal, made specifically for Muslims and not associated with Riba.
It is similar to the approach of mutual organizations, with profit sharing.
Even some members of Islamic cooperatives that currently are using takaful credit life products were not aware of the general concept of takaful. The general lack of awareness greatly limited the discussion of takaful products. After receiving some information on takaful, questions and comments regarding the differences between takaful and conventional insurance were raised. The highlights of the perceptions below show that various factors influence the preference or aversion for takaful.
A few respondents still expressed preference for conventional insurance due to the following reasons:
Past bad experience in Islamic banking
Perception of “takaful” as only a change in name, but with still the same approach, which signals a “munafik” or hypocritical strategy
Lack of knowledge about takaful while abundant information about conventional insurance makes for comfortable decision-making
Preference for a national product that everyone would feel comfortable using and would not exclude anyone
The price and benefit of the product were the most important factors for the preference or aversion for takaful, rather than its compliance or non-compliance with Shariah rules. Some participant expressed willingness to choose a takaful product over a conventional insurance product if the price and benefits are good or better.
For those who preferred takaful products, the willingness to pay for the additional premium range of IDR 5,000 to IDR 10,000 more per payment period (month or year) was expressed. However, if offered a cheaper conventional insurance product, preference was still for this cheaper product.
Still, some participants expressed the willingness to purchase takaful even if the price were more expensive than the conventional insurance product, as long as they are able to pay for it “mampu”.
Information was also received that some students and teachers at a local Islamic boarding school would absolutely not purchase insurance unless it was Shariah-compliant.
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4 CREATING AWARENESS AND EDUCATING THE MARKET
The relative lack of awareness and understanding of the distinction among microinsurance, takaful, and microtakaful is a glaring challenge to the market. Without the understanding, the perception is that the product does not differ from microinsurance. The bullet points below list the themes for which information seems to be highly needed by consumers, as evidence by some of the questions expressed in FGDs:
Benefits
Will I get my premiums back if I don’t have a claim?
If I am in an accident and receive the payout, but I haven’t paid in as much as I receive, what happens?
Does the educational insurance pay directly to the school or to me?
If we have only paid health insurance premiums for a few months and then get sick, are we covered?
Does insurance pay interest?
I can get my money back for educational insurance, why can’t I get it back for health insurance?
If my loan is paid off before the term is up, do I get back any of my premium/tabarru?
Eligibility
What is the age limit?
Distinction of features
What’s the difference between conventional insurance and takaful?
Is there insurance for retirement?
What is covered for homeowners insurance?
How does disability insurance work?
Is there insurance for livestock?
Is insurance the same as saving?
Can insurance cover more than one risk at one time or only one risk at a time?
Payment modes
If I die and the policy period is still not complete, who will continue payments?
Is it cheaper to pay per year, rather than per month?
Where does my money go if I don’t make any claims?
In addition to the need for education on the general topics of microinsurance and microtakaful, the need for education on the Shariah compliance element of insurance is also important. A number of initiatives are expected to provide this educational need. OJK’s education and socialization on microinsurance through the “Grand Design: Development of Microinsurance” in Indonesia has, to a certain extent, opened the door to an awareness campaign. However, the outreach is currently rather limited. With the establishment of the Economic Syariah Committee Center (ESCC), various activities have been implemented for the microtakaful inclusion of the low-income. This included the socialization/education on microtakaful which included topics such as benefits of microtakaful, how to obtain the product, and how to contribute and how to claim.
A dedicated website, mass media, via TV Muamalat, bazaars, book launching event, Shariah Economic Writing Competition, Program Sejuta have all been designed by the center to reach out to a much larger audience. The ESCC works closely with the MUI
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(Islamic Scholars Council), the AASI and the BMTs in these initiatives. On the measurement of its Key Performance Indicators, the center establishes a system of color to identify groups who had been identified as initially poor (below poverty line) with the color Red and advancing to Yellow (crossed the poverty line, but still financially weak), Green, ready to be developed and Blue, moving on to become financially independent. However this color coding system does not necessarily indicate whether the education on microtakaful actually reached its intended audience and uplifted their economic status.
Finally the most notable initiative is the design of the Asuransi Mikro Syariah Indonesia, or GRES! which it hoped to dispel all doubts on the Shariah compliancy and permissibility of the microtakaful product. The GRES! with the term Syariah included in it connotes that the product is permissible hence suitable for Muslims. The ESCC also partners with various other channel distributors (membuka lorong komunikasi) to ensure it covers both microtakaful and Islamic finance and banking.
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5 THE POTENTIAL MARKET FOR MICROTAKAFUL
An accurate description or profile of the existing microtakaful market clientele (demand-side) cannot be completed at present since the market itself is still evolving and a monitoring system has yet to be adopted by either takaful / insurance providers or the regulator. In addition, the issue of defining the market is an on-going debate. The potential microtakaful market is influenced by how “micro” is defined. Is the definition based on who the target consumers are - the unbanked or under banked? Can it be defined based on the product features that specifically target the poor? If so, who are the poor? Allianz has stated in its 2013 Half Year Report that the micro market is that which pertains to low-income individuals who are not the very poorest, but rather are those who live on $1.25 to $4 a day.
This survey has also documented that some Islamic Microfinance Institutions do not consider the very poor as ready to participate in profit-sharing Islamic credit models but can and are only participating as loan clients without the burden of profit-sharing, until they are ready to share with the profits.
Perceptions from microfinance providers also highlight the micro market segment is not always perceived as poor, but rather those with unpredictable and unstable incomes. To restrict the definition of “micro” segment too much would result in the exclusion of those who would benefit from a takaful product, but who might not be ready to avail of one yet.
The 2013 Millennium Development Goals report suggested that 60% of populations in the developing world live on less than $4 a day. The Indonesian population, as recorded in the 2010 census, is a total of 238,518,800 million people, hence if we generalize, there are approximately 143,111,280 people that live on less than $4 a day in Indonesia. In September of 2013, BPS data reported a total of 28,553,930 Indonesians living under the poverty line. If we take the Allianz definition and apply it to Indonesia, using the local poverty line measurement rather than $1.25, then the potential market for microinsurance is somewhere around 114,557,350 people which represents those living above the poverty line, but still on less than $4 a day. Assuming that 86.1% of these people are Muslims (2000 census data), the specific low-income Muslim segment is a total of 98,633,878 people.
This survey and secondary literature search has come up with a general overview of the profile of the potential target market for microtakaful (see Table 3). Studies on creating demand for Islamic finance specifically takaful indicated a few factors that would hasten the process. Firstly, demographic factors including occupation, income (explains affordability), education level, and locality (urban vs. rural) are determinants for the products demand (Abdul Rahman et. al, 2009; Redzuan et.al, 2009; Sherif and Shaairi, 2013). Secondly, increased visibility and awareness level is considered important for consumer consumption of any products or services because these are determinants that could accelerate sales and growth. This is illustrated by Colley’s (1961) DAGMAR Model (Defining Advertising Goals for Measured Advertising Results), which suggests that the ultimate objective of advertising must carry a consumer through four levels of understanding; from unawareness to awareness, comprehension (comprehend what the product is and its benefits), conviction (arrive at a mental disposition to buy the product), and finally buy that product. Thirdly, connectivity especially in this digital age brings products right to the doorstep of the customers in an instant. Finally, accessibility both virtual (mobile phones, PDA, laptops etc.) and physical (services and facilities) are the two most important factors that would help increase awareness levels and create demand for products or services, while improving productivity and continued economic growth and development (Smart 2009-0072, McKinsey Global Institute, 2013).
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Table 3: Demographic profile of microtakaful target market in Indonesia
Demographic Variables
Description Comments
Occupation Agriculture, Informal Worker, Fishery, Small Business Owners
All occupational categories are potential customer but focused should be on agriculture and small business owners & cottage industries
Awareness Low
However, as Muslims they are receptive to microtakaful because the assumption of it being a Halal product.
Income/year
Seasonal/cyclical; Range between US 1.25 to US 4 per day.143.1 million live less than US4/day.
Very low and unstable income, living on less than subsistence level.
Affordability Ranges from IDR 5,000 per week to IDR 1,000,000 per month
The range is too wide and may opt for lower contribution depending on type of occupation and income sources.
Education (Level %)
Literacy: 92.6%
Target market falls mainly in the primary educated group
Primary: 96%
Secondary: 67.3%
Tertiary: 23.1%
Internet users or connectivity to urban and rural low income and poor
Mobile cellular subscription 97.7 for whole of Indonesia; the percentage of low income subscribers are not known
Residence Rural and urban Promotion via cooperative membership and rural banking and through village post offices
Accessibility to Infrastructure, services and facilities
28.5 million living under poverty line and poor access to physical infrastructure
Cooperatives, rural banks and post offices are the best distribution channels given the widely dispersed provinces
Box 1 describes the typical qualitative profile of a microinsurance policyholder in many countries. This should provide ideas in designing products and business models that would fit to the characteristics of the target market.
Box 1: Profile of a typical “micro” policyholder
• The potential “micro” policyholder is unlikely to have a stable source of income and low average level of income
• He/she will have minimal savings
• He/she will also probably have a below average education standard
• This would imply a particularly low appreciation of the use of microtakaful/insurance as a risk management tool, in particular what to insure and what can be ‘self-insured’.
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• He/she is unlikely to have a bank account. Premiums will likely then have to be made on a cash basis, potentially increasing the cost of collecting instalment premiums.
• He/she is unlikely to own much in the form of assets. This would mean any one loss event can be financially ruinous to the family.
• He/she probably has limited access to healthcare, proper sewage and clean water and thus can be susceptible to poor health, leading to questions on insurability.
• For the extreme poor they will most probably be dependent on loans and government handouts to make ends meet from day to day.
• The ability to pay regular premiums is therefore in doubt.
• The level of disposable income may fluctuate greatly from month to month again affecting the ability to maintain a regular contribution towards microtakaful/insurance.
Underwriting guidelines and an actuarial approach for microtakaful have to consider the peculiarities of the target market. The majority of takaful products are tailored towards the market with financial capabilities and this makes it less demanding on underwriting of the risk. With microtakaful however, due to financial incapacity and instability of income faced by the majority of the target market, the underwriting itself has to be phenomenal and unique only to this targeted group.
The suppliers’ insufficient database on customer’s profile may undermine effective pricing and product. Take-up failure by poor potential clients is a risk and needs to be addressed through market awareness raising and education. 80 percent of Indonesia’s poor have only completed up to or has elementary education level and below, hence financial and takaful literacy will prove to be a challenge. Operators need to market their products using different concepts and appeal especially since takaful is based on solidarity and brotherhood of the community.
5.1 Strength of the microtakaful business in Indonesia
Despite inadequacies in the infrastructure and other socio-cultural issues faced by the market segment, Indonesia is poised and able to broaden the Islamic finance sector due to several factors that work to its advantage:
i. The 115 million low income and poor population is a ready market and critical mass can be reached within a short span of time in which the microtakaful fund can be built to guarantee financial stability.
ii. The numerous networks and existing distribution channels, particularly the banks, the cooperatives, the pawnshops, and the post offices scattered throughout the Indonesian provinces are all legitimate and legal ways of distributing microtakaful, and are set to provide the necessary outreach needed if only pushed in the right direction through regulatory measures will enable immediate availability of the market and its outreach.
iii. During the survey, the market segment responded positively towards the microtakaful products in comparison to the conventional ones due to its halal or permissible status.
iv. Management costs and expenses of takaful providers can be reduced significantly if the distribution channels are given the marketing, training and awareness creation tasks since they are the front liners and in direct contact with the potential customers. Additionally, the same personnel can be entrusted with contribution collection and claims processing if the claims procedure is made simple, the same personnel can also be entrusted with these roles.
v. Along with the above roles, these distribution channels also have a ready database of the customers for the takaful providers to tap and to concentrate on in their marketing efforts, especially if bancatakaful is used in the near future.
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There is a growing interest from the industry to pursue microtakaful market development. Box 2 provides an excerpt from testimonies of speakers in the 2014 Microtakaful Conference in Indonesia1.
Box 2: Reasons for the interest in microtakaful – It can generate profits (testimony from various speakers participating in the 2014 Microtakaful Conference in Indonesia)
• Microtakaful is a new market compared to upper income markets that are often saturated.
• Microtakaful helps to get the company’s brand name into the market. Brand recognition is important since today’s low-income client is tomorrow’s middle class client.
• Microtakaful helps develop good relationship with the regulator and government.
• Microtakaful can be presented as an act of corporate social responsibility, but should not be limited to that.
1 For further information, please visit www.inclusiveinsuranceasia.com
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6 THE MICROTAKAFUL SUPPLY CHAIN
6.1 Microtakaful providers
Currently, there are two ways of selling licensed microtakaful products in Indonesia. First, microtakaful may be offered through full-fledged takaful operators. The market is currently comprised of five (5) full-fledged takaful operators, three (3) of which currently offer microtakaful products (Table 4):
Table 4: Full-fledged Takaful operators
Takaful operators Status
1) PT Asuransi Takaful Keluarga (Life) In partnership with TAKMIN, offers credit life, additional lives, motor, and PA microtakaful to a network of MFIs
2) PT Asuransi Takaful Umum (General) No microtakaful products on offer yet
3) PT Al Amin, (Life) Health and PA product marketed to schools (students and teachers)
4) PT Amanah Githa (Life) In partnership with ASyKi and the Sidogiri Group of Islamic cooperative, offers life and PA microtakaful
5) PT Jaya Proteksi Takaful (General) No microtakaful products on offer yet
The second way to sell licensed microtakaful products is through a takaful window. There are 17 life insurance companies and 23 general insurance companies that operate a takaful window, but only five (5) of these sell microtakaful products. While many of the companies have microtakaful products planned in the pipeline, not many have officially registered their products with the OJK.
Allianz has been selling takaful credit life in partnership with MFIs.
Adira Insurance has a Syariah Dengue Fever Product
Bumiputera offers a Syariah-compliant credit life product. They are also partnering with Asuransi Syariah Keluarga Indonesia (ASyKi), a newly established microtakaful broker, to provide a motorcycle protection product. While not necessarily micro according to the Micro Insurance Grand Design, Bumitputera has also recently launched a new investment linked Syariah product for as little as IDR 200,000 per month.
BRIngin Life offers both group and individual microtakaful products, but has not really branded them as micro.
Indonesia’s experience with offering of microtakaful has shown encouraging signs. Testimony from the PT Asuransi Allianz Life Indonesia (takaful window) for example showed a portfolio of 50 percent microinsurance and 50 percent microtakaful, and maintained a consistent profit margin of 3 percent per year for the last 3 years (2011-2013).
PT Asuransi Tri Pakarta, also with takaful window, has a large spread of branch offices in small cities to cater to microtakaful customers. Tri Pakarta has declared that as much as 20 percent of income was generated from microtakaful business.
While there are companies that seem to be proactive in microtakaful product development, still other companies prefer to wait for the appropriate regulations before entering the market.
The willingness to participate in the market, however, seems to be affected by concerns over the possibility of the phasing out of takaful windows in 2014 as initially raised by the Indonesian government. Indications, however, are towards a later period if the
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windows are indeed to be phased out. One potential impact of this phasing out is that those offering takaful products through windows will be forced to operate as full-fledged takaful providers, even though they might not be organizationally equipped and poor performance might lead to failure.
6.2 Microtakaful distribution channels
Only a few of the existing insurance agents, brokers, microfinance institutions and cooperatives are documented as microtakaful distribution channels. The exact proportion of the 151 insurance brokers and 25 company-agents in Indonesia that currently offer microtakaful is unclear. However, some few documented offering of microtakaful has shown encouraging signs.
The BMT Sidogiri set up of ASyKi (microtakaful broker) services are provided more efficiently and their cooperative (ta’awuni) concept of microtakaful has reached out to more than 14,000 small business owners and 400,000 members through their credit and savings scheme. ASyKi is working towards collaborating with companies with a “micro character” and creating value for consumers through efficient claims payment services. ASyKi management believes that the company can respond to claims under IDR 20 million within 1-2 days, and claims up to IDR 70 million within a week. Both of ASyKi’s current products are being offered through scratch-off vouchers that can be activated by a mobile phone text message.
The Pawnshop (Pergaidaian) owner’s experience also indicates positive growth of microtakaful bundled with pawned products. According to the owners, microtakaful is easy to market, well understood by the customers (contrary to findings from the FGDs), distinguishable from conventional ones, delivery is kept simple which handling cost is low.
Non-government organizations have played a crucial role in introducing and expanding the distribution of microtakaful to microfinance institutions. A well-documented success story is that of Peramu, a local NGO, which organized the microtakaful-focused working group TAKMIN to pilot initiatives in 2006 with the Islamic cooperative, UPK Ikhtiar in Bogor. TAKMIN is not an insurance broker, but served a similar capacity to link the company Family Takaful of Indonesia with a network of MFIs, including LKMs, BMTs and Islamic rural banks. This linkage resulted in 43 partnerships. Their alliance had borne fruit with more than 100,000 members and has reaped with contributions reaping a contribution of IDR 150 million per month. The bond with the cooperative members generally has been strong and to retain membership, each receives 10 percent share of the cooperative. Most of the contributions (premiums) are deducted directly from members’ subscription and in the words of their members “tabungan tidak dirasa” (the deduction and fund build-up is not felt).
While the Grand Design for Microinsurance specifically mentions MFIs as one of the main distribution channels of microtakaful, their legality in distribution seems to be interpreted differently in different regions in the country. Clarifying the understanding of the legal implications and guiding the potential distribution channels calls for action from OJK.
Among commercial insurance companies, Allianz has taken the lead in tapping MFIs for microtakaful distribution. Other companies, such as AIG, Astra Buana, Sun Life, Prudential and Jaya Proteksi Takaful are also beginning to move towards selling microtakaful through MFIs, IMFIs, and cooperatives.
In the Islamic cooperative sector, BMTs are the leading Islamic cooperatives acting as microtakaful distribution channels. BMT Sidogiri, the largest Islamic cooperative in the country with 400,000 members, offers microtakaful by bundling it with their other financial products. BTM, a collection of 332 cooperatives, also offers microtakaful through a variety of partnership modes.
As in other countries, mobile phone technology is being considered as a potential microtakaful distribution c hannel in Indonesia. Communications company Telkomsel has already explored the market by offering a short-term personal accident
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takaful product called Takaful Safari that can be purchased through SMS. A similar approach could be adopted for microtakaful in the future.
The effective use of mobile phones as a microtakaful distribution platform, however, will rely on the resolution of some identified challenges. For example, air time deduction is not allowed by current regulations. Moreover, mobile money is still not a feasible option for the collection of premiums due to its low usage.
Retail spaces are also viewed as potential distribution channels, but some challenges exist:
The stores are not allowed to promote the insurance product unless it is one of the top ten products sold or if there is a special promotion.
Giving a commission to the stores for selling the product is not allowed. Competitions between stores for a prize may be used, but is not believed to be effective.
Marketing costs will be expensive. While the costs can be shared with the insurance company, it is an investment deemed too costly.
The minimart personnel are not fully knowledgeable about the product and are not capable to explain properly to customers.
Data entry for registering the product takes too long.
Connection to the internet across Indonesia is still not stable. The instability could affect the Internet-linked registration system.
The Islamic Council of Indonesia (MUI) has recently been reinvigorating the religious practices in the country, requesting Muslim citizens to prioritize and choose Shariah compliant entities, products and services, wherever possible. Hence, the preference should be for Islamic banks and halal minimarts, as an example. With this revival and the growth of crucial channels as BMTs, the future seems to hold great opportunities for microtakaful distribution channels.
6.3 Partnership arrangements
The largest distribution channel for Takaful motor in Indonesia is through multi-finance companies. Although this is not termed micro, almost everyone in the FGDs and interviews mentioned this because most low-income Muslims in Indonesia have purchased motorcycles with credit. Banks and direct selling to bank members through telemarketing is also practiced.
During the launching of the Microinsurance Grand Design, many organizations signed an MoU with the industry. Those participating in the informal agreement include the Indonesian Post Office, PNM (Permodalan Nasional Madani) which includes both MFIs and IMFIs, Pawnshops, Bank BNI, Bank BTN, Bank BRI, Bank Mandiri, and Indomaret. The strong role of cooperatives and the MFIs and IMFIs in providing financing for business and assets, rural banks and also state banks are seen as the best outlets for microtakaful in Indonesia. A variety of channels have been identified and practiced also in other countries. For a comparison, see Table 5.
Probably the most common practice for microtakaful is that of partnering with MFIs & IMFIs (partner-agent model).The benefits of this arrangement are twofold. First, the MFI has proven to be a great distribution channel to gain access to the low-income segment. Second, MFIs undertake several tasks on behalf of the insurer such as marketing the microtakaful product, explaining it to MFI clients, and helping in claims processing. This saves the insurer a lot of time and money besides raising awareness on microtakaful.
Subsidies from Zakat funds have also played a role in partnership between Takaful providers and the low income segment. For example, when TAKMIN started its pilot project in 2006-2007, the first year’s credit life premiums for their pilot partner’s members were paid for by the Tazkia Zakat fund.
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Partnerships among insurance companies, insurance companies with Takaful provider, and Takaful provider with Takaful Broker (e.g. ASyKi) exist. This partnership models has proven to be the most useful, given the vast low income population of Indonesia and the wide outreach.
Given the landscape of microtakaful in Indonesia, the providers have to deal with high distribution and acquisition costs due to the inaccessibility of potential customers. Penetrating the rural market has obvious obstacles, but reaching the urban customers is also not easy due to the lack of infrastructure. In both cases, their lack of awareness and understanding of microtakaful, the shortage of facilitating services and capacity gaps will impede acquisition and may contribute to attrition. Therefore, it seems in line with this reasoning, the best option available to enable this industry to take off despite various setbacks is to create partnerships with organizations that are already available and in which the market is already familiar with.
Based on experiences and the remarks learned from various industry stakeholders such as the BMT Sidogiri, NGO TAKMIN, the Takaful Broker ASyKi as well as the current microtakaful provider providers (Allianz and etc.), it seems the best would be to create partnerships with existing entities in which the market are already in relationship with potential microtakaful clients or subscribers. This will automatically provide the industry with a database to promote their products. Besides providing the database for potential clients, the cooperatives (LKS, LKM or MFIs and IMFIs) can be the marketing arm for the microtakaful providers, in return saving them costs, be their information disseminator (provide training and brochures etc.) creating microtakaful awareness and in the long run, enhancing their financial and takaful literacy. The acquisition cost (of clients) is borne by the microtakaful partner while the administrative and other costs will be borne by the microtakaful provider. This relationship will facilitate and at the same time speed up the process of formalizing the current arrangements.
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Table 5: Summary of Microtakaful Products Features, Delivery Channel in 8 Countries
Countries Life General Microloan/ bundling
Delivery Channel Target Population Contribution
Malaysia ▪ Life ▪ Savings ▪ Education
▪ Fire and loss of property
No Bank, agent, cooperative (coops)
Low income, small business owners, farmers
From USD3.5 (RM10)/month
Lebanon ▪ Life ▪ Health ▪ Scholarship for education
▪ PA, Motor Vehicle
Yes MFIs, Coops Low income and poor From USD10/month per family
Sri Lanka ▪ Life ▪ Funeral ▪ Education ▪ Hospitalisation ▪ Marriage ▪ Child birth
▪ Agriculture Yes MFIs, Coops Factory blue collar workers, tea estates, apparel sector, labourers and other self-employed workers.
From USD0.01/month From USD3.38(LKR365)per annum
Bangladesh ▪ Life ▪ Saving ▪ Pension
Yes MFIs, Coops Factory & office worker, members of trade unions, associations, co-operative, Bangladeshi who work abroad.
USD6.8 to USD14.5 for a term of one year and from USD17.3 to USD40.8 for a term of three years
UAE ▪ Life ▪ Health
Takaful Operators Manual workers From US139/year
Sudan ▪ Life ▪ Motor Vehicle ▪ Agriculture ▪ Fire & burglary
Yes Banks, MFIs, Coops Farmers, low income and poor N/A
Trinidad & Tobago
▪ Funeral benefit scheme ▪ Islamic investment fund
N/A N/A MFIs, Coops All USD20/annum USD5/annum for person below 16.
Indonesia ▪ Credit Life and health ▪ Life and PA ▪ Disability and healthcare ▪ Education Savings ▪ Dengue fever ▪ Pension Fund ▪ Sacrificial animal & Savings
▪ PA ▪ Motor Vehicle
Yes Post Office, MFIs, IMFIs, Coops, BadanAmil Zakat Nasional (BAZNAS), Banks: rural and state & private, Brokers & Agents, Pawnshops & Retail Outlets
Small business owner, informal workers, fishermen, farmers & all low income and poor
USD20 (IDR20,000/)/ year (varies with types of products)
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7 MICROTAKAFUL PRODUCTS: FEATURES AND ISSUES
At present, there are some 14 microtakaful products in the market which range from credit life, personal accident, motor, disability, education, some medical and hospitalization to dengue takaful products. The market survey participants expressly mentioned their risk priorities are those pertaining to illness, death (bundled with microloans), accident, education and business risk due to loss of assets (motorcycles and other properties). Most of the products currently offered are those demanded by the market with few exceptions, such as Tabung Qurban designed specifically to pay for a goat/cow for sacrificial purposes and Demam Berdarah Syariah (Dengue fever). While Table 5 presents a selection of microtakaful products offered in 8 different countries, Table 6 provides an overview of the products currently available in Indonesia.
The sums insured are small (Tabung Khairat) which refers to mainly funeral benefits with some cash assistance, ranging between IDR 1 to 5 million [USD 103 to USD 516]) and the perils covered are standard, e.g. life microtakaful, natural death, disability due to accidents (>IDR 5 – 7.5 million [USD 516 to USD 773]). Depending on the type of coverage and frequency of payment, contributions are equally small ranging from IDR 20,000 to IDR 200,000 month/year (USD 1.88 / USD 18.8).
Microtakaful products offered by the industry are registered with the regulators. However, those offered under the cooperatives, e.g. BMT Sidogiri, are not under the purview of the regulator since the cooperatives are regulated by a different government agency.
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Table 6: Existing microtakaful products offered in Indonesia
Provider Name of Product Type Benefits Cost
PT. Asuransi Takaful Keluarga – in partnership with TAKMIN
TAKAFUL PEMBIAYAAN (named by Takmin as “ Takaful Mikro Sakinah”)
Credit Life with option of additional lives
> Outstanding loan balance is paid off if borrower dies > Outstanding loan balance is paid off if spouse of borrower dies
> Remitted monthly to the insurer: 0.05% per month on outstanding portion of the loan > Charge to insured: Single premium calculated and collected at the time of loan disbursement. The collected premium is 0.05% X term in months X initial loan amount
PT. Asuransi Takaful Keluarga – in partnership with TAKMIN
TAKAFUL AL KHAIRAT (named by Takmin as Takaful Ukhuwah Mikro)
Life and PA IDR 1 million for natural death IDR 5 million for accident related death
IDR 20,000/year
PT. Asuransi Takaful Keluarga in partnership with Bank Muamalat
FulPROTEK Life, PA, Disability, and Accident healthcare
IDR5 million for natural death IDR25 million for accident related death IDR5 million accident related disability IDR1.25 million for healthcare costs related to an accident
IDR 175,000 per year with a minimum savings account balance of IDR 100,000
Amanah Githa in partnership with ASyKi
Keluarga Mu’awanah Life & PA Death benefit of IDR2.5 million if natural death and IDR5 million if accident related death for 1 year
IDR 25,000/year
Al Amin AT TA’MIN Siswa - Plan Dinar
Life, PA, and health group product
IDR 6 million for accident related death or total disability IDR 1 million for deathfrom sickness Other benefits for partial disability IDR 400,000 for hospitalization IDR 600,000 for outpatient care related to accident
IDR 15,000/year
Adira Dinamika Asuransi Deman Berdarah Syariah
Dengue Fever Covers up to IDR5 million for 1 year IDR 50,000/year
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Provider Name of Product Type Benefits Cost
Bumiputera Syariah in partnership with ASyKi
Sepeda Motor Mu’awanah Motorcycle Covers up to IDR7,500,000 if motor cycle is damaged or stolen for 1 year
IDR 200,000/year
Allianz Payung Keluarga Credit Life Takaful Outstanding Loan Balance, Initial Loan Coverage, Funeral Benefit (proportional to loan or non-proportional to loan).
Depends on package chosen by MFI.
BRIngin Life Syariah Purnadana Syariah Life and PA Pays a death benefit of IDR7.5 million for natural or accident related death while the policy is still active along with profits from investment
IDR 200,000/3 months*
BRingin Life Syariah Group Life insurance and Pension Fund (for employees)
In the event of death:
a) Full coverage on initial loan amount
b) Coverage only on outstanding loan
Profit sharing, equivalent to 1.7% to 2.7% of financing at a minimum of 3million loan according to the 2 different benefits** ** Microinsurance Stakeholders Indonesia; USAID, 2013
BMT Sidogiri
Tabungan Umum Syariah Death Benefit packaged with savings
Pays a death benefit of IDR2 million Free when savings account reaches IDR500,000 – costs are included in the profit sharing margins
Pembiayaan Credit Life Takaful Covers outstanding loan balance up to IDR100 million
Free – costs are included in the profit sharing margins
Tabungan Qurban Sacrifice Savings plan covered by Takaful
The BMT will provide the sacrificial goat or cow to the family of the saver in the event that he/she dies
Initial deposit of IDR 50,000 and monthly savings of IDR 25,000.
Tabungan Lembaga Peduli Siswa
Education Savings plan covered by Takaful
The BMT will pay the rest of the payments in the event that the saver dies. The family will also still get the promised payout for education costs.
There is an initial deposit of IDR 100,000 to start the account and then monthly payments of IDR 50,000. The Takaful premium of IDR 3,500 is paid by the BMT.
* This is not a standard product offering, but can be adjusted based on affordability and desired benefits. BRIngin Life offers a calculator online that can demonstrate possible payments.
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7.1 Potential microtakaful product features
While some microtakaful products are already in the market, improvements are still needed to address product voids. Based on the market survey and other countries market offerings, table 7 offers some features which future microtakaful products could adapt.
Table 7: Proposed microtakaful product features
Characteristics Proposals Remarks
Coverage
Family inclusive of Education, Health, Accident, Credit life and Property takaful (based on priority)
It may be too expensive to offer health microtakaful singly and this could be added on as a rider under the Family Takaful. May use the Asuransi Sampah or Garbage Clinical Insurance model. Property microtakaful should take into consideration the widespread ownership of motorcycles to offer motor microtakaful.
Contribution (Price or Premium)
Range between IDR 5,000 to IDR 1 million Market is prone towards monthly and yearly
Medium range is between IDR 6,000/week, IDR 126,272/month, IDR 130,555/quarter, IDR 109,166/year.
Delivery channel
Post office, rural banks, agents, insurance office & community groups & cooperatives
Post office is the most preferred channel according to the market survey followed by rural banks, agents and cooperatives.
Another aspect prevalent in microtakaful offerings in other parts of the world are the bundling with other relevant and critical products needed by the low income and poor. In Malaysia, 1 Malaysia Micro Protection Plan is offered to microenterprise or small business owners and bundled with banking products.
Sudan, the first country to introduce takaful, offered under its Islamic Microfinance product a subsidized microtakaful policy (50 percent) to its borrowers. In Sri Lanka, family takaful is bundled with education products while in Lebanon, the first microtakaful scheme offered to the world in in 1997 bundled microloans with family takaful, along with agricultural and health insurance to complement the State’s national health insurance scheme. The government (Lebanon) subsidized 85 percent of the health cost while the remaining was paid for by the microtakaful health scheme, benefiting 5,000 families and 23,000 beneficiaries.
Table 5 also provides a summary of microtakaful products, features, delivery channels and contribution amount as well as modes of payment offered in other parts of the world.
Suggested Characteristics / Features of a Microtakaful Product and business model are:
Microtakaful products would need to be ‘simple’ and ‘affordable’. ‘Simple’ means simplicity in design and simple to administer.
Expenses, which include, partner-institution commission, promotional expenses, general administrative expenses, profit and contingency expenses shall be minimized by standardizing the acquisition process as much as possible. These include, simplifying premium collection and claims payments, creating situations of automatic coverage to minimize the worry over anti-selection and minimizing the required number of points of contact between the microtakaful provider and the participants.
Limited statistics on the expected claims experience (not only death, but also property claims etc.) represent a challenge to calculate ‘affordable’ premiums, for this segment
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of the market it is difficult to establish underwriting guidelines, but could be standardized using other countries experience.
Profit margins shall be built in but it should be allowed that any surplus to be distributed back to the participants in one way or another.
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8 THE REGULATORY ENVIRONMENT FOR MICROTAKAFUL MARKET DEVELOPMENT
The Otoritas Jasa Keuangan (OJK) or Financial Services Authority of Indonesia is the government body that regulates and supervises the business of both conventional and Shariah insurance. There is no specific regulation yet for microtakaful, thus the business entity is regulated and supervised at the moment through the existing 18 PMK (Finance Ministry Rules or Peraturan Menteri Keuangan) and OJK Regulations (POJK) or OJK Circular Letters (SEOJK) binding for all Shariah insurance or Asuransi Shariah business. The current regulations defined that risk insurers in microinsurance are insurance companies, whereas microtakaful are takaful providers or insurance companies which operate all or part of its businesses in compliance with Shariah principles. Insurance and/or takaful companies can cooperate to produce microinsurance and or microtakaful products that provide protection over a combination of various risks in the form of ‘joint insurance/takaful product’. All regulated providers must clearly describe in the policy contracts which insurance or takaful companies act as the insurer, an address for claim submission and complaints, and information of the company that accepts premium from the customers. Insurance and takaful companies must evaluate microtakaful performance regularly and OJK will resolve guidance on microtakaful performance monitoring.
To be aligned to international practice, the Islamic Financial Services Board (IFSB) standards may also be consulted by OJK on commonality of issues pertaining to microtakaful business. These will include the definition of microtakaful, its characteristics, the type of stakeholders involved, and the challenges faced by this sector (Kartina Mohd. Ariffin, April 2014).
The standards already established by the IFSB on takaful and soon to be enacted for microtakaful should be able to solve technical and religious issues which have been deliberated on and subscribed to by more than 40 countries (refer to Box 3).
Box 3: Takaful Standards
• Corporate Governance not related to financial goals (shareholders) ONLY but to include stakeholders (suppliers, employees, consumers, MFIs, IMFIs, society); Shariah Governance to Shariah compliancy
• Prudential Requirements – microtakaful operations, multiple contractual relationship of Islamic finance transaction
• Business Conduct & Consumer Protection
• Operational & Reporting – accounting system could be guided by the AAOFI Standards
• Risk Management (systemic, market, liquidity, credit risks)
• Solvency – Shareholders’ Fund, Participants’ Risk Fund & Qard; tackling both the underwriting and claims settlement, reserves, retakaful, accounting, investment model, etc.
• Talent Development – various initiatives and measures need to be undertaken to create a pool of Shariah scholars and technical experts to drive the microtakaful industry
• Research – focus on applied Shariah research issues and to work with the support organizations to achieve a synergy where the regulators gain from experts output while institutions are engaged in providing the curriculum and training for these personnel
8.1 Prevailing regulatory issues
The development of the microtakaful market is consistent with the government’s Grand Design for Microinsurance, but specific regulatory issues need further elaboration and possible issuance of decrees.
Current regulatory practices on product registration are considered to be
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conducive to the market, with the process of product registration made quicker and more efficient. Product evaluations by OJK are done on a quarterly basis and it is expected that once a product is registered, selling can already commence. While there are no specific decrees for the registration of microtakaful products, Decree No. 422/KMK.06/2003 on the Business Conduct of Insurance and Reinsurance Companies currently apply.
The absence of a specific regulation encouraging rural banks as microtakaful distribution channels is an issue needing further discussion. At present, the Bank of Indonesia only allows both conventional (BPR) and Islamic (BPRS) rural banks to participate in a reference business model, and providing their clients access to insurance can only be possible through partnership with an insurance company (Surat Edaran bank Indonesia Nomor 12/35/DPNP). However, no regulation exists either that prohibits them from selling insurance directly to their clients.
The OJK has clarified that the interpretation of the regulation on selling of insurance by banks is dependent on the regional authorities. This is still under discussion by authorities though no new regulation is being planned. As of January 2014, Indonesia has 163 Islamic banks with 402 branch offices and 1,636 conventional banks with 4,697 branch offices.
The regulatory environment also needs to consider what is called the “Shariah risk”, whereby existing insurance models and product structures could later be considered as no longer compliant with Shariah laws. This risk has implications on the competitiveness of products and services in the future, whereby, if some are deemed no longer compliant and are subsequently eliminated, only a few choices would be left for consumers which could dangerously lead to poor product quality and service.
Pawnshops, with its major potential for microtakaful distribution, are exposed to this Shariah risk, having only 637 Shariah compliant entities out of the total 4,000. Should the laws become more restrictive in the future and allow for only Shariah-compliant pawnshops to offer microtakaful, a significant number of channels will be lost. Minimarts are also exposed to this risk as these sell non-halal commodities, such as alcohol. Post offices, however, are safe because they do not sell anything non-halal.
No data currently exists to document the volume of informal risk sharing / takaful schemes being operated. Neither the Ministry of Cooperatives nor the OJK gathers information on this. It has been documented that some MFIs deduct 1% of member loans and allocates the money into a risk fund which then serves to repay a deceased member’s loan.
OJK has purposefully not made any restrictions on informal schemes to allow innovation and development within the cooperative segment. In the Grand Design for Microinsurance, informal schemes are not mentioned but it is understood from discussions that the regulatory body will oversee only those that sell and market registered microinsurance products. The aim is to prevent obstacles for cooperatives who can manage insurance/takaful programs on their own, leaving room for the growth of informal takaful schemes as ‘Takaful in its true essence is a cooperative’.
Other than regulatory matters, the Islamic finance and takaful industry suffers from lack of consistency in the interpretation of the Shariah rules.2 There are four main schools of Islamic jurisprudence and scholars may take a different view as to the compliance of an Islamic product. Although divergence of views can be considered as strength as it allows innovation when developing new products, it does not, however, provide a solution to the issue.
2 This issue was raised after the Microtakaful conference. For details, visit www.inclusiveinsuranceasia.com
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Indonesia a vast nation with 27 provinces where Shariah rules are interpreted based on regional authority which may pose a problem to OJK regulation and supervision. OJK, therefore, is seeking for standardization for an enabling regulatory framework to survive the test of time. However, if rules are passed by an Act of Parliament then regional authorities must abide by the aspiration and prioritize based on national interest.
8.2 Considerations for the regulatory framework
The development of microtakaful market involves more than the development of new products and new institutions to deliver them. The government needs to establish the rules under which takaful companies and its intermediaries can operate in this market, and once these rules are set, to supervise these companies to make sure that they comply. The government may also need to regulate meso-level actors like actuaries or claims adjusters. They may also play a role in enhancing consumer protection through the funding of an ombudsman. Currently, Indonesia through OJK has equipped itself with a framework to regulate Microinsurance through its recently launched Microinsurance Grand Design. Microtakaful with its Shariah compliancy requirements needs to be enhanced with the appointment of a Shariah Advisory Council to ensure the Islamic laws are followed.
To preserve the financial stability of the takaful fund and to maintain public confidence, prudent undertaking on the part of the regulators requires the Takaful Company to adhere to professional ethics and business code of conduct to observe high standards of integrity, honesty and fair dealing. Hence an internal review mechanism must be in place and enforced compliance with the code, as in the establishment of an appropriate governance structure representing both the interest of the stakeholders, namely the shareholders and the participants. The Governance Committee can be formed from members of the Shariah Committee of the Takaful Company, an actuary, and an independent non-executive director from the Board of Directors appointed within the organization should be able to serve this purpose [Principle 2.1, Sub section 44-54 of IFSB Standards]. Indonesia’s regulation also has to give effect on the allowance for the accounting standards to take into account the contribution (premium) as a donation, a departure from the insurance accounting standards.
According to the Secretariat of the Islamic Finance and Services Board, to date there is no legal definition of the poor hence, ‘who constitute the market for microtakaful’ has yet to get a consensus and be established amongst the providers or industry concerned as well as the regulators. The challenges as outlined by IFSB are summarized in Box 4.
Box 4: Challenges of providing microtakaful to the poor
• Coverage: protection has to be restricted to maintain affordability and solvency of the scheme
• Regulation: high capital requirements make servicing the low-income uneconomical
• Technical expertise: microtakaful requires a greater level of technical expertise and actuarial support
• Informal market environment: uneducated or low educated consumers are regularly defrauded
• Education: the poor find it difficult to understand and accept the risk pooling concept
• Moral hazard: the probability of the participant changing his/her behavior to reflect negative tendencies
• Adverse selection: a sufficiently large pool size of the right mix of risks is critical
• Affordability: there is a clear correlation between socio-economic level and the ability to contribute
• Retention: dropouts are high due to several reasons (e.g. cyclical nature of income, natural disaster, poor understanding of products, ineffective marketing or dakwah)
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• Flexibility: it is important to verify claims and process payments speedily
• Sustainability: in the initial years, most takaful providers after assertive consumer awareness and education promotional programs, finds that the market does not take up what is being made available due to consumer dissatisfaction, apathy or ignorance.
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8.3 Industry perspectives on regulatory improvement needs
The following list is the suggestions gathered during the survey from leaders of the insurance industry in Indonesia.
i. Mandatory selling of insurance for low-income sector. All insurance companies should be required to sell a certain percentage of their portfolio as microinsurance. A portion of this would then be for microtakaful. For companies selling takaful, one out of ten of insurance policies sold should be mandated as a takaful product. Mandating insurance business, following the Indian industry experience, could be an approach to allow microtakaful to gain solid ground before it could transition into a voluntary business component. Of the total responses received from the market survey only 2 companies suggested this approach, which in itself reflected the sentiment of the industry which should be a voluntary business transaction.
ii. OJK should lead financial literacy. Industry representatives believe that the regulator should lead awareness-raising and promotions for insurance/takaful literacy. The regulator is perceived to be in the best position to address the challenge of socialization. Through the establishment of a government promotional agency called the Economic Shariah Committee Center, OJK has done a substantial part of educating the public on microtakaful, including: explaining OJK’s role as the regulator, informing the masses through its involvement in takaful with GRES! and other activities, providing a dedicated website for microtakaful, and promoting microtakaful through TV and other media.
iii. Comprehensive regulatory guidance on defining microinsurance should be developed. While the definition of microinsurance has been loosely defined based on the premium ceiling of IDR 50,000 and sum assured ceiling of IDR 50,000,000, industry representatives expressed the need still for additional criteria as guidance for product registration. Some products in their portfolio might be priced cheaply, but are not designed for the low-income groups. It would seem inaccurate to register these as microinsurance products. A more comprehensive set of criteria would also apparently help insurance providers differentiate between their activities for corporate social responsibilities and for microinsurance portfolio development.
iv. Future regulations on microtakaful should still be conducive to products designed and offered prior to the issuance of these regulations. Some insurance companies claim to have started offering microinsurance products even prior to the encouragement of the OJK. But with the heightened focus in its promotion, providers fear that the existing products will need to be redesigned or discouraged altogether. The industry representatives hope that any future microinsurance or microtakaful regulations will not deter products already on offer to the low-income sector. The OJK using the IFSB standards should be able to resolve this issue in the near future, partly and also with the establishment of a Shariah Committee and Shariah Advisory Council that will be able to provide advice and guidance to ensure Shariah compliancy.
v. Regulation should support the possible participation of banks as microtakaful distribution channels. As there are still no clear regulations on the participation of banks in insurance selling, industry representatives believe that issuing a regulation to permit banks to act as distribution channels will push market growth. Some expressed that the Islamic banking industry should be required to offer microtakaful products, especially if a standardized product is to be provided by AASI. To date only BPR and BPRS were given the permits to offer microtakaful products through their channel network. However, taking from the Malaysian experience, the regulator allowed only Islamic banks to offer takaful products while microtakaful products could also be promoted via conventional banks.
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8.4 Financial literacy and consumer protection
According to the country’s insurance law (UU No. 21 Tahun 2011), the OJK has the responsibility and authority to conduct activities to educate and protect consumers regarding financial services, including financial and insurance literacy initiatives.
As provided for in the Grand Design for Microinsurance, and in line with the aforementioned insurance law, the OJK will be promoting microinsurance, including microtakaful, through the following avenues:
Designation of October 17 of every year as Microinsurance Day
Proposal of the creation of a microinsurance education curriculum
Creation of microinsurance motto, logo and jingle for public promotion use
Creation of a microinsurance website
Establishment of a service center or hotline for microinsurance
While no regulation is necessary to implement financial literacy for microinsurance, working agreements have been signed with organizations such as Kementerian Pembangunan Daerah Tertinggal (KPDT), Badan Nasional Penempatan dan Perlindungan Tenaga Kerja Indonesia (BNP2TKI) and Technology University of Sumbawa (UTS) to jointly increase the level of financial literacy and consumer protection for microinsurance.
Insurance literacy initiatives specifically designed for takaful are yet to be implemented. However, current initiatives of the Insurance Council of Indonesia (DAI) to promote insurance in general offer the opportunity for future integration of takaful and microtakaful themes. Some of these initiatives include:
Insurance Goes to Campus are visits to institutions to educate college student about insurance. It also includes an e-learning component.
The Grand Design for Insurance Education plans for activities as road shows, insurance expositions, insurance literacy surveys, talent competitions, and establishment of information centers, among others.
Insurance Day celebration has been declared to be on 18th October, as set during the 2006 East Asian Insurance Congress (EAIC).
Some insurance companies implement CSR programs that include a financial literacy component, but none focuses on Islamic financial literacy.
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9 SUMMARY AND CONCLUSIONS
In summation, this market assessment of the existing and potential market for microtakaful underscores the following:
Expenses incurred by illness and schooling are the main factors that influence the vulnerability to risk by the participating Muslim respondents. Natural disasters were not perceived as a high-ranking risk event, though disasters place them in significant risk of worsening poverty.
Awareness of takaful, in general, and microtakaful, in particular, is still very low. This seems to affect decision-making for product purchase, though the affordability of price and the significance of the amount of the benefits are main determinants of preference between conventional insurance and takaful insurance.
To convince consumers to avail of takaful, information needs will have to be addressed. In particular, consumers need to be informed about eligibility, distinction of features (as compared to conventional insurance), and payment modes.
Full-fledged takaful companies and takaful windows are the main providers for offering licensed microtakaful products. While MFIS and IMFIs have been tapped as distribution channels, there is ample space for expansion of distribution channels, including pawnshops and minimart.
The existing partner-agent model is suitably the best in the market. Both parties, the provider and the partner (agent) are eager to embark on a legitimate business relationship which will take care of the latter’s members risks while at the same time create the customer database necessary for the microtakaful business to thrive for the former.
Issues about product registration, bank participation, and persistence of compliance with Shariah rules are considered as main concerns for the regulatory environment.
The insurance regulator, OJK, the insurance associations, and the Insurance Council of Indonesia are the main facilitators of financial literacy for conventional insurance, microinsurance, and microtakaful.
Both the demand and supply side of the market is ready and further push into the market must come from the regulators.
The potential microtakaful market in Indonesia is indeed large and generally untapped.
The lack of information and understanding of takaful, and microtakaful, poses a challenge for both the regulator and the industry. But this is a challenge that, once overcome, could significantly contribute to market growth as numerous Indonesians shift from conventional insurance to microtakaful. However, capacities will need to be developed for both insurance supervisors and microtakaful providers and distributors to jumpstart market expansion.
OJK will play an instrumental role to develop regulations that will encourage the participation of more providers in the market. In the short-term, a steep increase in partnerships for microtakaful distribution is to be expected as OJK encourages insurers and takaful companies to be more involved in the microtakaful market.
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10 STRATEGIC RECOMMENDATIONS
Indonesia strives towards achieving best practices and standards by incorporating Shariah principles in all aspects of the takaful and microtakaful system frameworks including operational, reporting, business conduct and consumer protection, risk management, and oversight functions. Developing standards for microtakaful however, requires a different approach, partly due to the vulnerability of the market segment, the involvement of the distribution channels which currently are not under the purview of the regulator, different product design with a different method of pricing, and lastly the business model which leans towards cooperative features.
Based on these identified issues, the role of the regulator has become somewhat complex in order to satisfy different stakeholders with different priorities. The following are some points to be taken into account:
10.1 The Microtakaful market
Indonesia has sufficient number of low income people to create a critical mass for the success of this industry however, to reach them various initiatives need to be commenced first:
Financial and microtakaful literacy need to begin immediately and intensively to create awareness and enhance the public’s knowledge of takaful.
The supporting institutions, institutions of higher learning, training providers, the government agency, Economic Shariah Committee Center has a huge role to play in educating the public especially the target market.
Product design must satisfy the target market needs and the regulators must be equipped with Shariah scholars and technical experts to guide in this critical process.
Cost of building the business and customer retention must not concentrate only on making profit but also the other aspect, i.e. serving the under privileged which is a national agenda.
10.2 Microtakaful business model
Although most countries started the takaful business model with the Tijari Model (Business Model), it is highly recommended that Indonesia emulate the Pakistan’s takaful model which uses the cooperative based takaful-waqf model. This model builds on Indonesia’s strong network of cooperatives which is a patron to millions of its members in all provinces in Indonesia.
Using the cooperative-takaful-waqf model, each cooperative must make it mandatory for its members to participate in the microtakaful plans offered. This is partly to weed out moral hazard and adverse selection which is deemed negative for the microtakaful fund development.
10.3 The distribution channel
Indonesia has a single tier insurance industry (commercial companies) authorized to underwrite insurance, unlike in other jurisdictions where cooperatives and community-based associations can be authorized to form insurance entities. With this system, the existing partner-agent model is suitably the best in this market. Both parties, the insurance provider (partner) and the distribution channel (agent) are eager to embark on a legitimate business relationship which will take care of the latter’s members risks while at the same time create the customer database necessary for the microtakaful business to thrive for the former.
From the experience of cooperatives in general, cooperatives are offering microtakaful in a better position than others to serve the poor. Indonesia is already poised for this role since the cooperative network is present in almost all provinces. The cooperative structure also
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makes it easier to win the trust of the members, particularly in the face of market failure, and is better placed to tap into member’s know-how, loyalty and ideas. The strong community relationship, good user networks, member involvement, and democratic process encourage a feeling of trust and building of social capital to develop a better society, and Indonesia already has the right ingredients and recipe to create this.
10.4 Human resource plan
The AASI (Indonesia Shariah Insurance Association) together with the AAJI (Indonesia Life Insurance Association) and AAUI (the General Insurance Association of Indonesia) can be roped in to assist in the development of human capital, both as Shariah and technical personnel with the backing of the institutions of higher learning, training providers and experienced personnel within the industry to spearhead this effort. The DSN (Dewan Shariah Nasional) or the National Shariah Council is the highest authority which provides the technical expertise and Shariah aspects on Islamic Finance while the MUI which provides the religious edicts (fatwas or decree) are both powerful authorities that could assist in the human resource development in essence the learning of Islamic financial transactions and contracts. MOUs between training providers, locally and overseas, and the insurance associations should be sought to speed up this process.
10.5 Regulatory framework
Regulators shall require that insurers keep sufficient free assets as contingent reserves to meet excess claims (defined as claims incurred in excess of risk premium collected).
This ‘guarantee’ comes with a cost to the participants, as shareholders need to set aside regulatory capital for each rupiah of premium written. Solvency regulations usually do not recognize the unique nature of small policies, especially where the risks are geographically diversified, and so the amount of regulatory capital required for microtakaful must not be too excessive.
OJK may impose a regulation that is ‘light’ for the microtakaful sector. (Zainal Abidin Mohd. Kassim, 2013).
OJK should on its own initiative and with immediate action begin to formulate and set up Standards for Microtakaful as follows and as per Box 3 above:
Design Best Practice and Standards as per other regulatory standard setting bodies – IFSB
Facilitate and speed up rules and regulations on Takaful Companies registration process, legalize the insurance-like activities of MFIs, IMFIs, Banks, Cooperatives partnering with Takaful Operators (TO) via interfacing with the Rules and Regulations applied to these entities
Set up Shariah Advisory Council/ Board/Committee & Technical Takaful Expertise with the assistance of the DSN, MUI and AASI; the fatwas released by the DSN possess the power of positive law. The DSN also should take the role in Shariah Supervisory Board selection process.
Speed up approval of Shariah compliant microtakaful product offerings
Improve current takaful logo = In order to emphasize that product is halal OR design additional takaful/halal logo
Shariah rules are considered as main concerns for the regulatory environment.
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Appendix A: Summary of Interview with Potential Microtakaful Clients
Name Work Location Wage Risk Priorities Insurance Knowledge or
Suggestions Affordability &
Frequency Shari’ah Preference
Payment Preference
Mas Amin
Admin Assistant at Apartment Complex
Jakarta Wage not provided
1) Health 2) Needing employment 3) Home (protection
from earthquake and strong winds)
He currently has an educational insurance plan for his child from AIA. He doesn’t understand why health insurance plans don’t give back part of the premiums. He knew about BPJS
The BPJS Rp 25,000 per month is a good price. Amin pays Rp 300,000 per month for his educational policy.
Wouldn’t pay more for a Shari’ah product but would prefer it if it was the same price
House visit by Agent.
Qori Mustakim
Security Guard
Medan Rp 1,200,000 per month
1) Death 2) Accident 3) Health
Now receives JAMSOSTEK, but knows little about insurance
Rp 50,000 per month No Comment ATM or Bank
Rasman & Wife
Motorcycle Courier Services
Bandung, West Java
Rp 1,000,000 per month or Rp 50,000/day
Accident, health, motor theft, and education. Accident and health insurance were the most discussed.
Currently have an educational insurance product for their child. Have a good understanding of basic insurance concepts.
His family pays Rp 500,000 per month for the education plan, but for others in his line of work he suggests Rp 100,000 per month
Prefer conventional insurance due to past negative experience with Shari’ah banking
Internet Banking, ATM, Minimarket (indomaret or alfamart),
Post office
Nanang and Assistant
Manager for Boarding House
Kuningan, Jakarta
Around minimum wage (Rp 2,400,000) plus tips
Health, death, damage to house (fire, flood, natural disaster), accident, motorcycle, unemployment, cost of renting house
Knew a lot about government health programs and insurance. Had a general understanding of how insurance works. Still thinks in terms of savings based insurance in which money is returned.
Below 50,000 per month. Around 30,000 per month is a good price. Per year, Rp 500,000 – Rp 600,000.
Would be willing to pay Rp 5,000 extra for Shari’ah compliant insurance
House visit by Agent or Post Office. Nananga trusts the post office to deliver the money for a claim.
B. Soleh Contractor Sidogiri, East Java
Above minimum wage
Health and Education are of equal importance to him. Health insurance for himself and educational insurance for his children
He currently participates in health and educational insurance and understands how insurance works.
Personally can afford up to Rp 30 Juta per year
For low-income - Rp 10,000 per month or Rp 120,000 per year.
No comment. Assumed that he prefers takaful since he is a BMT client.
No comment
Soleh Occupation not stated
Sidogiri, East Java
“Sedang-sedang” – middle class
Desires educational product to be offered in addition to current insurance from BMT Sidogiri. He also is interested in motorcycle insurance.
Positive perception of insurance, but doesn’t understand the technical aspect of it.
Personal- Rp 1 Juta per year.
For low income – Rp 100- 200 ribu per year, but monthly payment
No comment. Assumed that he prefers takaful since he is a BMT client.
Premium payment cut from shared profit (SHU) at BMT
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Name Work Location Wage Risk Priorities Insurance Knowledge or
Suggestions Affordability &
Frequency Shari’ah
Preference Payment
Preference Pak Ahmad
Not specified, but has a stable monthly income (Non-seasonal)
Sidogiri, East Java
Wage not provided
He likes the life insurance and motorcycle insurance products offered by the BMT. Health insurance is also needed for all community members. BPJS is not enough
Understands insurance well, and can explain the difference between conventional and Shari’ah insurance.
Rp 25,000 per year or Rp 50,000 per harvest cycle for his fellow community members. Personally he can pay per month.
Is excited to explain takaful product to the local community members. Understands very well the Takaful mechanism.
Pay premium and distribute product through BMT. Socialize through community leaders, BMT branches, and religious gatherings.
Lilis Small Business – Shoe vendor
Bogor, West Java
Income of Rp 9 Juta per day before expenses
Education and health, but she prefers to use savings for health costs, while she would desire educational insurance for her children
She understands credit life insurance, but prefers savings to insurance overall. When she thinks about insurance she is “Pusing benar, blank.”
Rp 90,000 – Rp 100,000 per month based on her ability to save Rp 3,000 – Rp 5,000 per day
Prefers Shari’ah, but economic value is very importance. She would be willing to pay Rp 10,00 more for Shari’ah. (payment frequency not specified)
Local BPRS
Tempe Seller
Tofu, Tempe, and Fried Snacks
Bogor, West Java
Rp 80,000 a day after expenses
Business has not been great recently. She is afraid it won’t be stable in the future. Cost of education for her child is high. It just cost Rp 4 Juta for her child to go to school.
Has heard of insurance and previously participated in credit life through the BMT, but doesn’t remember it.
Rp 100,000 per year is affordable (“sedang”), but not cheap. She would consider Rp 50,000 per year cheap. She is afraid if the premium payment is per year that she will forget to pay.
Has heard of it, but didn’t know enough about it to comment.
Pick up payment at business like the BMT field staff do for her savings.
Sariwati General Store in Market
Bogor, West Java
Above minimum wage (she rents 3 kiosks in market).
Mentioned life and educational insurance. Educational insurance was very important for her while her kids were still in school
She doesn’t think she would be accepted for life insurance because she is already “old” (55 years old).
Before, she paid Rp 100,000 per month for educational insurance while her kids were still in school.
Prefers Shari’ah compliant insurance and would buy even if it was much more expensive according to her ability.
Pick up payment at house or business
Husband and Wife
Sell Chicken in traditional market
Bogor, West Java
Rp 200,000 per day after expenses
Participates in Health insurance because a friend of the wife is an agent. The wife recently had to have surgery on her leg.
Doesn’t want to participate in other insurance because they feel “rugi” or financial loss because their money won’t be returned to them.
Currently pay Rp 400,000 each per month for health insurance tied to investment. The policy is for 10 years.
No comment Prefer their premium to be picked up from their store. Otherwise through Bank or Post office
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Name Work Location Wage Risk Priorities Insurance Knowledge or
Suggestions Affordability &
Frequency Shari’ah
Preference Payment
Preference Muftalifun Food stall
close to traditional market
Bogor, West Java
Total Income of Rp 2.5- Rp 3 Juta per day
Primary risks: 1) Health 2) Education 3) Property
Understands about credit life as explained by BMT WU marketing staff, but overall perception of insurance is that it is “hal yang ribet” (difficult). He doesn’t currently participate in insurance.
He can allocate Rp 1 Juta per month for insurance, but daily collection is easier for him.
Doesn’t really know about or understand takaful/Shari’ah Insurance, but he prefers takaful and is willing to pay more for it.
Prefers premium to be picked up.
Irul Collection Staff for Hikmah Coop
Makasar, South Sulawesi
Rp 1,200,000 per month
Primary Risks: 1) Accident 2) Death 3) Health
He has most experience with credit life insurance which is provided by the cooperative for those who borrow money.
Can save Rp 150,000 per month for insurance
He prefers takaful over conventional insurance because he trusts it more. He would even purchase Takaful if the same type of conventional insurance was offered free.
No comment
Group Interview with Pak Denai, Ali, & Ibu Nin
Street/ Beach Vendors (Pisang Epe)
Makasar, South Sulawesi
Rp 100,000/ day or about Rp 3 Juta/ month
Primary risks: 1) Health 2) Education 3) Cultural Ceremony
for death (Tahlilan)
Don’t really know anything about insurance. It is expensive and burdensome. The requirements are difficult.
They can afford between Rp 100,000 and Rp 150,000 per year, but hope to receive benefits of around Rp 70 Juta
They prefer the cheapest product
Bank or Post Office, prefer to learn about insurance face-to-face
Aan Secretary at Public Works Office (contract worker)
Banda Aceh
Rp 1,500,000/month
Primary Risks 1) Accident 2) Education 3) Death
Insurance is for rich people so they can plan for the future
Rp 25,000/month (at first she didn’t want to answer because she thought all insurance would be too expensive for her).
She had heard of Takaful and prefers it because there is no interest allowed.
No Comment
Group Interview with Pak Rizal, Pak Hatta
Vendors in Market and clients at BQ Baiturrahman
Banda Aceh
Unknown, but BQ manager mentioned that they target those that have income of about Rp 1,500,000 per month.
Primary risk is health, but accident and death were also mentioned. Even though there is free healthcare from the government in Aceh, they prefer to have additional coverage.
The men have never had insurance aside from credit life from the BQ, but view it as helpful and important. They often see insurance companies and logo, but feel that the companies don’t want to mingle with low-income people to raise awareness. They expect that their premium should be returned to them if there are no claims, or at least some kind of profit sharing.
Pak Hatta can afford Rp 50,000/month while Pak Rizal can afford Rp 100,000/month. They wish they could receive a benefit of Rp 25-50 Juta
They would prioritize the benefit of the insurance over whether it was Takaful, but prefer takaful if the benefits are the same. They like the concept of takaful, but there has never been clear information about it. They have only heard the name takaful, but don’t understand it.
Don’t like the idea of initially paying through SMS; prefer to go to the office and to make sure the insurance company is real. Best to socialize takaful through Aceh TV and through the Mosque bulletin board.
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Name Work Location Wage Risk Priorities Insurance Knowledge or
Suggestions Affordability &
Frequency Shari’ah
Preference Payment
Preference Yanto Blue Bird
Taxi Driver Jakarta (from Solo)
Rp 200,000 per day or Rp 5-6 Juta per month
Primary Risks
1) Education costs 2) Daily expenses 3) Invitations to events from friends and family The first two can be predicted, but the last one does not “masuk program” (cannot be planned).
He has participated in educational insurance before, but now prefers to save. Before he forgot to to pay the premium and lost his money.
He can afford Rp 100,000 to 200,000 per month and commented that Rp 50,000 per month was very cheap “murah banget.”
Takaful isn’t very different than conventional insurance, but is made for Muslims. The main difference is that there is no riba/interest like other insurance.
No Comment
Wiwin Mechanic Banda Aceh (from SE Aceh)
About Rp 1,300,000 per month
1) Health 2) Retirement 3) Education
Also mentioned accident, life, auto, credit life (auto), haji.
Used to work as an agent for BNI Life and views insurance as important but says that it has traditionally been for those who are well off. His understanding of insurance is still more as a savings/investment product.
Rp 20,000/month for those making minimum wage or less (Rp 1,550,000/month in Aceh)
His understanding of Takaful is that it acts more like a mutual. He prefers it over conventional insurance, but will choose the cheaper of the two because of economic constraints.
Post Office. It is risky to pay through agents.
Pak Tantri & Wife
Farmer – Coffee and Vegetables
Takengon, Aceh
Not stable enough to know, around Rp 1,500,000/ month if coffee prices are good
1) Daily living expenses 2) Education 3) Agriculture
Both husband and wife had never heard of insurance
Difficult to determine because of unstable income, and a lack of understanding about insurance, but Tantri’s wife thinks that Rp 20,000 per month would be affordable, and maybe more if they understood the product better.
No comment No comment
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Name Work Location Wage Risk Priorities Insurance Knowledge or
Suggestions Affordability &
Frequency Shari’ah
Preference Payment
Preference Pak Ilyas Fisherman
turned Handyman
Banda Aceh (from South Aceh
Rp 2 Juta per month
1) Investment capital for fishing 2) Sickness 3) Work-related accident Also mentioned accident while driving his motorcycle and death, but death wasn’t something he was very concerned about. The costs associated with death aren’t very high in Aceh.
Have heard of insurance for health, life, and accident, but mentioned several times “there’s not any insurance for fishermen.”
Ilyas can afford Rp 50,000 per month, but suggested maybe others would only want to pay Rp 30,000. Rp 25,000/year is a price that even the poorest can afford for accident insurance.
Has never heard of Shari’ah compliant insurance or Takaful
Distribute through captains of fishing boats, pay though post office, insurance company office, or agents coming to house if they have permission from village head.
Group Interview with Suryatin, Rajiman, Wagino, Suriyanot
Pedicab Drivers
Medan, North Sumatra
Rp 70,000/day
1) Accident 2) Sickness 3) Education & Daily living expenses Also mentioned death from accident and sickness.
Perception is that insurance is expensive and not affordable. Their experience with Jamkesmas is that it is difficult to use and the process to register and claim takes a long time.
Rp 100,000 per month is too expensive, but Rp 50,000 per month is affordable.
No comment No comment
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Appendix B: List of Retakaful Operators Worldwide
1. Islamic Takaful & Retakaful Co. (IRT Co.) Bahamas
2. ASEAN Retakaful International Malaysia
3. Islamic Insurance and Reinsurance Co. (IIR Co.) Saudi Arabia
4. Islamic Takaful and Retakaful Co. (ITR Co.) Saudi Arabia
5. Tokio Marine Nichido Retakaful Pte Ltd. Singapore
6. National Reinsurance Co. (NRI Co.) Sudan
7. BEIT Iaadat Ettamine Tounsi & Saoudi
8. Reinsurance (B.E.S.T. RE.) Tunisia ARIG, Dubai
9. Malaysian Takaful-Reinsurance Berhad
10. ACR Retakaful SEA Berhad
11. Munich Retakaful Co. Germany
12. Swiss Retakaful Co. Switzerland
13. Hannover Retakaful Co. Germany
14. BMS Asia Re-Takaful, BMS Asia Intermediaries
15. Zurich Takaful Re, Switzerland
* this list is not exhaustive due to emergence of new retakaful operators every year.
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Appendix C: Questionnaire for field staff
Field Staff Questionnaire
Organization Name
Position in Organization
Length of time employed by Organization
1) How is the insurance program received and accepted by your customers? a. Very Well b. Good c. Overall OK d. Overall OK, but sometimes difficult e. Frequent criticism and resistance
2) How do your customers feel about the insurance premium?
a. All clients are happy with the premium: b. Most clients are happy with the premium, but some clients com-plain about it: c. Many clients are ok with the premium, but many also complain about it: d. Most clients feel the premium is an extra burden for them: e. All clients complain about the expensive premium
3) How do you think micro insurance has affected your organization’s number of
customers? a. Positively. Customers see insurance program as additional benefit to join: b. Neutral. No effect: c. Negatively. Customers tend to drop-out because of issues related with the
insurance program
4) When explaining the insurance, what is your most successful strategy?
5) What is the most difficult obstacle when socializing microtakaful/insurance?
6) What are the 3 most frequently asked questions you encounter about takaful/insurance from the customers?
a. b.
7) What other noteworthy questions are asked by the customers?
8) Would you recommend your management to continue the microinsurance program?
a. Yes b. Yes, but only with improvements: c. It makes no difference to continue or not d. No, I would recommend to stop it:
9) What improvements would you recommend?
10) Any other comments/ suggestions you would like to share with your management or the microinsurance providers about the current takaful/insurance program?
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For Discussion
1) Did you encounter any cultural, religious, or social obstacles in promoting
takaful/insurance?
2) What has been the best way to market/convey the product? Can you give an
example of how you explain it?
3) Would you feel comfortable marketing a voluntary micro-insurance product among
your clients?
4) How would conveying a voluntary product differ than a compulsory one?
5) Were customers ever asking for more insurance? If yes, what kind?
6) In your opinion, what types of people best fit micro-insurance?
7) How have claims been received by the community? Do people in the local
communities think positively about takaful?
8) Any other comments/questions?
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Appendix D: Questionnaire for Shariah insurance entities
Questionnaire for AASI Members
Name of insurance provider
Legal status
1st year of offering Micro Takaful/Shari’ah if applicable
Your name
Position
Phone
If your company currently offers any type of micro takaful/Shari’ah product, please fill out the rest of this questionnaire starting at point 1 below, entitled Target Market. If your company does not currently offer any type of micro takaful product, can you share the following:
Why does your company currently not offer any type of Mikro product?
Does your company plan to develop such a product?
If yes, what products will be developed first?
When do you expect to start selling this product?
1. Target Market
What is the income profile or your client base/target market for the micro segment?
Are there any specific segments that you have targeted, such as microcredit customers, farmers, etc.?
If you had to describe your target market for micro-Shari’ah in just a few words, who is your target market?
Which of your products are most popular and why?
In your opinion, what are the needs and wants of the people regarding Shari’ah
microinsurance?
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2. Product Details
Please fill out the tables at the end of this questionnaire for any current Micro Shari’ah/Takaful products currently being offered.
3. Business volume / Outreach microinsurance
Gross Written Premium 2011 Mikro-Shari’ah:
2012 Mikro-Shari’ah:
2013 Mikro-Shari’ah:
Number of Customers 2011 Mikro-Shari’ah:
2012 Mikro-Shari’ah:
2013 Mikro-Shari’ah:
Geographic Coverage in General
4. Sales and Distribution Channel
What is your selling approach for Micro Shari’ah?
Do you actively approach your partner(s)?
Which distribution channels do you currently use? Why?
What plans for distribution do you have for the future?
Do you have any current partnerships in the development or provision of your micro Takaful products?
5. Risk
Do you reinsure any part of your current micro-takaful/Shari’ah insurance?
If yes, do you reinsure with Retakaful or with a conventional reinsurer?
If no, do you plan on using a retakaful insurer in the future?
What kind of mortality tables do you use for low-income/or micro segment?
Have you recently put together any mortality tables?
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6. Regulations
In regards to Shari’ah regulations, other than regulations from MUI, what other bodies of Shari’ah law have influenced the development and selling of micro Takaful/Shari’ah products?
What influence has the decisions of the Islamic Fiqh Academy in Saudi Arabia, the Islamic Financial Services Board (IFSB), and the AAOIFI or other Shari’ah scholars had on how your provision and partnership in takaful?
7. Outlook
What is your expectation on future growth of Shari’ah microinsurance in Indonesia? What is
the potential/ market size?
Do you have plans to expand your outreach? (Expected growth in terms of GWP, no of policies;
product diversification, geographic expansion)
Does your company have any new micro products in the pipeline? What types?
Has your company done any in-house research for the micro-segment? Would you be willing to share any insights gained from this research?
8. Challenges
Which kind of restrictions do you currently face to operate your insurance business?
(Economic policies, regulations, demand: business growth, affordability, understanding,
reinsurance capacity, capacity of staff…)
Do you currently operate a takaful window?
If yes, do you have plans to open a full-fledged takaful operation? When?
9. Support/Training
Has anyone provided you any support for developing and/or distributing your Mikro-Shari’ah
product? (Examples – such as research, IT, training, legal advice, Shari’ah advice, donors,
academic institutions, government departments/programs, etc.)
10. Other
Do you have any comments, questions, concerns?
42
Current Micro Takaful/Shari’ah Products
Product #1
Product Name
Product Type
Insured Event
Cover (individual or group, voluntary or compulsory)
Exclusions/limitations
Age limitations Minimum entry age:
Maximum entry age:
Other:
Sum insured Minimum:
Maximum:
Other:
Protection Period
Premium
Method of Premium Collection
Method of Claims Payment
Timing of Payment Minimum days before payout of claims
Maximum days before payout of claims
Number of Current clients
Geographic Focus/outreach
Distribution Channel(s)
Product # 2
Product Name
Product Type
Insured Event
Cover (individual or group, voluntary or compulsory)
Exclusions/limitations
Age limitations Minimum entry age:
Maximum entry age:
Other:
Sum insured Minimum:
Maximum:
43
Other:
Protection Period
Premium
Method of Premium Collection
Method of Claims Payment
Timing of Payment Minimum days before payout of claims
Maximum days before payout of claims
Number of Current clients
Geographic Focus/outreach
Distribution Channel(s)
Product #3
Product Name
Product Type
Insured Event
Cover (individual or group, voluntary or compulsory)
Exclusions/limitations
Age limitations Minimum entry age:
Maximum entry age:
Other:
Sum insured Minimum:
Maximum:
Other:
Protection Period
Premium
Method of Premium Collection
Method of Claims Payment
Timing of Payment Minimum days before payout of claims
Maximum days before payout of claims
Number of Current clients
Geographic Focus/outreach
Distribution Channel(s)
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