MARKET ASSESSMENT on Microtakaful in Indonesia

The Executive Summary

ACKNOWLEDGMENT This market assessment was carried out by the Deutsche Gesellschaft fur International 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.

For further information, please contact: GIZ RFPI Asia Dr. Antonis Malagardis Program Director Insurance Commission Complex 1071 U.N. Avenue, Ermita, Manila Philippines 1000 T: +63 2 353 1044 -45 E: [email protected] OJK Moch. Muchlasin Directorate of Sharia Non Bank Financial Institutions Sumitro Joyohadikusumo Building 13FL Jl. Lapangan Banteng Timur 2-4 Jakarta Pusat 10710 T: +61 21-3858001 ext 21330 E: [email protected] AASI Srikandi Utami Vice Chairperson Graha Takaful Indonesia, Tower A, Fl. 2 Jl. Mampang Prapatan Kingdom No.100 South Jakarta 12970 T: 62-21 5289 0000 E: [email protected]

Table of Contents ACKNOWLEDGMENT .............................................................. 2 ACRONYMS ............................................................................. 1 I.

INTRODUCTION ............................................................... 2 A.

Background ............................................................................... 2

B.

Objectives of assessment.......................................................... 2

C.

Survey Methodology .............................................................. 3

II. THE RISK PROFILES AND PERCEPTIONS OF LOW-INCOME MUSLIMS ................................................................................. 4 III.

PERCEPTIONS AND UNDERSTANDING OF TAKAFUL5

A.

Benefits ..................................................................................... 6

B.

Eligibility .................................................................................... 6

C.

Distinction of features ............................................................ 6

D.

Payment modes ..................................................................... 7

IV.

THE POTENTIAL MARKET FOR MICROTAKAFUL ...... 7

V.

THE MICROTAKAFUL SUPPLY CHAIN ............................ 9 A.

Microtakaful providers ............................................................... 9

B.

Microtakaful distribution channels ............................................ 11

C.

Existing microtakaful products ............................................. 13

D.

Potential microtakaful product features ................................ 17

E.

Partnerships in microtakaful market development ................... 18

VI. THE REGULATORY ENVIRONMENT FOR MICROTAKAFUL MARKET DEVELOPMENT ..................................................... 18 A.

Prevailing regulatory issues ..................................................... 18

B.

Industry perspectives on regulatory improvement needs ......... 20

VII.

FINANCIAL LITERACY AND CONSUMER PROTECTION 21

VIII.

SUMMARY AND CONCLUSIONS................................ 22

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Table of Figures Table 1. Ranking of Perceived Risks/Problems .................................... 4 Table 2. Demographic profile of microtakaful target market .................. 8 Table 3. Takaful operators ................................................................. 10 Table 4. Microtakaful products ........................................................... 13 Table 5. Proposed microtakaful product features ............................... 17

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ACRONYMS 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)

BTM

Baitul Tamwil Muhammadiyah (Muhammadiyah Islamic Cooperative)

CSR

Corporate Social Responsibility

FGD

Focused Group Discussion

GIZ

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

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)

I.

INTRODUCTION A.

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 an appropriate market for insurance that is compliant with Islamic laws and that will cater to the low-income sector – a microtakaful market- 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 industry. The current situation needs to be understood to inform the future progress of the microtakaful market.

B.

Objectives of assessment

This executive summary highlights the results of a market assessment on microtakaful in Indonesia, conducted to contribute in the improvement of the regulatory and supervisory conditions for a conducive and favorable environment for the effective development of a microtakaful market that offers protection to the low-income Indonesians. The assessment analysed 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, particularly through financial literacy and consumer awareness. The market assessment ultimately aims to serve as a basis for the development of appropriate policies and regulations by the OJK and the development of microtakaful products and businesses by the members of the Asosiasi Asuransi Syariah Indonesia (Indonesia Syariah Insurance Association).

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C.

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 4 provinces and in DKI Jakarta, consisting of 7 mixed gender groups, 3 groups of men only, and 3 groups of only women. Interviews with potential microtakaful clients were conducted in an additional 2 provinces and consisted of 22 non-in depth interviews, 4 in-depth interviews, and 3 group interviews. In order to benefit from the insights of those working directly with the low-income segment, we also conducted 25 interviews with staff from microfinance institutions (MFIs) and cooperatives, and 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, we 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 survey 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, we tried to capture the perspectives of low-income Muslims that constitute the following segments: conventional and Islamic MFIs, community groups not connected with and MFI or cooperatives, and farmers. 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 five reasons: 1. It is assumed that MFI members are in general a part of the lowincome population 2. MFIs have traditionally been a partner in piloting microinsurance products around the world and represent a natural distribution channel for microinsurance 3. There are MFIs in Indonesia which are currently partnering with Takaful providers 4. Comparing the responses of low-income Muslims participating in Islamic MFIs with those participating in conventional MFIs, and 5. MFIs provide a convenient way for gathering a group of members for discussion.

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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).

II. THE RISK PROFILES AND PERCEPTIONS OF LOW-INCOME MUSLIMS Reiterating the results of past microinsurance surveys in Indonesia, this assessment identified the two main life events that determine the vulnerability of the poor to risk as illness and education expenses. Other factors that impact their risk vulnerability include daily living expenses, need for business capital/lump sums, 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 1. Ranking of Perceived Risks/Problems Ranking Method

Ranking of Risks/Problems 1. 2. 3.

Ranking with cards

Ranking by hand

Group ranking by discussion

4. 5. 6. 7. 8. 1. 2. 3. 4. 1. 2. 3. 4.

Illness Education Business Capital/lump sums of money Living Expenses Death Accident Retirement Motorcycle

9. 10. 11. 12. 13. 14. 15. 16.

Illness Education Accident Death & Fire (Business related) Illness 8. Education 9. Living Expenses 10. Business Capital/Lump 11. sums of money 5. Accident 6. Death 12. 7. Cost of Livestock 13.

House Haji/Umroh Business Lebaran (Religious Holiday) Social Pressures Poor Education Facilities Debt Livestock

Business Failed Harvest Death of Livestock Social Pressures (invitations to community events) Motor Cycle (Upkeep) House Rent

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III.

PERCEPTIONS AND UNDERSTANDING OF TAKAFUL

Many of the assessment participants were not aware of takaful or Shariahcompliant 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 regular insurance, but would like to know more about it first. Those that had heard of takaful or Shariah-compliant insurance 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/Shari’ahcompliant insurance. 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: 1. Past bad experience in Islamic banking 2. Perception of “takaful” as only a change in name, but with still the same approach, which signals a “munafik” or hypocritical strategy 3. Lack of knowledge about takaful while abundant information about conventional insurance makes for comfortable decision-making 4. 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 Shari’ah rules. Some participant expressed willingness to choose a takaful product over a conventional insurance product if the price and benefits are good or better.

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For those who preferred takaful products, the willingness to pay for the additional premium range of IDR5, 000 to IDR10, 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. The table below lists the themes for which information seems to be highly needed by consumers, as evidence by some of the questions expressed in FGDs: A.       

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/tabarugh? B.



Eligibility

What is the age limit? C.

     

Benefits

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?

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

Can insurance cover more than one risk at one time or only one risk at a time? D.

  

IV.

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?

THE POTENTIAL MARKET FOR MICROTAKAFUL

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 lowincome individuals who are not the very poorest, but rather are those who live on $1.25 to $4 a day. This assessment has also documented that some Islamic Microfinance Institutions do not consider the very poor as ready to participate in profitsharing Islamic credit models but 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

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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 assessment has come up with a general overview of the profile of the potential target market for microtakaful (see Table 2). Table 2. Demographic profile of microtakaful target market Demographic Description Comments Variables

▪ Occupation

▪ Awareness

▪ Income/year

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

Low

However, as Muslims they are receptive to microtakaful because the assumption of it being a Halal product.

Seasonal/cyclical; Range between US 1.25 to US4 per day.143.1 million live less than US4/day.

Very low and unstable income, living on less than subsistence level.

▪ Affordability

Ranges from IDR5,000 per week to IDR1,000,000 per month

The range is too wide and may opt for lower contribution depending on type of occupation and income sources.

▪ Education (Level %)

Literacy

Target market falls

92.6

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▪ Internet users or connectivity to urban and rural low income and poor

Residence

96

Secondary

67.3

Tertiary

23.1

Mobile cellular subscription

Rural and urban

▪ Accessibility to Infrastructure, services and facilities

V.

Primary

28.5 million living under poverty line and poor access to physical infrastructure

mainly in the primary educated group 97.7 for whole of Indonesia; the percentage of low income subscribers are not known Promotion via cooperative membership and rural banking and through village post offices

Cooperatives, rural banks and post offices are the best distribution channels given the widely dispersed provinces

THE MICROTAKAFUL SUPPLY CHAIN A.

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 full-fledged takaful operators, three of which currently offer microtakaful products:

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Table 3. Takaful operators Takaful operators Status 1) PT Asuransi Takaful Keluarga In partnership with TAKMIN, offers (Life) credit life, additional lives, motor, and PA microtakaful to a network of MFIs 2) PT Asuransi Takaful Umum No microtakaful products on offer yet (General) 3) PT Al Amin, (Life) 4) PT Amanah Githa (Life)

5) PT Jaya (General)

Proteksi

Takaful

Offers an education microtakaful product In partnership with ASyKi and the Sidogiri Group of Islamic cooperative, offers life and PA microtakaful 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 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. 1. Allianz has been selling takaful credit life in partnership with MFIs. 2. Adira Insurance has a Syariah Dengue Fever Product with additional products planned for offer. 3. Bumiputera offers a Syariah-compliant credit life product. They are also partnering with ASyKi to provide a motorcycle protection product. While not necessarily micro according to the Micro Insurance Grand Design, BP has also recently launched a new investment linked Syariah product for as little as IDR200, 000 per month. 4. BRIngin Life offers both group and individual microtakaful products, but has not really branded them as micro. 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,

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are towards a later period if the 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 performance might lead to failure.

B.

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 companyagents in Indonesia that currently offer microtakaful is unclear. One recent development is the establishment of a new broker which has a particular focus and interest on the microtakaful. Asuransi Syariah Keluarga Indonesia (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 IDR20 million within 1-2 days, and claims up to IDR70 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. 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. 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.

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In the Islamic cooperative sector, BMT Sidogiri (Baitul Maal wat Tamwil) and BTM (Baitul Tamwil Muhammadiyah) 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 channel in Indonesia. Communications company Telkomsel has already explored the market by offering a short-term personal accident 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 channel, 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: 1. 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. 2. 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. 3. Marketing costs will be expensive. While the costs can be shared with the insurance company, it is an investment deemed too costly. 4. The minimart personnel are not fully knowledgeable about the product and are not capable to explain properly to customers. 5. Data entry for registering the product takes a long while. 6. 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

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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 . C.

Existing microtakaful products

At present, there are some 14 microtakaful products in the market which range from credit life, personal accident, motor, disability, education, and dengue takaful products.

Provider PT. Asuransi Takaful Keluarga – in partnership with TAKMIN

Table 4. Microtakaful products Name of Type Benefits Product 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

Cost 



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 disbursemen t. The collected premium is 0.05% X term in months X initial loan amount

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PT. Asuransi Takaful Keluarga – in partnership with TAKMIN

TAKAFUL AL KHAIRAT (named by Takmin as Takaful Ukhuwah Mikro)

Life PA

and

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

IDR175,000 per year with a minimum savings account balance of IDR100,000

IDR25 million for accident related death IDR5 million accident related disability IDR1.25 million for healthcare costs related to an accident

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

IDR25,000/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 15,000/year

IDR 1 million for death from sickness

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Other benefits for partial disability IDR 400,000 for hospitalization IDR 600,000 for outpatient care related to accident Adira Dinamika

Asuransi Deman Berdarah Syariah

Dengue Fever

Covers up to IDR5 million for 1 year

IDR50,000/year

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

IDR200,000/year

Allianz

Payung Keluarga

Credit Life Takaful

Outstanding Loan Balance, Initial Loan Coverage, Funeral Benefit (proportional to loan or nonproportional to loan).

Depends on package chosen by MFI.

BRIngin Life Syariah

Purnadana Syariah

Life PA

Pays a death benefit of IDR7.5 million for natural or accident related death while the policy is still active along

IDR200,000/3 months*

and

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with profits from investment 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**

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

BMT Sidogiri

Pembiayaan

Credit Life Takaful

Covers outstanding loan balance up to IDR100 million

Free – costs are included in the profit sharing margins

BMT Sidogiri

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 IDR50, 000 and monthly savings of IDR25, 000.

BMT Sidogiri

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

There is an initial deposit of IDR100, 000 to start the account and then monthly

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family will also still get the promised payout for education costs.

payments of IDR50, 000. The Takaful premium of IDR3, 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. IDR200, 000 is the lowest premium amount available. D.

Potential microtakaful product features

While some microtakaful products are already on the market, improvements are still needed to address product voids. Below are features which future microtakaful products could hold:

Table 5. Proposed microtakaful product features Characteristics Proposals Remarks

Coverage

Family inclusive of Education, Health, Accident, Credit life and Property takaful (based on priority)

Range IDR5,000 IDR1million Contribution (Price or Premium)

between to

Market is prone towards monthly and yearly

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. Medium range is between IDR6, 000/ weekly, IDR126, 272/mo, IDR130, 555/ quarter, IDR109, 166/yr.

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Delivery channel

E.

Post office, rural banks, agents, insurance office & community groups and cooperatives

Post office is the most preferred channel according to the market survey followed by rural banks, agents and cooperatives.

Partnerships in microtakaful market development

The industry seems cognizant of the fact that scale and market expansion can only be achieved through cooperation. The partner-agent approach seems to be the most commonly adopted and exemplified by insurance companies and microfinance institutions. The mutual benefits include the reach of MFIs in the low-income segment and the ease on administrative processes of the insurance companies, as the MFIs take over the roles of marketing and claims processing. Insurance companies, through their industry association, are also collaborating to expand the market. AASI is currently designing standardized microtakaful products that can be adopted and offered by the insurance companies. AASI members are also working with the Islamic banking sector to better market future products and improve reception by low-income Muslims.

VI. THE REGULATORY ENVIRONMENT FOR MICROTAKAFUL MARKET DEVELOPMENT

A.

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 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.

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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 these 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

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programs on their own, leaving room for the growth of informal takaful schemes as ‘Takaful in its true essence is a cooperative’.

B.

Industry perspectives on regulatory improvement needs



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.



OJK leading 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.



Comprehensive regulatory guidance on defining microinsurance. 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.



Complementation of microinsurance branding with existing products. 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.



Regulatory support to microtakaful distribution by banks. 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 as distribution channels will push market growth. Some expressed that the Islamic banking industry should be

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required to offer microtakaful products, especially if a standardized product is to be provided by AASI.

VII. 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 shall 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 such organizations 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: 1. Insurance Goes to Campus are visits to institutions to educate college student about insurance. It also includes an e-learning component.

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2. 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. th 3. Insurance Day celebration has been declared to be on 18 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.

VIII.

SUMMARY AND CONCLUSIONS

In summation, this excerpt of the 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 operators and takaful windows are the main channels for selling licensed microtakaful products. While MFIS and

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IMFIs have been tapped as distribution channels, there is ample space for expansion of distribution channels, including pawnshops and minimart



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, and the Insurance Council of Indonesia are the main facilitators of financial literacy for conventional insurance, microinsurance, and microtakaful.

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. But 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 to be more involved in the microtakaful market.

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