Strategies for Takaful during economic downturn

With the hike of oil price and depreciating in USD, the inflation of many countries including Indonesia seriously affected. Price of basic consumer goods had been escalating as a result of oil price hike. In this situation, takaful players must be extra careful in accepting new cases especially those with high sum covered. Due diligence must be carried out onto small companies without clear article of association and nature of business. There might be potential corporate clients which setup their companies mainly to benefit from takaful coverage whether life or general via claims. Any irregularities of the company should trigger for comprehensive investigation prior to acceptance.

Investment performance is also seriously affected nowadays. Nevertheless, takaful players should view it as opportunity to make profit by collecting those equities with high potential for growth. New premiums should be invested in selected shares with the highest drop in values. If the company is still operating very well then their shares should be a favourite to investors due to low price. As most life policies are long term in nature thus the investment in equities should be for long term strategy to ensure higher return on investment.

Claims processing also require special attention especially those with shorter duration of policies. Accidental causes need further investigation.

Health Cover Upon Retirement?

It is not uncommon to cease insurance or takaful protection upon retirement especially health cover. Simple and frequent reason is that the retiree is no longer actively at work. This is obviously against the consumer needs as it is the period where medical attention is desired most due to the deteriorating health condition.

We can overcome with the situation by introducing a special scheme where the underwriter need not to worry on the escalating risk exposure. The scheme is a simple sinking fund or pure endowment with minimal death cover with the target desired fund as the sum cover upon maturity at retirement age. Upon retirement, the total accumulated fund will be utilized to cover all medical costs till depleted. To ensure longer period of cover, the amount required to manage the medical cost shall be as minimal as possible so that the balance of the fund will continue to be invested for optimum investment return.

Real Estate and Takaful

Many developers experience difficulties in their property sales currently mainly due to the uncertainty in global economy as a result of oil price hike and depreciating in US dollars. Thus, developers must create innovation in their marketing strategies such as incentive to lure more potential buyers. One 'out of the box' idea is to package strategically with takaful products. Assuming that the price of an apartment is say USD50,000. The developer may allocate say 20% or USD10,000 for takaful package to add several benefits such as cash back equivalent to USD50,000 at the end of 20 years, death benefits equivalent to the outstanding balance of financing, fire insurance, and personal accident cover. It can be promoted in such a way that the buyer will obtain an apartment, fully covered against loss due to death or permanent total disability for any causes, fire and moreover money back "guaranteed" at the end of certain period which can be utilized as a pension benefit should the buyer survives the period.

New Insurance Regulations in Indonesia

On May 23, 2008, Ministry of Finance of Indonesia or Depkeu had issued a revised insurance regulations covering several important aspects. The most important area affected is the minimum paid capital required for conventional and syariah based insurers. The regulator had set Rp100 billion and Rp50 billion as minimum paid up capital for conventional and syariah based insurer, respectively. Moreover, syariah window operator is required to maintain a minimum of Rp25 billion as their paid up compared to none previously. Consequently, I foresee few insurers may restructure their equity and operation accordingly in order to comply with the new requirement. Based on preliminary findings, it is estimated that at least 37 insurers whether life or general plus 2 reinsurers failed to meet with the new capital requirement.

For instance, a conventional insurer needs to maintain a minimum of Rp125 billion if they intend to continue their syariah window. If their existing paid up is say Rp75 billion, the additional capital required is Rp50 billion. Should they decide to withdraw their syariah window license and focus on conventional license solely they just need to add a minimum of only Rp25 billion against Rp50 billion.

Perhaps, the main objective of the above revised regulation is to reduce the number of syariah insurance operators from 42 currently where only 3 are full-fledged whilst the rest are just windows. The 3 full-fledged syariah operators are PT Asuransi Takaful Keluarga, PT Asuransi Takaful Umum and PT Asuransi Syariah Mubarakah. The first two capture about 65% of takaful market share in Indonesia and being the pioneer syariah insurance since 1994.

This new development in the insurance industry in Indonesia can be viewed by investors as potential for mergers and acquisitions of those without sufficient capital to meet the new regulations.