What is Takaful?

During my visit to Bandung recently, I was asked with a basic (for some) question on what actually takaful is all about. Let me share some points to those who is interested to know about it.
Takaful has been described by Takaful Act 1984 in Malaysia as a scheme which is based on mutual cooperation, solidarity and helping each other in financial aids in the event of mishap. The root of takaful is 'kafala' in Arabic which means guaranteeing, maintaining and preserving. This lead to the meaning of takaful as simply joint guaranteeing each other. It is a contract of agreement for mutual cooperation among the group who agree to jointly guarantee among themselves against loss or damage that may befall any of them. The main objective of the 'pact' for takaful is to pay for a defined loss from a defined fund.

Risk Based Capital

Risk Based Capital, which measures the financial security or solvency level of insurance companies in Indonesia, was introduced in 1999 and all insurance companies (including takaful) must maintain an RBC ratio of not less than 120% (current).

RBC ratio = (Solvency Margin ÷ Minimum Solvency margin) ≥ 120%

Where,

1. Solvency Margin = Admitted Assets – Liabilities; and

2. Minimum Solvency Margin is the summation of the following risks:

a. Asset default risk

b. Cashflow mismatch risk

c. Currency mismatch risk

d. Claims experience worst than expected risk

e. Insufficient premium risk

f. Reinsurance risk

3. The calculation of the above risk is clearly defined in MOF’s regulation no. 3607/LK/2004 which was recently revised under regulation no. PER-02/BL/2008.

4. Admitted assets are calculated based on the accounting standard as prescribed by MOF under the same regulation.

5. The current financial turmoil had resulted in several companies experiencing negative RBC or below the minimum required ratio, ie. 120%.

6. As a result, those companies are undertaking several measures including capital restructuring and corporate restructuring in order to rectify the situation.

7. IMOF had, early of the 2009, reviewed the RBC guidelines which allow some flexibilities in determining the risk factors.

Merger & acquisition

A friend of mine came to meet me in Jakarta recently after quite sometime haven't meet with each other. Out of curiosity, I enquired the main reason for him to be in Jakarta especially during this financial turmoil. Surprisingly, the response was to evaluate on the possibility of acquiring any insurance companies (life and general) in Indonesia and ultimately to convert into takaful operators. Well, this could be a good opportunity considering the financial crisis which affecting almost everybody in the financial sectors. The price maybe attractive should the companies' NTA drop due to unrealise losses of marketable securities.
However, one interesting issue yet to be resolved was with regard to direct or indirect acquisition of the insurance companies. Direct obviously means an equity in the company whilst indirect is via another non-insurance company. As for direct acquistion, the new foreign shareholder must be an insurance related company or a holding of any insurance company. Besides, the interested party must obtain an A rating from any international rating agency. This is tough for those who had never gone thru such exercise. Moreover, the total foreign holding shall not exceed 80% of the total paid up of the insurance company.
Should indirect holding is a choice there are few critical issues need to be addressed. The target company must fall under the auspices of IMOF otherwise there will be some difficulties in the status of the target insurance company. With indirect holding, the new foreign shareholders may loose their right to place their representatives in the insurance company due to non-JV company status which is known as local company or 'swasta nasional'. Pls refer to PP77 1992 article 4 (1) and (2) which was revised recently, for further details.