Keynote Speech Chairman of Indonesia Financial Services Authority at the Microtakaful Conference Indonesia Hotel Borobudur Jakarta, 24 April 2014

Transcription

1 Keynote Speech Chairman of Indonesia Financial Services Authority at the Microtakaful Conference Indonesia Hotel Borobudur Jakarta, 24 April 2014 Assalamu alaikum warahmatullahi wabarakatuh. Excellencies, Distinguished Colleagues, Speakers, Ladies and Gentlemen Good Morning. Let me begin by extending my gratitute to GIZ and AASI for making this event a successful one. Furthermore, I greatly appreciate all speakers present today and providing us the luxury of their experience and view sharing. And last but not least, I welcome my colleagues, Comissioner of Indonesia Financial Services Authority and all participants of this event. Distinghuised speakers and participants, Rationale for promoting microtakaful in Indonesia Sharia insurance or takaful in Indonesia still represents a relatively small part of the insurance industry but is growing rapidly. Total contribution or premium of takaful remains low,i.e., less than 5 percent in However, we believe that there is a big opportunity for takaful to grow considerably in this country, as the Moslem population in Indonesia represents a big portion of the society. Rapid growth of the takaful industry within the last five years (27% annual growth of contribution and 49% annual asset growth) has created confidence that the takaful industry will keep growing. However, the source of the growth continues to come from the middle and high income society, since most takaful products offered by 1

2 takaful operators in Indonesia were dominated by products that meet middle and high income individuals. In other words, the benefits of takaful industry has yet to be received by the lower income group. In my view, serving the lower income group has vital roles for both the takaful industry and the society. For the takaful industry, microtakaful may play a significant role in creating a sustainable growth. In the short term, large lower income population may generate contribution of microtakaful and make profitable business eventough the share may still be lower than ordinary takaful market. In the long run, serving the lower income group, which represents a large part of the population, may build public awarness and create a takaful culture. In the meantime, as the national economy grows, the lower income households may move to middle income class, or even high income class. This becomes a potential source of higher takaful contribution. For the society, serving microtakaful to lower income households may enable them to access financial protection products to cope with adverse events and minimize the negative impacts to their household income and consumptions level. These instruments will protect the poor and vulnerable by empowering them with a way out of their poverty and give them a real hope of being financially self-sufficient. Besides, microtakaful may also improve productivity of the lower income group by broadening access for financing from islamic banking and other funding sources that in the end will enable such group to increase their business capacity. Religion and culture also play a fundamental role in the lives of the lower income group. As such, microtakaful may prove to have great relevance in increasing access to insurance for the lower income households in Indonesia. Takaful, which is an Islamic based insurance may be more welcomed by lower income population where Islam has a sizeable presence. In addition, the principle of takaful, namely, bearing 2

3 one another s burden could be accepted easily by the lower income households who still considers solidarity or brotherhood as a core value in the society. Surveys conducted worldwide and even in Indonesia have indicated the need of the lower income households towards insurance or takaful products does really exist. Moreover, self insured in the lower income community worldwide include Indonesia is also an evidence that the society needs insurance or takaful product. Furthermore, the experience of some insurance companies in Indonesia and other countries indicated that microinsurance or microtakaful is profitable. Considering the existing situation and potential impact of microtakaful in Indonesia, promoting microtakaful in the country appears to be an excellent policy. However, taking into consideration the characteristic of lower income households, we need to serve them differently from regular target market of takaful. Ladies and Gentlemen, Opportunities, Challenges and Critical Issues The potential role of microinsurance and microtakaful has attracted initiative from insurance players and government in the emerging market as well as global intiative supported by multilateral organizations, NGOs and Development Agencies. Although microtakaful has not been a major focus of insurers or takaful operators, international experiences show some insurers and takaful operators have found microtakaful to be profitable. In Indonesia, we recognise some insurance players have started to provide microtakaful and some of them achieved relatively good performance. However, the question is: will this remarkable growth and performance of microtakaful industry sustainable in the future?. I note there are eight critical issues 3

4 to be considered for all the stakeholders to achieve sustainable growth of microtakaful industry in the future, which are: 1) Shariah Compliant. The most relevant question is to ask whether it is operating fully on the basis of Shariah. There are many issues in Takaful where a uniform ruling of Shariah is still not available. Any issues appear not very clear as to its permissibility from Shariah point of view, should be asked for Shariah scholars resolution at the earliest possible time. Ijtihad is necessary to shape the Takaful system purely as per Shariah ruling to response all the changes that take place in the society and in the business world. 2) Product design. The critical aspect on product design of microtakaful is client demand driven and simplicity. When microtakaful products meet demand or need of low income people, then the product will be valued and used by client. And product that used by big proportion of the society will lead to economic scale. Microtakaful products should be designed as simple as possible. Simple means easily to understand and implemented. This is not limited to product feature but all related business process includes underwriting, documentation, premium payment, and claims handling. The need for simplicity may demand for efficient business process. It may also mean that insurers and takaful operator have to adapt their normal business practices and consider using unorthodox mechanisms for controlling moral hazard, adverse selection and fraud. The involvement of advance technology application may necessary to support those requirements. Furthermore, we recognize that some microtakaful products are complementary and integrated with other financial product, such as saving or 4

5 financing-related insurance. Therefore, microtakaful product design should consider other financial products to further meet the client s needs. Another aspect of product design that has to be considered is database building. Management Information system should be able to provide relevant information for product related decision-making, such as decision on the pricing and product features adjustment. 3) Products awareness and consumer protection mechanism. Poor knowledge of various insurance products, including how the products work and their likely costs, may prevent individuals from making full use of existing insurance products appropriately. Consumer awareness is about trust building. The higher the customer's knowledge of microtakaful products, the more he will trust using or buying microtakaful product. Insufficient levels of awareness about related regulations and consumer protection scheme may result in lack of confidence on financial services provider which also reduce the demand for financial products. Therefore, masive aducation and promotion of microtakaful should be accelerated to address demand-side barriers and help individuals to be confident dealing with Microtakaful. This eduation program should be integrated with the national strategy to promote financial inclusion and empower low income people, as a part of financial inclusion program. 4) Transparency. Transparency is a unique feature of the Microtakaful system. Therefore, it is necessary that we provide sufficient transparency in all aspects of Microtakaful operation. We should bear in mind that transparency and accountability can make Microtakaful more trustworthy and can create confidence among the lower income households to deal with this product. 5

6 5) Microtakaful products pricing. Product pricing is one of the key success factor for microtakaful development. Traditional delivery channel, i.e through insurance agent, might lead to high cost which lead to high insurance premiums which is a barrier on the demand side. Therefore, innovation on products, delivery, and operational are important to make microtakaful product not only available in the market but also affordable for lower income households. However, product pricing should take consideration of the risk, and they must cover, even from the start, the cost of expected claims. 6) Claim services. We should be aware that complex claims procedures will only frustrate legitimate beneficiaries. Therefore, the whole claim settlement process should be designed as simple as possible and straightforward without sacrificing prudential aspects. I believe that the speed at which claims are paid is a key competitive advantage for microtakaful operators. 7) Availability for Non-Muslim Community. The current development in Microtakaful is that it has also attracted the non-muslim households. Therefore, the market for Microtakaful is not limited to Muslim Community. The horizon of the Takaful market will expand gradually throughout the world because of its unique features of profit sharing, transparency & accountability to all the stakeholders. In our neighbors countries, a large number of Takaful customers are non-muslims and many of the non-muslim agents are now engaged in selling Takaful products. This is one of the key success factors for Microtakaful development. 8) Key stakeholders supports. Microtakaful development should be integrated with various programs to empower lower income households such as social security program, natural disaster management, and empowerment of micro enterpreneur. Microtakaful should be complementary to and conducted in the 6

7 same platform to those empowerment programs. Therefore, effective and in continues basis coordination among key stakeholders should be in place. Distinghuised Speakers and Participants, Ladies and Gentlemen, Conclusion I believe that the market for microtakaful has large potential to be exploited. This is only possible when all the stakeholders play their roles, not only depending on the regulators. All stakeholders have to concurrently give adequate attention and work in their proper fields respectively. OJK, as the regulator, will promote market development and sound prudential practices, provide supportive integrated regulation environment, including establish the optimal synergy among financial sectors in developing microtakaful industry. Ladies and gentlemen, in closing, I would like to convey my high hopes of the fruits of this conference. I understand that there is a full agenda for the conference and I wish you every success in these deliberations. Thank you very much. Wassalamu alaikum warahmatullahi wabarakatuh. Jakarta, 24 April 2014 Muliaman D. Hadad Chairman The Indonesia Financial Services Authority 7