INDONESIAN ISLAMIC INSURANCE: CHALLENGES, OPPORTUNITY, AND

WAY FORWARD

Fitria Purnama Sari**

Faculty of Economics and Business, Padjadjaran University, Indonesia
Nila Dewi
Faculty of Economics and Business, Padjadjaran University, Indonesia

Abstract
Islamic insurance is the potential industry in the challenging global economic
climate. Indonesias large Muslim population has presented opportunity in
rapid growth of Islamic Insurance. Nevertheless, regarding the conditions that
occured in domestic market, asset growth, and penetration at low level. Thus
indicates that acceptability level in Islamic insurance product and service
utilization is still low. This study attempts to explore the challenges and aspects
that influenced islamic insurance acceptability in Indonesia through
descriptive analysis approach. It is found that Islamic insurance operator,
regulatory framework, market condition and macroeconomic, and public entity
are the challenge and aspects which influenced Islamic insurance
acceptability.
Keywords : Islamic insurance, Indonesia

The authors gratefully acknowledge the support from Mrs. Dian Masyita, Ph.D, and Prof. Dr. Tati S.
Joesron, SE., MS.
**
Corresponding author : Fitria Purnama Sari, Faculty of Economics and Business, Padjadjaran University,
Bandung, Indonesia. Email : fitriapurnamas@yahoo.com

I. Introduction
Nowadays global islamic insurance development or known as takaful has
attention and contribution to itself against Islamic financial system continuance. Islamic
insurance (Tamin, Takaful or Tadhamun) is an attempt in protecting and helping each
other among people/parties through investment on asset form and/or tabarru that gives
returning pattern to face specified risk through contracts that suitable with sharia.
Takaful (Islamic Insurance) has been known as alternative for society in the
middle of competition between conventional insurance industries. The concept of Islamic
insurance is not only introduced in Muslim countries but also in some non-Muslim
countries. The concept of Islamic insurance firstly introduced in Sudan in 1979, and
followed by UAE (United Arab Emirates) at the same year. Even though application and
expansion of takaful industry has been much done, the growth is not yet significant in the
middle of insurance global market competition. Observing the biggest market movement
contribution which is in UAE and Malaysia, global Islamic insurance is expected
growing for 16 percent in the next years compared in between 2007-2011 with average
22 percent.
In the end of 2011, global Islamic insurance contribution reached $12 billion, and
was expected would be able to reach $25 billion in 2015. Islamic insurance industry
growth is assumed to have big potention especially at market of Muslim countries. This
day Takaful industry just put concentrate in Mena and Malaysia, but next it is expected
that the growth og takaful market will increase in Indonesia and India region, followed by
Africa and CIS (Commonwealth of Independent States) area.
In Indonesia itself, Islamic insurance has been introduced in 1994, although the
growth would be seen in 2010-2011. Insurance company that becomes pioneer of
insurance industry with sharia basis in Indonesia is Asuransi Takaful Indonesia that
established in 1994. This industry is based on Fatwah of National Sharia Board
Indonesian Council of Ulama (DSN-MUI) No:21/DSN-MUI/X/2001 that explained about
insurance purpose and Islamic insurance operational guidance. Based on BAPEPAM-LK
2

data, on 2012:QIII, asset value of Islamic insurance reached 3.54 percent from total asset
of insurance industry overall was as much as Rp 322.2 trillion. It also can be seen from
the growth number, Islamic insurance asset is still assumed to have low growth which is
7.26 percent compared with the end of quarter three at previous year. This number is still
far if compared with asset growth of insurance industry which is 12 percent.
From that data, next attention is how far aspect of Islamic insurance acceptability
in society, with the lower asset amount that belongs to national Islamic insurance
industry, it can be indicated the lower level of Islamic insurance products acceptability. It
cannot be denied, Islamic financial industry is faced with conventional financial
instrument competition, in this case including insurance industry. In the middle of that
competition, then appear an encouragement how the ability of Islamic insurance can
compete and show its existence as insuranced alternative that especially put high the
sharia compliant elements within its practice or operational. Important determinant from
sharia compliant in this thing also becomes basic difference compared wih conventional
insurance is the attendance of taawun and tabarru, that make Islamic insurance free from
gharar and maisir, then based on profit sharing and interest-free investment. Other factors
that able to influence Islamic insurance acceptability level are economic and socio
demography factors (Yazid, 2012), behaviour, then information availability (Rahim,
2011).
Based on the above background, there seems to be a big potential especially for
Indonesia with large Muslim population to develop Islamic Insurance as an alternative of
businesses and individuals for mitigating risks and losses. Therefore, there should be a
study on the aceeptability of Islamic Insurance that reviews the experience, challenges
and strategies in the process of developing domestic market.

II.

Overview of Indonesian Islamic Insurance

Islamic insurance first held in Indonesia in 1994 and there are 46 Islamic

insurance companies until 2012. From those numbers, three of them are arranged as
Islamic life insurance companies, two general insurance, 17 life insurance business units,
20 general insurance business units, and the rest of them are reinsurance unit or
3

companies. It can be seen that the majority of Islamic insurance operators is filled by
business unit or the development from conventional insurance. The mechanism of
creating Islamic insurance by conventional insurance industries (opening Islamic
insurance business unit) usually known as window based operations. Some
internationally conventional insurance which already operate in Indonesia for decades
participate through opening some sharia based products (Wyman, 2007).
The increasing in the number of Islamic insurance operators is followed by the
variety of products being offered by the companies. Generally, Islamic insurance
products in Indonesia can be grouped into two types, such as general insurance and life
(family insurance). In each of those types, there are some product variations which
consumers can choose. Until 2010, 69 percent of the Islamic insurance market is
registered as family insurance, while 31 percent as general insurance. In the operational
practices, Islamic insurance seems likely with the conventional ones especially in the way
of offering scheme.
Rules and policy is a necessary condition in developing the sharia insurance
products. Those rules and policy mostly important as a control for the insurance
implemented well with the sharia compliant aspects. Until 2013, there is no distinctive
legal act from government to regulate Islamic insurance industry. By far, the guideline
for operating Islamic insurance is from Ministry of Finances regulation and Fatwah from
National Sharia Board. Fatwah plays a role as a referral for the operators to operate the
business based on sharia compliant. Fatwah of National Sharia Board-Indonesian Council
of Ulama (DSN-MUI) No. 21, 2001 about the General Conducts of Islamic Insurance
becomes one of the guideline for the Indonesian Islamic insurance operation. To
complete that, Fatwah of National Sharia Board-Indonesian Council of Ulama (DSNMUI) No.52, 2006 about Wakala bil Ujrah on Islamic Insurance and Reinsurance is
issued. The regulation explains some important points related to the sharia based
insurance practices, mostly about contracts.
There are two types of contracts which mostly used in Indonesia they are wakala
bil ujrah and mudharabah. The Islamic insurance companies mostly provide those two
options for the participants. The participants are freely to choose among them. The

options provided for contracts determine the product scheme, how the fund will be
processed and how the gain will be paid.

Chart 1.1
Wakala bil ujrah scheme
Fees

Operators

Participants
Tabarru
fund

Claims for
participants
Sources : Soemitra, 2009

Wakala bil ujrah is the authorization from the participants to the insurance
companies for managing the fund and ujrah (fee) is the administrative cost which
participants must paid for the companies (MUI, 2006). At this stage, the insurance
company acts as an agent for the participants. The insurance companies role is different
when mudarabah is applied. The companies become a mudharib. Investment process on
managing the fund is included in mudharabah scheme. Because of that activity, profit
loss sharing (PLS) is applied to share the gain from investment activity. The scheme for
wakala bil ujrah and mudharabah is described in chart 1.1 and chart 1.2.
Chart 1.2
Mudharabah scheme

fee

Participants

Tabarru
fund

claims
participants

Investment
fund

Profit/loss
Operators
5

Sources : Soemitra, 2009

Aside of those two types of contracts, the contract types much varies on global
level nowadays. The hybrid model (mudharabah-wakala) and wakala with waqf are
alternatives which proposed by some Islamic scholars. Those types are proposed because
the need of sharia compliant products is increasing. The variation of contracts also
purposed for complying the need of participants, where Muslim society are very potential
through the large number of population. Muslim population in Indonesia is one of the big
potential in the world for the Islamic insurance growing.
From the total of Indonesian population, 87 percent are filled by Muslim society
(BPS, 2010). Most of them are concentrated in young age and under-insured (EY, 2013).
It is a big potential to enhance the development of sharia based business, especially
insurance. Yet the large number of Muslim society cannot be captured well by the
Islamic insurance industry recently. It can be seen through the low of Indonesian Islamic
insurance penetration level (LII, 2006). By the end of 2012, the insurance penetration
level is 1.77 percent (EY, 2013). In 2011, The growth of asset for Islamic insurance
industry is 7.26 percent compared with the year before (BAPEPAM LK, 2011). At the
same year, compared with the conventional industry, this industry is growing 12 percent.

Chart 1.3
ASEAN Countries Gross Islamic Insurance Contribution, 2012

(a) in nominal (US$M)

2012

1931

2011

666

1595

2010

1155

2008

992

2007

841
0

124

529 122

1450

2009

(b) in percentage

5%

290196
24%

251125

Malaysia
Indonesia

17270

Others

8467

71%

1000
Malaysia

2000
Indonesia

Others

3000

Sources : Ernst & Young, 2013

At the regional level, Indonesian Islamic insurance is seen catching up the rapid
growth to expand. Malaysia is the leader for ASEAN Islamic insurance market by
contributing 71 percent of the market share. Indonesia becomes the second major in
ASEAN Islamic market insurance with the 24 percent of market share in ASEAN market.
Due to the chart 1.3(a), the growth of Indonesian Islamic insurance market contribution
in 2012 is seven fold compared with the market contribution in 2007. This increasing on
the level of market contribution due to the rapid extension of sharia based insurance
operators during 2007-2011.

III. Previous Studies

Arifin et al. (2013) on his study submitted a model that can be used in analyzing
demand against family takaful in Malaysia. Literature review that was presented reveal
that wakala system, reputation from takaful operator, product and service type, also
marketing are the factors that could determining the level of society demand of family
takaful product. Competitive and inovation potency are some factors that need to be done
by sharia insurance in increasing insurance market penetration.
Yazid et al. (2012) do the same topic with Arifin et al. (2013). Topic that was
dicussed is knowing determinants that influence demand of family takaful in Malaysia.
The difference lies in the perspective used in seeing factors that influenced demand
against family takaful product. Yazid explains about social and economic factors which
are income, income per capita, interest rate, stock price index, inflation, saving,
unemployment rate, life expectation, dependency ratio, urbanization level, family size,
education level, and age. Almost all variables are strongly having a positive relation
against level of demand for takaful except inflation, savings level, and jobless that have
negative relation. The studies about demand for takaful that influenced by economic
factors also done by Redzuan et al. (2009). In that study, Redzuan et al. (2009) use
income, interest rate, inflation, savings and stock price variables. The result of Redzuan
et al. (2009) study shows that income per capita influences significantly against demand
for takaful.
7

Rahim anda Amin (2011) do the empirical analysis about factors that influenced
Islamic insurance acceptability level. Amount of information that belongs to society
against Islamic insurance become an important factor in influencing acceptability level of
Islamic insurance. Behaviour and subjective norm also become another factor that
influenced society acceptability level against insurance. Tendency of trust and the belief
of Islam religion give positive influence for someone decision in accepting Islamic
insurance product, that thing is reflected through behaviour and subjective norm that tend
to be more religious.
Society preference to choose product that suits with sharia become one of
important aspect in seeing Islamic insurance product acceptability level. There is
tendency that muslim society now prefer to choose product and service that suitable with
sharia aspect (Naser et al., 1999; Ahmad & Haron, 2002; Al Ajmi et al., 2009; Mansour
et al., 2010; Rustam et al., 2011). That choice is rooted from perception, behaviour, and
knowledge which is balance with their religious belief. The increase of takaful
acceptability at the end requires a product that suitable with sharia aspect.
Qureshi (2011) explains comprehensively how an insurance product can operate
based on sharia principle. Riba activitiy, gharar, and maisir are several things that is tacky
with current conventional insurance. Insurance that is balance with sharia principle
should be based on cooperation in helping each other to share risk voluntarily (Mahmoud,
2008). Tabarru and investment fund that become component in takaful need to be
watched deeper. Investment activity in case of fund management sould be halal. Funding
activity using interest (riba), investing on alcoholic beverage sector, cigarettes, porks, and
other prohibited things should be avoided. There should be an institution to control the
activities of insurance operator as a condition, so that it will be going to be as Sharia
compliant. That institution should have a good economic and sharia comprehension.
Since banking and economic industry is a complicated thing, each operator should
possess the incredible knowledge. The lack of sharia reinsurance has made sharia
insurance company theory overlapping with the conventional reinsurance company
(Qurashi, 2011). When overlapping theory is happened between sharia insurance and
conventional, Islamic principle would be more likely violated. This overlapping would

lead the fundings from sharia insurance to be spent on the activity that violated sharia
compliant, such as investment with interest system and/or funding on non-halal sectors.

IV. Discussion
The rapid development of sharia insurance globally shows that financial product
with sharia compliant is well-accepted. Some of the countries, especially the countries
with large number of Moslems such as Arab and Malaysia have long histories regarding
sharia insurance. Malaysia has become benchmark of the world in the effort of
developing sharia insurance sectors. However, Indonesia, with the large amount of
Moslem people, is still has lack penetration in sharia insurance sectors. Conventional
insurance is highly and easily still accepted than sharia insurance product in Indonesians
eyes.

Scheme 1.1
Indonesian Islamic Insurance Acceptability

Islamic Insurance Operator

Product strategy and service
Sharia Compliant
Window based operation
Professional experties

Regulatory Framework
Regulation
Institutional
structure
Good governance

Indonesian
Islamic Insurance

Market Condition and

Macroeconomic
Global best practice
Macroeconomic factors
Competitiveness

Public Entity
Behavior
Subjective norm
Accessibility of information
Level of knowledge and consumer
awareness
9

The phenomenon of poor number in accepting sharia insurance product in

Indonesia should be discussed more comprehensively. Sharia insurance sectors condition
and observation on some literatures that has been discussed beforehand are references to
be analyzed more deeply in this research. The research refers to literary observation of
some countries regarding sharia insurance to seek the answer of the formulated questions.
In line with the literary observation, it can be drawn that the factors which influence the
skeptical of using sharia insurance are not only come from consumer or insurance
operator, but the other factors are contributed. The market condition (economic
condition) and institutions role are also the factors to control the development of sharia
insurance in Indonesia. Scheme 1.1 represented some aspects that contribute to the
Indonesian Islamic insurance acceptability.

1. Sharia Insurance Operator

In business scheme above, sharia insurance operator is on supply side. Islamic
insurance operators offer products, collect, and manage consumers funding. If an
insurance product runs by al wakala bil ujrah principle, the operator acts as an agent or
representation of participants in managing their insurance funding. The compensation for
the operator could be in the form of fee (ujrah/commission). If the agreement works in
mudharabah way, the operator is being as mudharib with shared commission as their
compensation. In relation with this, Sula (2010) suggested that in Islamic long histories,
the agreement used for insurance has undergone big development and changes. Those
development and changes show that Islamic principle is flexible and straight in
performing muamalah system.
A product with sharia compliant is subjective to influence the acceptance of
Islamic insurance. The insurance product that is far from gharar, maisir, and riba activity
is the character of an Islamic insurance product with sharia compliant (Qureshi, 2011).
There are many possibilities for Islamic insurance product to be sharia compliant. In his
study, Qureshi (2011) affirmed that at least there are two problems which made Islamic
insurance to be not sharia compliant. First, the insignificant Islamic reinsurance could
make Islamic insurance to be not sharia compliant. The minimum number of Islamic
10

reinsurance companies makes Islamic insurance forced to share their portfolio risk to
conventional reinsurance company. This causes the profit and saving from conventional
insurance which is having the tendency of riba, gharar, and/or maisir mixed with Islamic
insurance. This type of problem could be happened in Indonesia today. It can be seen
from the data until 2012, Indonesia has fewer Islamic reinsurance companies compared to
the Islamic insurance to be served.
Second, the choice of investment sector for insurance funding. Insurance funding
is divided into two types which are voluntary fund (tabarru) and investment fund.
Tabarru is non-saving funds for insurance participants claims. Investment fund is saving
funds for operator and insurance participant to be managed in order to get the profits. The
problem raised when those investment funding is used for non-sharia principle activities.
As in Qureshi (2011), there is possibility of investing the fund in prohibited or non-halal
sectors. In Ministry of Finance Regulation No. 11 Year 2011 about Finance Health in
Insurance and Reinsurance with Sharia Principle found that there are several regulations
allowing conventional financial activities to support Islamic insurance activities. On the
one of the verse in Financial of Ministrys regulation, it is stated that the deposit to the
bank as an investment activity is allowed. The maximum number of investment on
deposit is 20 percent from the total investment. The investment can be done in Islamic or
conventional bank. However, this regulation is come with an issue that investment
activity on conventional bank, so-called riba, will also go along.
Indonesia currently permits the use of takaful window operations by conventional
insurance companies. Window operations are potentially controversial and for some time,
it has been suggested that they were a temporary measure that would, in time be required
to convert to entities. Therefore, most important challenge that the Takaful industry is
facing is creating awareness about the concept itself. Regarding dual financial system in
Indonesia, the way forward is Islamic insurance must offer competitive products/services
in term of price, quality of coverage, and using the best professional expertise.

11

2. Regulatory Framework
Institution is a set of rule or a game of rule to keep a system runs proper.
Institution could be in the form of rules or organization that runs those rules, and/or the
provided budget to control supervising agenda. Qureshi (2011) suggested about how
important supervising institution is and well-organized rules to maintain a good insurance
environment that in line with sharia compliant. In Indonesia, National Shari a Council is
an institution which decided the sharia and non-sharia of an activity or a product. In
relation to this, BAPEPAM LK under Ministry of Finance, is supervising non-bank
financial institution to work in accordance with good governance principle. National
Sharia Council and BAPEPAM LK are two institutions that has role to control sharia
insurance industry in Indonesia. In playing their roles, National Sharia Council and
BAPEPAM LK make several obligatory rules for those who will run sharia insurance.
Fatwah and Goverments Rules are two type of rules used in Indonesia to
supervise sharia insurance. Fatwah comes from National Sharia Council, while
Governments Rules comes from Ministry of Finance. Fatwah consists of rules or
decisions as answer to questions from people. Fatwah is an institution discussed about
whether a certain thing has in lined with Islamic law or not. In sharia insurance cases,
they talk about products or general rules and decide whether those products are sharia
compliant or not. Meanwhile, Governments rules is only arranging technical problem of
sharia insurance to make them always in line with good governance. A good institution
will create sharia insurance circumtances healthy and trusted so that it will motivate
people to choose product of sharia insurance and it is also increasing the acceptibility of
using sharia insurance.
Some agenda that policy makers can choose to do are to transform whole
economies and make them sharia compliant, sooner or later the policymakers and
planners will need well-defined phases and well-thought out plans with committed and
sustained efforts. This will require (i) identification of transformation requirements in
terms of laws, rules, regulations and institutional structures in different jurisdictions and
components of policies fitting into the overall implementation timetable; (ii) laying down
a phased plan and the implementation mechanism; and (iii) feedback or continuous

12

review and evaluation in order to ensure proper application and to remove any obstacles.
(Ayub, 2007)
At present, Indonesia will have to wait in 2014 for a new law that will require the
spin-off of their sharia-compliant units, an official at the country's financial regulator
This attempt could reshape Indonesia's Islamic insurance, or takaful, market by getting up
mergers as firms try to meet capital requirements for their full-fledged Islamic units.

3. Market Conditions and Macroeconomic Conditions

As the condition of the dual system adopted as the national financial system, the
existence of the Islamic financial system in the midst of the conventional systems that
had come earlier apparently triggers its own challenges. Responding to the Islamic
insurance markets in Indonesia, with the Islamic insurance contributions of 3.96% of the
total industrial insurance premium of Rp 114.3 trillions (Capital Market Supervisory
Agency and Financial Institution, 2011) it can be concluded that the contributions of
Islamic insurance premiums currently are still modest. In addition, reflecting on the
development of Islamic banking markets at 40.2% for the past 5 years (2007-2011), it can
be seen that Islamic insurance in Indonesia currently is incapable of accompanying the
activities of Islamic banking. In turn, such conditions show the challenges faced by
Islamic financial industry in becoming conventional dominant in domestic and global
market competitions. Thus, global best practice is prominent to create harmonization and
convergence with international Islamic financial markets.
Essentially, the potential that Indonesia possesses in terms of socio-demography,
along with the majority number of Muslim populations, should have showcased that the
implementation of the Islamic financial system in Indonesia can contribute to the global
Islamic financial industry and certainly create national financial stability. However, what
becomes the focus of analysis and the center of attention is where we can find out how
far the development has gone and how the existence of Islamic insurance in Indonesia is,
and this is inseparable from the effects of macroeconomic factors.
The components of macroeconomy, such as per capita income, long-term interest
rates, and composite stock index, had the most significant effects on the consumption and
13

demands of family takaful in Malaysia. As for the inflation and savings rates, there were
no tangible significant effects (Redzuan et al, 2009). It is also similar to the research
conducted by Yazid (2012), who performed an analysis on the determinants of insurance
demands in the Asian regions. The result showed that the interest rates had positive
relations towards the demands of takaful insurance. The indicators of macro economy,
particularly the interest rates, in this case indeed underlie the differences between Islamic
and conventional systems. However, in the implementations, the interest rates in several
cases were shown to have effects on Islamic industry in this case, the insurance
industry. Considering that in the macroeconomic condition all industrial sectors are
related to the cycle of business, the interest rates become the variable that affects the
insurance demands.

4. Public Entity
The following factors that determine the acceptability certainly are related to the
behaviors and preferences of public, which in this case act as insurance consumers. The
behaviors play a significant and pivotal role on a particular person in determining a
product or service that they wish to use. In addition, the availability of information and
the subjectivity of public also have positive relations to their intentions and behaviors
(Rahim, 2011). Currently, the obstacles appearing among many people are those
concerning the level of knowledge and understanding on the characteristics of Islamic
insurance products (Hamid, 2009). In dealing with such challenges, particularly in
Indonesia, in an effort to distribute information regarding Islamic insurance system and
products, it is supposed to be encouraged by active participations of the public entity.
In the Islamic concept, it is explained that the consumption behaviors put focus on
two important elements: maslaha and blessing. A wise Muslim who excels at decision
making, particularly in managing demands of products and services, certainly will not
disregard the blessing contained within the product. In addition, all actions and measures
are taken to consume based on the fairness limits and high expediency elements. This
means that he will never commit the combination of product and service demands that do
not contain maslaha and blessing within. Based on this notion, maslaha become the
14

determiner of the number of demands; the higher the level of maslaha and blessing
withing the product, the higher the level of satisfaction or his utility. The challenges of
Islamic Insurance related to society problem are many consumers are still stick to
conventional insurance; they adopt more than Takaful which is Islamic insurance and less
human resource development; there is lack of human skill or have no enough knowledge.
In order to decrease this challenge, so it is important to concern the educational issues
surrounding Islamic insurance to develop consumer awareness and intensive training
programmers which is more regarding Islamic insurance industry, training programs that
enhance financial industry experts. Public entity as policyholders also need to support
Islamic Insurance and be proactive to assure that the companies can do their functions
and operations are sharia compliant in all aspects.

V. Conclusion
Indonesian Islamic insurance has attention and contribution to itself against Islam
financial system continuance. Some aspects that contribute to the Indonesian Islamic
insurance acceptability come from (i) operators of Islamic insurance, namely product
strategy and service, sharia compliant, window based operation, and professional
expertise; (ii) regulatory framework such as regulation, institutional structure, and good
governance; (iii) market condition and macroeconomic, they are best global practice,
macroeconomic factor, and conventional competitiveness; (iv) public entity related to
behavior, subjective norm, accessibility of information, level of knowledge of the Islamic
insurance operational concept and consumer awareness.

15

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www.bapepam.go.id
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