Takaful contributions in the Indonesian market grew by around 4.1% to around IDR10.5 trillion (US$777 million) in 2015, slower than the previous year amid a slowdown in the country’s real GDP growth. But the Islamic insurance growth was 2.5 times as fast as that of the conventional insurance segment that posted more modest growth of 1.6%, according to Fitch Ratings.

In its report, “Indonesia Takaful Dashboard”, Fitch says that takaful expanded to account for 6.2% of Indonesia’s insurance market by gross written premiums in 2015, from 2.6% in 2010. Indonesia, the world’s largest Muslim country of more than 200 million, offers vast, untapped potential for takaful products, the report said.

The insurance law introduced in 2014 stipulates that conventional insurance/reinsurance companies have to spin off their Shariah divisions when the combined “tabarru” funds (the funds contributed by participants) and investment funds of the participants of the relevant sharia unit are at least equal to 50% of the total insurance or, in any event, within 10 years from the promulgation of the law. Fitch expects the mandatory spin-off regulation to stimulate growth and competitiveness of the Indonesian takaful industry in the longer term.

Insurance companies are likely to focus on boosting their Shariah businesses, and gradually enhancing their capacity and capitalisation to achieve the maturity needed to finally be independent of their conventional siblings. Nonetheless, Fitch believes any market consolidation is expected to happen gradually, given the conditions and ample timeframe set by the regulator for insurers to fully develop their takaful units.