Basic Principles for Sharia Insurance and Re-Insurance Businesses

Sharia banking has been an ongoing development in Indonesia over the last few years, and the latest news on that front is Minister of Finance Regulation No. 18/PMK.010/2010 on the Implementation of Basic Principles for Sharia Insurance and Re-Insurance Businesses. The regulation implements principles governing Sharia insurance, and regulates various programs and agreements unique to Sharia insurance.

Principles that shape Sharia insurance and re-insurance operations include: justice (‘adl), trustworthiness (amanah), balance (tawazun), benefit (maslahah), and universality. Meanwhile, among other things, uncertainty (gharar), gambling (masyir), and interest (riba) are prohibited.

Concordant with the collective orientation of Sharia banking and insurance, the regulation elaborates rules around Tabarru’ funds, which pool collective contributions from customers into funds that can extend coverage in certain instances (e.g., natural disasters) listed in Article 4 (2). For each line of business an insurance or reinsurance agency is involved in, there must be a corresponding Tabarru’ fund. The fund is not for commercial purposes, and the terms of the fund’s usage for the collective must be contained in written agreements (Akad) between insurers and customers.

Meanwhile, for commercial purposes of individual customers, the regulation details a different fund - the ‘Participant Investment Fund’. Each type of investment portfolio an insurance company is involved in must have a corresponding Participant Investment Fund, and the terms of that engagement are to be agreed upon in a written agreement, or Akad. 

Akad themselves do much of the Sharia-related regulation of different engagements, and are the extensive subject of Articles 8 to 12 of this regulation, which stipulates what content must be contained and agreed upon. Companies will have two fundamental types of Akad: (1) Akad Tabarru’, which are non-commercial agreements relating to Tabarru’ funds, and; (2) Akad Tijarah, which are individual and collective commercial agreements.

In the case that the Tabarru’ fund is larger than the amount required, surplus underwriting (i.e., the allocation of benefits) can take 3 forms: (1) distribution of funds to Tabarru’ participants in addition to retaining some funds; (2) retaining all surplus funds in the Tabarru’ fund, and; (3) distributing the funds amongst all parties (i.e., participants, the insurer, and the Tabarru’ fund). The method for surplus underwriting in any particular instance is dictated by Akad agreements and, in turn, company policy. In the case that the Tabarru’ fund is smaller than required, the insurer is responsible for the gap; this is called Qardh.

Supervision over the implementation of this regulation in the Sharia banking and insurance industry is assigned to the Sharia Supervisory Council, which coordinates with both Bank Indonesia and the Insurance Bureau of the Capital Markets and Financial Institution Supervisory Board, or ‘Bapepam-LK’.

Companies must have aligned themselves with this regulation no later than 31 December 2010, and the regulation has been in force since 25 January 2010.