Health insurers in Saudi Arabia and the United Arab Emirates face a profit squeeze that the coronavirus pandemic will exacerbate.
Citizens of the two largest Arab countries receive free state healthcare, but foreign residents — who constitute an estimated 38% and 88% of the Saudi and UAE populations respectively — rely on private insurance, which is usually provided by their employer. Coverage typically extends to an employee's dependents.
But insurance premiums are failing to keep pace with the rising value of medical claims, Fitch Ratings warned in a February 2020 report. In Saudi Arabia, this medical inflation was 8.2% in 2019, according to a survey by Mercer Marsh Benefits. The introduction of 5% VAT in January 2018 was a big cause of these cost increases, which are three to four times the rate of inflation.
The outlook in neighboring United Arab Emirates is even gloomier, with Fitch warning that the country's health insurers will struggle to generate underwriting profits. That's because of tough competition and medical inflation, which was 12.2% in 2019 — the fourth straight year it has hit double digits.
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Pandemic adds to existing pressure
The coronavirus pandemic is adding to the health insurance sector's strains. While relatively unaffected so far, with 171 cases in Saudi and 113 in the UAE as of March 18, and no deaths in either, the authorities have begun taking drastic measures to try to curb its spread.
"Although hard to predict with certainty, the advent of the COVID-19 pandemic will likely result in significant financial burden on most healthcare systems," said Dr. Howard Podolsky, CEO of the Cambridge Medical and Rehabilitation Center in the UAE and Saudi Arabia. "Who will pay for care such as prolonged ICU hospitalizations for large expat populations with limited caps on their lifetime health insurance benefits?"
These concerns seem to have spooked investors. Shares in Saudi's two biggest health insurers, Bupa Arabia For Cooperative Insurance Co. and The Co. for Cooperative Insurance (Tawuniya), tumbled 18.2% and 29.1%, respectively, from Feb. 23 to March 17 to each slump to their lowest levels in over a year.
Insurers are likely to now tweak their product offerings, said Julio Garcia-Villalon, Mercer Marsh benefits leader for the Middle East and Africa. "We may anticipate a potential increase in rates and changes in policy wordings being more restrictive for clients."
High claims inflation
The top three causes of claim costs in the Middle East and Africa are respiratory conditions, diseases of the circulatory system, and endocrine and metabolic diseases, according to Mercer Marsh. Type 2 diabetes and obesity are common in the Gulf due to poor diet and a sedentary lifestyle. In Saudi Arabia and the UAE, for example, Type 2 diabetes affects 31.6% and 25% of their respective populations. Sufferers also tend to have other chronic conditions such as cardiovascular disease, peripheral vascular disease and kidney disease.
"The higher prevalence of these conditions drives utilization and costs — as the population in these countries continues to age the burden of chronic disease increases," said Podolsky.
In the UAE, Abu Dhabi and Dubai began phasing in mandatory healthcare insurance in 2005 and 2013 respectively, with the five other emirates starting to do likewise. These reforms led to a huge expansion of private healthcare, although this has largely been in the likes of high-cost acute inpatient hospitals and specialty clinics, which has contributed to insurers' margin pressure.
Similarly, Mercer attributes insurers' cost inflation to patients' rejection of primary medical care in favor of seeing expensive consultants and specialists for minor ailments, as well as an increased likelihood of over-diagnosis.
"Regulatory changes making health insurance compulsory have attracted new players, increasing competition and eroding profit margins," Fitch wrote, noting the UAE sector comprises 62 licensed insurance companies, 163 insurance brokers, and 26 health insurance third-party administrators, which are contracted by health insurance companies to process and settle claims.
The biggest operators in the UAE include Abu Dhabi government-controlled Daman – National Health Insurance Co., which is 20% owned by Munich Re Co. and is the emirate's market leader, plus Allianz Group's Middle East partner Orient Insurance PJSC and Bupa affiliate Oman Insurance Co. PSC. Among foreign-owned insurers, the most prominent include units of France's Axa SA and U.S.-based MetLife Inc.
"Despite efforts to diversify the insurance market in Abu Dhabi by the regulator, there has been little success in attracting additional insurers into the market," said Podolsky. "In Dubai, the insurance market is significantly more diversified with many more health insurance companies assuming full (financial) risk for their insureds. Because there is not one, large insurance company backstopped by the government in Dubai, this has resulted in a far more competitive landscape."
Health insurance accounts for more than half of insurance premiums in Saudi and totaled $5.3 billion in 2018, up from $5.1 billion in 2017, Fitch wrote, predicting that health insurers should enjoy "significant growth" in 2020 after the kingdom introduced mandatory visa-linked health insurance for religious pilgrims. Fitch forecasts this will create $800 million in new premiums to cover an estimated 17 million people annually, although that was before Saudi banned foreign pilgrims from entering the country due to the coronavirus outbreak.
Bupa Arabia, a joint venture between Bupa UK and Saudi Arabia's Nazer Group, and Tawuniya combined account for nearly 70% of written premiums and are likely to remain dominant, with 25 other insurers fighting for scraps.
"Given their respective movements into functioning as third-party administrators for entities such as [the Ministry of Health] and other quasi-governmental agencies, I would expect these companies to maintain significant market share for the foreseeable future," added Podolsky.