Compulsory coverage: Mandatory health and motor lines bring opportunities and challenges

The reasons for the low insurance take-up seen across the MENA region are well documented: a low level of consumer awareness, cultural resistance and the relatively underdeveloped financial sectors of some nations are frequently cited to explain the penetration rate of around 1%, compared to a global average estimated by PwC at 6.5% in 2012. However, while the industry remains in its infancy regionally, it has nevertheless gained much ground in recent years, its increasing scope and sophistication driven by the development of regulatory frameworks; increased capitalisation of insurers; rising populations; and a shift towards urbanisation; deepening financial markets; growing demand for personal banking products such as automobile and personal loans; and better awareness of insurance as a consequence of compulsory lines. Saudi Arabia has exhibited all of these trends, and in the area of compulsory insurance it is a regional leader.

Mandatory Lines

The introduction of compulsory health cover for expatriates in 2006 made the Kingdom the first GCC country to successfully implement such a scheme, and this has been a key driver of the industry ever since. According to A.M. Best, health insurance premiums represented 32% of the gross written premiums (GWPs) in the year of the scheme’s launch, and by 2010 this figure had expanded to 53%.

The segment that is the second-largest contributor to GWPs has also grown to its present size thanks to a government decision to make it mandatory: third-party liability (TPL) cover was made compulsory for motorists in 2002 – a move which by 2011 had driven motor insurance’s contribution to GWPs up to 21.2% of the total. The existence of these compulsory lines has done much to familiarise Saudis with the concept of insurance, and provided insurers with a platform from which to expand. “We have been able to use the compulsory lines of medical and motor as a starting point. From there we can cross-sell other products to clients,” Bader Al Shaya, the vice-president of marketing and sales at Solidarity Saudi Takaful, told OBG.

The question of compulsory lines is a prominent one within the industry in Saudi Arabia, just as it is elsewhere in the region. In 2013 PwC identified the expansion of compulsory schemes beyond the motor and health segments as one of the principal means by which regional authorities might incentivise the growth of the MENA insurance market. In Saudi Arabia’s case, an expansion of compulsory insurance to areas such as employment and real estate is in the pipeline, but just as important in the view of some industry observers is the need to fine tune the mandatory regime already in existence.

Tackling Fraud

While the price war that has adversely affected the health segment over the past year remains the most visible challenge to the sector, just as damaging is the high rate of fraudulent claims that is a feature of Saudi Arabia’s compulsory insurance lines. According to a report in Saudi newspaper Al fraud. With regard to the health segment, the nation is well positioned to tackle the problem compared to many of its peers, in that medical policies are already sent directly to the Council of Cooperative Health Insurance server, which acts as a centralised database through which activity can be monitored.

Widening The Net

Attention has also turned to the possibility of the government expanding compulsory cover in areas such as property insurance. In January 2014 the government announced that third-party insurance is to become compulsory for high-risk facilities, such as schools, hotels, shopping centres and factories. Following the announcement of the new policy, the Cabinet has authorised the Civil Defence Council to identify facilities which fall within the remit of the directive, while government departments and agencies have been instructed to incorporate the new criteria in the tendering process as applied to all companies wishing to run such properties.

Additional business is expected to be generated as a result of the gradual introduction of mortgage legislation. While the new legislation does not compel property owners to obtain home insurance, many lenders now require life insurance as a condition for approving a mortgage. “The full implementation of the mortgage legislation will greatly boost life insurance, because banks will require those taking out mortgages to have life insurance in order to protect their loans,” said Adel Al Eisa, CEO of Solidarity Saudi Takaful.

Unemployment Insurance

January 2014 also saw a second government announcement concerning compulsory insurance, although in this case the benefits to the sector are less tangible. According to a recent Cabinet decision, compulsory employment insurance will be introduced in 2014 in a bid to encourage more nationals into private sector jobs. While this is likely to significantly increase both awareness and acceptance of insurance, the industry will play no part in administering the new scheme, which will be managed by the General Organisation for Social Insurance. According to current plans, all Saudi employees in both the public and private sectors will pay a monthly subscription into the scheme of 1% of their salary, which will in turn be matched by an employer’s contribution. Their payments will entitle those that lose their jobs to up to 12 months of compensation, at a rate of 60% of their average salary earned in the previous three years for the first three months, and 50% for the following nine.

The introduction of unemployment insurance through a nationwide scheme undoubtedly represents a significant milestone in the development of insurance in Saudi Arabia, although many in the industry would like to see the private sector take the leading role in its deployment. “It is a pity that the scheme hasn’t been given to the market. I feel this is a step in the wrong direction,” Mousa A Al Rubaian, the founder and CEO of Dar Mousa Investment, told OBG. Nevertheless, it is clear that the growth of the industry, which has been driven by the nation’s compulsory lines to date, will be augmented by the anticipated expansion of mandatory cover across a range of lines in the coming year.