In mid-December, the Emirate of Dubai announced that, after many months of expectation and consideration, it will introduce compulsory medical insurance for all workers and dependents in the emirate.

This action prompts a number of questions, not least the effect it will have on the local insurance sector. Moreover, what does this law's introduction in Dubai, which differs to the laws for medical insurance implemented in the Emirate of Abu Dhabi, say about the framework of government and service provision in the UAE, which is a federation of states?

Standard & Poor's (S&P) Ratings Services expects a progressive surge in premium income from the introduction of this cover, but probably not a material increase until 2015. Although it is difficult to accurately predict the total new gross premiums that will be added to the market following the implementation of the law, Saudi Arabia and Abu Dhabi provide useful reference points.

Medical insurance has become the dominant line of business in both Saudi Arabia and Abu Dhabi since compulsory medical schemes were introduced there in the past decade, according to S&P.

In Saudi Arabia, we estimate that medical insurance is now about 55 per cent of total insurance premiums, up from about 40 per cent in 2008; in Abu Dhabi, we estimate it is about 40 per cent. The Emirates Insurance Authority (EIA) report for 2012 identifies medical business as contributing 32 per cent to market premiums in UAE.

Looking at statistics published by the EIA, in 2005, medical was 8 per cent of the UAE nonlife insurance market; in 2007 it had grown to 18 per cent and by some 4x in volume. In 2009, medical was 25 per cent of the nonlife sector, with premium volume again twice that in 2007.

The growth of medical insurance premiums in this period reflects both the introduction of compulsory cover in Abu Dhabi, and also that this was a period of high economic and structural growth for the country. S&P expects similar factors to influence the growth of this line for the next five years or so.

The UAE is planning for its population to increase significantly over the next decade, and this too will prompt growth in medical insurance, as the number of employees and dependents requiring cover rises, said S&P.

A high-volume, low-margin sector

Medical insurance is a high volume, and usually low margin, line of business; that same EIA report identifies a 2012 market loss ratio of 83 per cent for medical, so there was only a 17 per cent margin to cover production and management costs.

Such insurance therefore necessitates very high service levels by the providers to keep the various stakeholders happy. In contrast to the state subsidy seen in Abu Dhabi, the Dubai Health Authority (DHA) is licencing only private sector insurance companies that pass the necessary qualifying criteria, and there is no government subsidy. The terms of the roll out are:

•    Companies with 1,000+ employees must have cover in place by Oct. 1, 2014;

•    Companies with 100-999 employers must have cover in place for August 2015; and

•    Companies with fewer than 100 employees, including family, dependents, and domestic workers, must have cover in place for July 2016.

This staged introduction mirrors the approach taken by Saudi Arabia, and, as many large employers in Dubai already have medical schemes in place, the real impact on market premium levels is unlikely to be felt until 2015-2016, when the smaller employers are required to introduce it.

In our opinion, premium growth will not necessarily enhance the quality of the insurance market. Medical insurance has seen a fiercely competitive market in recent years. Many insurance companies, particularly the smaller and newer entities, have used aggressive pricing to win medical scheme covers and then struggled to make any underwriting margin on the business.

It is our opinion that the larger insurance companies are best placed to receive the first tranche of licences because they have the necessary operational scale and efficiencies, as well as track records of tightly managed schemes and customer satisfaction.

However, we do not think that the big insurance companies will automatically become the dominant medical insurers in the market. Rather, we believe that over time, the quality of service given, rather than price, will dictate who wins contracts.

The role of the DHA in monitoring the market place is therefore crucial. Consequently, we approve of the DHA's plan to tightly monitor the medical insurance providers to ensure that they deliver services on a sustainable basis. S&P interprets that to mean service provision with technically profitable pricing, and this will be tested by the pricing ranges set by the DHA for the new cover.

Again, this mirrors the Saudi market where the Council of Cooperative Health Insurance (CCHI) monitors risk pricing to make sure that insurers are offering sustainable service levels to the policyholders and covered employees.

The Saudi medical market faced significant hurdles--initially administrative and then in underwriting performance terms--in the three to four years following the introduction of compulsory medical schemes in 2006. In response, the CCHI has proven to be very effective at steering the market in a more stable direction with a sustainable level of provision. But it is the big Saudi insurance companies that effectively control distribution and ownership of the majority of the market now.

The nature of medical risk management commends it to high volume management, as this can more effectively drive economies of scale. As a result, it is possible that the companies best placed to service this demand will be the bigger companies that are already managing substantial medical accounts in the market--these insurers can more readily provide this level of cost-effective service. This could therefore lead to some concentration in the top companies in Dubai.

Compulsory health schemes now the norm in GCC

Across the GCC region, compulsory health schemes are now the norm, and the following are in place:

•    Bahrain: Compulsory for nationals since 2003, and expatriates since 2013.

•    Kuwait: Compulsory for expatriates since 2000.

•    Oman: No compulsory insurance, but all companies employing over 50 people must offer health services.

•    Qatar: To be compulsory for all expatriates by the end of 2014; Social Health Insurance scheme covers nationals.

•    Saudi: Compulsory for all foreign workers and their dependents since 2005 in the private sector, rolled out in stages by the number of employees up to 2008.

•    UAE: Compulsory in Abu Dhabi for all employees since 2005; regulated by the Health Authority of Abu Dhabi (HAAD). Daman (state-owned insurer) offers the "thiqa" product, which covers all UAE nationals through a third-party administrator relationship subsidised by the government.

S&P anticipates that the other "northern" UAE emirates of Ras Al Khaimah, Sharjah, Ajman, Fujairah, and Umm Al Quwain will eventually introduce compulsory insurance schemes in line with Dubai at an indeterminate time.

But if they do not, then it is feasible that employers could choose to relocate staff residences to avoid the cost of compulsory covers in Dubai to other emirates. In this regard, this new Dubai law could therefore be modestly influential in the UAE's future population dynamics.

No immediate effect on insurance ratings

With this new legal requirement still at the launch phase, S&P sees no short-term impact on its financial strength ratings on UAE insurers. S&P could re-evaluate the ratings in the longer term, depending on which insurers pick up the new business streams and the extent to which they can manage these schemes on their existing capital/asset bases, while delivering profitable margins. In our opinion, this is unlikely to become evident until 2015, it said. – TradeArabia News Service