Can the nascent OIC Islamic insurance industry meet rising healthcare costs?

Organisation of Islamic Cooperation (OIC) countries have for too long given low priority to healthcare but the sector has in recent years been paid due attention as governments work to shift the increasing burden of medical and healthcare costs from shrinking state budgets to the private sector.

The 57-member Organisation of Islamic Cooperation (OIC) pointed out in its OIC Strategic Health Programme of Action 2014-2023 (pdf) that while making up 22.8 percent of global population in 2010, member countries accounted for only a significantly low 3.5 percent of total world health spending ($227 billion).

OIC governments’ expenditure on health as a percentage of overall state budgets was a woeful 8.9 percent in 2010 compared to 18.5 percent in developed countries and 16 percent in the world.

Low government health spending in OIC countries, said the report, is not merely due to public financial constraints but is also an indicator of low priority given to health.

The lack of state-funded and private sector financed health plans and programmes is clearly evident; the report notes that the most widely-used method of health financing in OIC countries is still out-of-pocket spending, which accounted for 36 percent of total OIC health expenditure in 2010 compared to 17 percent at the global level.

This is a major concern given rising medical and healthcare costs.

NASCENT

Unfortunately, Islamic insurance is currently neither easily nor widely available in all countries; by regions, the GCC was home to the highest number of operators – 102 in 2015 - followed by Southeast Asia (87), Other MENA (72), and South Asia  (35).

Globally, the sector’s assets reached $37.745 billion in 2015, up 11 percent from 2014.  That's around 1 percent of the world's total insurance assets.

Around 80 percent of the Islamic sector’s assets in 2015 were concentrated in Saudi Arabia, Iran, and Malaysia; Iran had the highest Shariah-compliant insurance penetration but Malaysia had the highest overall insurance penetration.

MEDICAL AND HEALTHCARE FINANCING

The OIC 2014-2023 programme of action identifies health financing as a “critical component” of healthcare systems, including risk-pooling, which describes takaful.

Risk pooling entails grouping a large number of individuals or companies to spread risk and reduce the cost impact of highest-risk individuals.

Global aggregate figures for Shariah-compliant health insurance are hard to come by but looking at the three biggest markets gives a good indication of prevailing trends.

SAUDI ARABIA

Saudi Arabia’s insurance sector is based on a cooperative model, and considered Shariah-compliant.

According to data from the Saudi Arabian Monetary Authority (SAMA), Saudi health insurance net written premiums represented 52 percent of the country’s net insurance premiums, equivalent to 18.19 billion riyals ($4.85 billion) in 2015 compared to 14.65 billion riyals ($3.9 billion) in 2014.

The kingdom’s healthcare sector is undergoing major changes, guided by the over-arching Saudi Vision 2030 and National Transformation Plan, along with the Ministry of Health’s National Healthcare Project and National e-Health Strategy.

While the 2017 allocated state healthcare spend is up around 18 percent from 2016 to reach 120 billion riyals ($32 billion), this is still around 9.6 percent lower than pre-oil slump 2014 levels, as the kingdom continues with its austerity programme.  

The good news is that health insurance penetration, measured as a percentage of premiums to Saudi Arabia’s GDP, rose from 0.45 percent in 2011 to 0.77 percent in 2015, according to data from SAMA.

Albilad Capital, the investment banking arm of Bank Albilad, said in a report that the number of health insurance policyholders reached 11 million in 2015, from 9.7 million in July 2014. This is around 30 percent of Saudi Arabia’s total resident population.

However, a substantial imbalance is evident as foreigners form a major percentage of the insured resident population due to compulsory regulations that stipulate foreigners and their dependents must be covered by insurance.

In July 2014, 7 million of the 9.4 million covered by health insurance were foreigners.

This shows there is a significant need to move Saudis into private insurance and away from out-of-pocket or government-funded or subsidised healthcare treatments.

IRAN

In Iran, health insurance made up 24.1 percent of premiums in 2015, equivalent to 54.97 trillion Iranian rials (est $1.8 billion). The largest insurance business line is motor, which made up 37.4 percent of total premiums in 2015.

Overall, insurance penetration grew from 1.93 percent of GDP in 2014 to 2.08 percent in 2015.

To tackle increasing healthcare costs, Iran’s latest healthcare programme, the Health Sector Evolution Plan (pdf), was released in 2014 and involves all government hospitals. It includes increasing population coverage of basic health insurance and reducing out-of-pocket expenditure on health. The success of the plan is still being assessed, but a review (pdf) in late 2015 pointed out that healthcare costs to consumers was still not any lower.

MALAYSIA

In Malaysia, family takaful net contributions are around 80 percent of total contributions of 6.81 billion ringgit ($1.5 billion), with the remaining 20 percent going to general takaful. Equivalent to life insurance, family takaful provides protection with a strong savings/investment link.

According to Ministry of Health data, in 2013, private insurance and managed care organisations shouldered only 7 percent of total healthcare costs, compared to 43 percent by the government, and a staggering 39 percent was out-of-pocket.

To shift the burden of costs from government coffers to the private sector and give residents better access to medical and healthcare services, Malaysia’s financial sector blueprint 2011-2020 highlights the need to build capacity and capability of the takaful (and insurance) industry to provide higher-value-added medical and health insurance.

Malaysia has a goal of 75 percent overall conventional and Islamic insurance penetration by 2020 (by population, not by percentage of GNI or GDP). It has a long way to go - in 2015 it stood at 54.9 percent, down from 55.5 percent in 2014, according to the central bank.

The goal for the number of takaful policies is 8.5 million by 2020 from 4.58 million in 2015. In the conventional space, there were 12.56 million insurance policies in 2015.

CHALLENGES AND OPPORTUNITIES

Islamic insurance market operators in OIC countries have for years been speaking about the key challenges facing the sector. They include:

1. Weak regulatory environment in most OIC countries;

2. The need to harmonise takaful regulatory frameworks especially across regional blocs such as the GCC and ASEAN in order to facilitate mobility of insurance/takaful policies. This is especially pertinent in the GCC where public budgets have been hit by low oil prices and is home to a substantial foreign and transient workforce; and for the closer integration of the ASEAN Economic Community;

3. Lack of a skilled and knowledgeable insurance workforce for takaful

4. The need for improved distribution channels

5. Lack of product development (mostly due to regulatory restrictions)

6. Bigger markets, such as Saudi Arabia, are distorted by a small number of large players; the top four companies (out of 35)—Tawuniya, Bupa Arabia, Medgulf, and Malath—hold around 58 percent market share.

However, away from these largely infra-structural issues, the core challenges to the growth of healthcare insurance/takaful penetration for OIC countries are a lot more rudimentary:

1. Low levels of financial literacy among the wider OIC population result in a lack of understanding of insurance and the need for it. In the Islamic space, as a comparison, Islamic banking, which is the most mature and biggest Islamic finance sector with around 70 percent of global Islamic finance assets, still struggles for penetration in key OIC markets.

2. Lack of regulatory support and initiative

As OIC Islamic insurance leaders, Saudi Arabia and Malaysia have tackled these challenges differently.

Malaysia has a higher take-up rate for insurance overall and it operates a dual conventional-Islamic system (conventional insurance penetration rate is 4.2 percent of GNI, which is seven times higher than takaful).

The Malaysian government continues to focus on financial literacy programmes across the board, and in recent years released new guidelines to strengthen the takaful industry, including:

1. Takaful Operational Framework in 2012;

2. Islamic Financial Services Act 2013 that is re-structuring the industry with its imposition of a segregation of family and general businesses by June 30, 2018, and liberalisation of the commissions’ structures;

3. Life Insurance and Family Takaful for Everyone (LIFE) framework, that seeks to “promote innovation and a more competitive market supported by higher levels of professionalism and transparency in the provision of insurance and takaful”, according to the central bank.

The big challenge for the takaful industry in Malaysia is changing the perception of citizens towards Islamic insurance.

Malaysians are reticent to shift from conventional insurance products in spite of their relative higher awareness of insurance.  

Worryingly, from 2013 to 2015, contributions growth lagged premiums growth: the year-on-year contributions growth was 5.44 percent, 1.98 percent and 7.57 percent (4.99 percent average growth over the three years), versus 6 percent, 8 percent and 3 percent for conventional insurance (5.67 percent average growth over the three years).

The re-structuring of the Malaysian insurance and takaful markets is expected to drive sector growth, as new regulations push consolidation. Operators are also analysing the viability of new niches, such as micro–health takaful for rural communities.

© SalaamGateway.com 2017 All Rights Reserved