Point of View MEDICAL INSURANCE COSTS ARE ON THE RISE IN SAUDI ARABIA CAN EMPLOYERS BALANCE THE NEED BETWEEN CARING EFFECTIVELY FOR EMPLOYEES AND MANAGING COSTS? MARSH SAUDI ARABIA INSURANCE AND REINSURANCE BROKERS
The rising cost of healthcare insurance is one of the most significant issues facing employers in the Kingdom of Saudi Arabia. MEDICAL INSURANCE COSTS INFLATION IS ON THE RISE A private sector company in Saudi Arabia from the manufacturing industry employed 2,000 employees. The HR manager responsible for arranging medical insurance for the employees was, for many years, renewing the group policy with the same insurer directly. As a result, the premium costs were increasing every year as the company grew. The increase, however, was propotional every year and remained as a similar percentage of total payroll costs. The situation changed two years ago when, suddenly, the current provider asked the employer to pay a premium 15% higher than the former year, explaining that new regulations forced them to do so. The following year, the provider again raised the price by an additional 10%, resulting in the medical insurance costs reaching 8% of total payroll. The HR manager started to talk to other insurers, but they were quoting similiar or higher prices. Concerned about containing costs spiraling out of control, they turned to Marsh for advice. THE COST OF DOING NOTHING Over the past few years, medical insurance costs have risen at around 15% per year. In 2014, those employers providing basic Council of Cooperative Health Insurance (CCHI) cover experienced a further rise of 10%-15%, driven by an increase in the levels of cover prescribed by government legislation. The rise has been significant and relentless. For most organizations, it has posed a significant challenge in successfully balancing between caring effectively for employees and managing cost in an environment in which employee benefits are a key element in attracting and retaining talent. In a market in which medical insurance costs can account for around 6% of total payroll costs, the impact on profitability, viewed as a simple cost outlay, is significant. 24M 21M 18M 15M 2013 /14 2014 /15 2015 /16 2016 /17 2017 /18 Source: Mercer Marsh Benefits Saudi Arabia client data 2014 Estimates for the future suggest that this balancing act will become even more difficult. Demographic changes and recent legislation introduced in the Kingdom will result in further increases to premiums in the short to medium term. Some of the analyses suggests a rise in medical insurance premiums of between 15% and 20% within next 12 months as a result of increased maximum coverage limits for compulsory insurance. Even going by the most cautious forecasts, private sector employers in the Kingdom of Saudi Arabia face a doubling of medical insurance costs for their employees over the next six years, should they choose to do nothing. BENEFITS COSTS (DOING NOTHING) 2 Marsh Point of View
RISING COSTS OF MEDICAL INSURANCE IN SAUDI ARABIA A RISE IN THE COST OF MEDICAL INSURANCE PREMIUMS IS INEVITABLE THE UNPRECEDENTED DEMOGRAPHIC BOOM Medical insurance premium inflation is caused by many varying factors. In order to better understand these, one needs to consider the Kingdom s demographic outlook, recent legislation, and the insurance market itself. The Kingdom witnessed a demographic explosion over the past 20 years, during which the population grew by almost 11 million from 18 million in 1994 to almost 29 million in 2014 1. Such rapid growth poses a number of challenges, and expanding the capacity and modernizing the healthcare system is one of them. Labour law changes driving treatment costs Decreasing liquidity of several insurers Increased number of Saudi nationals and their families included in mandatory private medical insurance schemes Increased sophistication of medical care and treatment Introduction of mandatory medical insurance in private sector INTRODUCTION OF A PRIVATE HEALTHCARE SYSTEM The Kingdom decided to address these challenges by embracing the private sector in expanding healthcare infrastructure. To date, the private sector has delivered 130 new hospitals and close to 2,300 polyclinic medical centers 2. It is estimated at present that approximately 34% of all healthcare services are provided by the private sector 3. The development of the private sector helped not only increase accessibility to medical care for the population (mainly in the urban areas), but also its overall quality and growing complexity. MANDATORY PRIVATE MEDICAL INSURANCE The expanding population and escalating costs of medical care prompted another reform, namely the requirement for private sector employers to provide private health insurance for expatriate staff. This move not only fueled the growth of the public healthcare systems but also ignited a rapid growth of the MEDICAL INSURANCE PREMIUMS Private sector employers are left with limited options to contain rising employee-related medical insurance costs. They are caught between market forces driving significant changes in Saudi Arabia s insurance landscape. The usual short-term strategies aimed at hard bargaining with the providers or shopping around the market are proving to be inefficient against this harsh reality. The expanding population and escalating costs of medical care prompted another reform, namely the requirement for private sector employers to provide private health insurance for expatriate staff. This move led to the growth of public healthcare systems, together with a rapid expansion within the insurance industry. More than 50% of medical insurance spend in the Kingdom is accounted for by medical insurance. 2013 saw unprecedented medical treatment cost inflation of 25%-40%, which immediately led insurance markets to adjust their pricing and increase premiums by 30%. 1 World Population Prospects, 2012 Revision, United Nations, June 2013 2 World Healtch Statistics 2013, World Health Organisation, 2013 3 Healthcare in Saudi Arabia, The Economist Intelligence Unit, 2014 Marsh 3
Finding the right balance between caring for employees and managing costs is the key to finding a way out of the uncontrollable spiral of increasing medical insurance costs. 4 Saudi Arabia Medical covers for privatesector workers to become mandatory, Middle East Insurance Review, 15 May 2014 insurance industry. More than 50% of the insurance spend in Saudi Arabia is for medical insurance. A growing demand for private medical services kept increasing the cost of medical treatment. With mandatory insurance, the volume of medical claims has increased dramatically. In 2013, the market saw unprecedented medical treatment cost inflation of 25%-40%, which immediately spurred the insurance market to adjust their pricing policies and increase premiums by 30%. The next phases of this reform, introduced in 2014, stated that all Saudi nationals working for the private sector and their families have private medical insurance, with increased maximum coverage from SAR 250,000 to SAR 500,000 4. Employers now need to not only buy more insurance policies, but also find them increasingly expensive due to higher limits an average increase of 15%-25%. THE FAST GROWTH OF THE INSURANCE MARKET Insurers in Saudi Arabia are now starting to feel the weight of the recent changes in the market. The expanding number of private medical insurance program members naturally results in a growing number of claims. These claims are becoming more and more expensive as the cost of medical treatments is also rising dramatically due to recent labor law changes affecting private health care providers directly. On top of the recent market developments, insurers in Saudi Arabia noted substantial losses in 2013 stemming from inadequate pricing and material reserve deficiencies in the medical and motor portfolios of insurers. This has led to drop in the liquidity of the insurers and the necessity to increase premiums in both of these segments, which are also the key drivers of growth for the industry as a whole. CAN MEDICAL INSURANCE COST INFLATION BE STOPPED? Private sector employers are left with limited options to contain the rising cost of medical insurance for their employees. They are caught between market forces driving significant changes in the Saudi Arabia s insurance landscape. The usual short-term strategies aimed at hard bargaining with the providers or shopping around the market are proving to be inefficient against this harsh reality. What employers need to realize is that an active approach to finding the right balance between caring for their employees and managing costs is the key to finding a way out of the uncontrollable spiral of increasing medical insurance costs. 4 Marsh Point of View
RISING COSTS OF MEDICAL INSURANCE IN SAUDI ARABIA CONTAINING THE INCREASING COST OF MEDICAL INSURANCE Leading organizations in Saudi Arabia and around the world are increasingly turning to wider-reaching, more innovative, and more holistic approaches to managing and measuring the costs and benefits of good health. Using the right mix of strategies can help them remain competitive and be cost-efficient at the same time. OPTIMIZING POLICY DESIGN Policy design is a key lever in managing the cost and benefits of medical insurance. Buying standard, off-the-shelf policies offered by insurers can lead to cover and limit levels being inadequate to the needs of your employees and increased costs. These issues can be contained by managing the following key elements influencing them: DEFINING THE RIGHT TIERS OF COVER FINE-TUNING WHO IS IN WHICH TIER SHAPING THE MOST APPROPRIATE NETWORKS FOR EACH TIER Buying standard, off-the-shelf policies offered by insurers can lead to increased costs and cover and limit levels being inadequate compared to the needs of your employees. In order to achieve the above, employers in Saudi Arabia are increasingly using the advice of insurance consultants that can offer broad knowledge of current market practices in their particular industry sector. MANAGING CLAIMS RATIOS SENSITIVELY With the advent of new regulations in Saudi Arabia and increases in the costs of medical treatment, the pricing of medical insurance policies is in a large part determined by the level of recent claims. Many employers remain unaware of the levels of medical claims filed by their employees until the time of the policy renewal and are often surprised by the increase in the premium costs. By this time, they are left with very limited room for negotiation and often decide to limit the scope of insurance, which in turn has a negative effect on employee morale and the perception of the company by the employee. BETTER UNDERSTANDING OF CLAIMS DATA CAN HELP CONTAIN PREMIUM COSTS Marsh was working closely with an organization facing a very significant rise in medical insurance cost because of its recent claims experience. Our teams worked with the company and identified that the recent high claims ratio was in part due to a small number of acute surgical cases. It was explained to the insurer that this was a oneoff incident that was unlikely to be repeated. As a result Marsh successfully negotiated a discounted rate for the company. Understanding claims data can be a very valuable tool when negotiating with the insurance market. Insurers tend to look at the overall claims ratio, which in many cases does not represent the actual patterns experienced by the company. Using this data in negotiations helps contain any premium increase, as insurers adjust their pricing on more accurate predictions. Marsh 5
A MARKETING EXERCISE CAN CREATE COMPETITION TO SECURE THE BEST POSSIBLE TERMS Insurers are not all the same. They vary in size and also in their risk appetite. Some may want to grow their portfolio quickly and are ready to offer competitive prices, while others will specialize in certain risks or industries and will prefer clients from these sectors to others. However, all of them are keen to have companies on their books whose risks can be well identified and easy evaluated. A marketing exercise performed by Marsh with several insurers can create a healthy degree of competition and result in the best possible terms of coverage and pricing. NEGOTIATING THE BEST DEAL WITH THE BEST PROVIDERS Economy of scale is one of the best pieces of leverage in price negotiations. The purchasing power of private sector companies is weakened in Saudi Arabia as a result of the large number of individual buyers facing a rather consolidated market. The three biggest insurers hold an estimated 63% of market premium. Employers are often therefore faced with limited choice and price maneuverability. By using the services of an insurance consultant with a significant portfolio of clients, companies can achieve a similar effect of scale. A consultant will not only help design insurance programs suited for the needs of a particular company, but also, by using the weight of its portfolio, achieve significant premium cost efficiency. LOOKING BEYOND THE COSTS OF INSURANCE Medical costs are, of course, just one element of the cost of ill health. Medical bills are very visible and easy to measure; however, they are often just the tip of the cost iceberg. Reduced productivity of employees and the cost of days missed due to ill health are often of far larger cost to employers. Introducing wellness programs that encourage employees to take a better care of their health is a very effective way to increase the productivity of the workforce. A healthier workforce helps contain medical insurance costs due to improved claims history. WELLNESS PROGRAMS Workplace wellness programs, also known as workplace wellbeing, are by definition any workplace health promotion activity or organizational policy designed to support healthy behavior in the workplace, and to improve health outcomes. Wellness programs usually consist of a variety of activities, such as health fairs, health education, medical screenings, health coaching, weight management programs, wellness newsletters, on-site fitness programs, and/or facilities and educational programs. The key to an effective wellness program is to ensure it is customized to the needs of an organization, meets the needs of its employees, and is aligned to the srategic objectives of the company. 6 Marsh Point of View
RISING COSTS OF MEDICAL INSURANCE IN SAUDI ARABIA Marsh 7
For further information, please contact your local Marsh office or visit our web site at: me.marsh.com MARK BUTSON Employee Health & Benefits Country Head +966 50165 0932 mark.butson@marsh.com ALAADDIN K. MUKHALALATY Business Development Country Leader +966 509444223 alaaddin.mukhalalaty@marsh.com MOHAMMAD AL ABDUL JABBAR Assistant Vice President Central Province Leader +966 50 0126 724 mohammad.alabduljabbar@marsh.com BANDAR AL GHAMDI Employee Benefits Western Province Manager +966 500 204 902 bandar.alghamdi@marsh.com ASIF QURESHI Assistant Vice President & Employee Benefits Eastern Region Leader +966 55 080 3564 asif.qureshi@marsh.com Copyright 2014 Marsh Saudi Arabia. All rights reserved. IMPORTANT NOTICE: This document does not constitute or form part of any offer or solicitation or invitation to sell by either Marsh to provide any regulated services or products in any country in which either Marsh has not been authorized or licensed to provide such regulated services or products. You accept this document on the understanding that it does not form the basis of any contract. The availability, nature and provider of any services or products, as described herein, and applicable terms and conditions may therefore vary in certain countries as a result of applicable legal and regulatory restrictions and requirements. Please consult your Marsh consultants regarding any restrictions that may be applicable to the ability of Marsh to provide regulated services or products to you in your country.