Takaful Feature – Healthcare: Treating Health Takaful

Ms Farzana Ismail and Mr Zainal Abidin Mohd Kassim of Actuarial Partners discuss the challenges faced in the health takaful business in Asia and the Middle East, and ways of overcoming them.

Within the takaful industry, the health business has grown to be a major component of new business sales globally. The drivers underlying this growth for each of the major takaful markets vary, and despite its popularity among consumers, the business is also subject to many common challenges faced by takaful operators.

Why is health takaful popular?

Pure protection takaful products are typically not popular with consumers, as the contributions payor is not able to directly enjoy the benefits arising from the product. For example, in a pure term takaful product, the benefit upon death is only payable to the next-of-kin. Therefore, the inability of the policyholder to personally utilise the benefit whilst still alive is often viewed as an unattractive feature.

In comparison, health takaful products have the advantage of being a protection product whereby the benefits are tangible from a consumers’ perspective, as the benefits arising from such products can be directly utilised by the policyholder during his or her lifetime. With growing awareness on the benefit of medical and health takaful coverage, and as medical cost and access to healthcare services continue to become increasingly expensive, we have observed an increasing demand for medical takaful products and increased willingness for consumers to purchase these products voluntarily.

Growth in medical takaful

In the Middle East, the key driver for the growth of health takaful has been the implementation of mandatory medical protection coverage which was implemented in Kuwait, Saudi Arabia, Abu Dhabi, Dubai and Qatar.

Under these regimes, there is a requirement to provide health coverage to expatriates and private sector employees. This is intended to reduce the financial burden on the government from providing free healthcare services, particularly to expatriates and their dependents, and effectively obtain the support of private sector firms to meet some of the healthcare costs. Given the large and growing proportion of expatriates in the Middle East, which is expected to increase by around 5% per annum, the implementation of such schemes has contributed to the growth of medical takaful to the extent that it has become one of the major business lines within the region.

In Asia, there is also increasing popularity of medical takaful business. Malaysia continues to dominate the takaful market in Asia, with over 70% of the gross family takaful contributions coming from the Malaysian market. Although health business is often classified as general takaful in most markets, in Malaysia, medical and health takaful can be sold either as a family takaful business or general takaful business. The product features are often similar, except that for health takaful products sold as family takaful business, the contract is often long term and includes features such as guaranteed renewability and benefit payout upon death. Often, the medical coverage is sold as a rider to an investment-linked policy, although standalone contracts are also available. Contract terms are usually based on non-guaranteed reviewable rates to allow for increasing medical inflation. In contrast, health takaful products sold under general takaful products are yearly renewable contracts.

Health takaful products are often used as “door-openers” in the agency-driven market in Malaysia. Despite the free healthcare services provided by the government, these are often over-burdened, resulting in long waiting periods to obtain treatment. Consequently, there is an increasing number of private hospitals in Malaysia as consumers prefer their convenience and accessibility. However, as the cost of private healthcare can be expensive, the availability of medical products has enabled the mass market to access treatments in the private hospitals.

Under family takaful business, the contributions for medical and health takaful products have increased five-fold from MYR74 million (US$18 million) to MYR409 million between 2007 and 2014. In addition, based on the split of new contributions as shown in Figure 1, the proportion for medical business doubled from 8% of new business contributions in 2007 to 16% in 2014.

Similarly for the general takaful business, gross contributions for medical expenses and personal accident business have doubled from MYR117 million to MYR225 million between 2009 and 2014. The significant growth indicates the public demand for voluntary purchase of medical cover as well as increasing number of takaful operators with the capability to write this business.

Challenges in health takaful

Given the increasing demand for medical takaful cover in the retail market, many takaful operators are keen to tap into this market, which contributes to overall new business growth of the company. In an agency-driven market, there is also the desire to reap the high level of commissions from the sales of such business, particularly since the business can be sold rather easily to the consumers. In the Malaysian market, medical takaful business classified as family takaful business further enjoys a much higher level of commissions relative to the general takaful business.

However, the desire to gain takaful market share in medical can also be detrimental to the company without the appropriate knowledge and expertise to manage the business. Often, products are aggressively priced to achieve the required sales. However, a poorly priced product combined with increasing medical inflation typically results in the risk fund being insufficient to meet claims.

This is particularly a concern for medical products sold as family takaful, given the long-term nature of the contract. Although medical products are typically based on non-guaranteed reviewable rates, which takaful operators can increase if the experience is poorer than expected, a re-pricing exercise can be time-consuming and expensive. In addition, there is often a delay for the positive impact of re-pricing to materialise, given that the implementation of re-pricing usually occurs at the certificate anniversary. There is also a reputational risk if the company continues to increase the rates yearly to catch up on the expected losses.

For medical products sold as riders to investment-linked family takaful plans, it is not uncommon for the consumers to be unaware that they have also purchased an investment-linked policy. The sales illustration may also indicate good returns to the policy which will enable the consumers to continue to enjoy the medical protection coverage over the long duration of the contract. However, consumers are often not made aware that due to medical cost inflation, there is a strong likelihood that they are required to increase or top up the contributions if they wish to enjoy the same level of medical protection, particularly at older ages and in the event that investment returns are not favourable to support increasing medical costs.

In the Middle East, healthcare services remain dominated by the public sector, although the implementation of the mandatory healthcare cover for expatriates is slowly shifting the burden to the private sector. Nevertheless, there is a significant shortage of local healthcare talent within the region, given the reliance of expatriates in the healthcare services.

In addtion, smaller takaful companies tend to rely on third-party administrators (TPAs) to manage medical claims. This can be a misplaced trust as the TPA’s interest is in paying claims effectively, rather than ensuring claims amounts are managed, and avoiding fraudulent claims. There is a need to improve the healthcare infrastructure within the region to support the continued growth of the medical takaful products.

Opportunities and the way forward

In our view, the demand for health takaful will continue to grow, given the mandatory requirements for medical cover in the Middle East and the increasing voluntary purchase of medical takaful products in Asia. The desire to access the private healthcare sector in Asia, even from the lower-income segment as observed in Malaysia, remains strong as consumers are willing to pay a significant portion of their income as premiums to obtain medical takaful cover.

In developing health takaful products, incorporating co-takaful and “excess of loss” features have also been observed to improve the claims experience, as the structure encourages participants to take responsibility for some of the medical costs and therefore minimises fraudulent claims. Developing further tangible value to the product, such as discounts or reward points for non-claimants, is also essential to maintain the persistency of the business so that the good risks remain on the books. Such features are also very much part of the takaful experience.

Retakaful support has also played a strong role in the growth of medical takaful, particularly in providing technical expertise in pricing and underwriting. It is essential for takaful companies to price their medical products appropriately, with a forward-looking approach on whether rates need to be reviewed, rather than a reactive approach. In addition, the focus should remain on the profitability of the product rather than its contributions to new business levels, as a loss-making business, particularly those sold on a guaranteed renewable basis, can have a significant adverse financial impact to the adequacy of the risk funds to meet claims.

Providing comprehensive training to distributors is important to ensure that the key risks underlying the products are appropriately communicated during the sales process to avoid potential issues of mis-selling. For example, the reviewability of rates should be highlighted, as well as the scenarios where additional contribution top-ups may be required in the future. For long-term medical products, regular communications with participants to highlight the non-guaranteed features of the rates are also essential in managing consumer expectations. Transparency and good communications at point-of-sale and post-sale are essential, so that consumers’ trust in medical takaful products remains and continues to grow in the future.

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