Discussing Insurance in Saudi Arabia with Dr Goetz Friedrich Kuras of Leading Insurance Company Medgulf

Interview with Dr. Goetz Friedrich Kuras, CEO of Medgulf

What is your overview of Medgulf and the sector in Saudi Arabia?

After Medgulf was founded, we very quickly became one of the largest insurance companies. Medgulf, like any other insurance company in Saudi was built in two lines of business which were mainly health insurance, which is still by far the largest, and motor insurance. Both are essentially mandatory for us. You need to have your third-party liability, even though today, up to 50% of cars on the roads do not. It is a law and companies need to insure their employees. Medgulf was actually my first client in the region when I was a management consultant. At that time, Medgulf had, like many others, true issues because it was very easy to get a large contract with a company that had 100,000 employees, families being insured, and a huge premium coming in, but less ability to provide around claims cases. This is something that still clogs the industry in Saudi. Distribution is essentially distribution of selling to corporates and much less has been through professional brokers. But in the old days, it used to be individuals making significant money by getting commissions on very large amounts of premiums. Medgulf got into a financial storm in 2016. In 2017, it was suspended by the regulator for some time. I came in as a consultant in the end of 2017 to help them to be allowed to come back to the table according to the regulator. In 2020, after I had a couple of conversations as a consultant for the Chairman, eventually, I was asked to join the selection process for CEO in early 2021 and I was selected by the Board in March last year. Medgulf at this stage was having serious issues, not only financially, but also operationally, with lots of cliffs that each needed to be navigated or they could have destroyed the ship. Fortunately enough, we navigated all of them. We managed a rights issue which brought us back to full solvency and got us a three-notch credit rating upgrade, which is quite unusual. You typically get one notch, but not three, in one step. We also managed to reach an out of court settlement with the founder of Medgulf. It was very helpful because not only will it bring us quite a substantial amount of money into our war purse, but it will also take a big question mark away from Medgulf and bring us back to doing government business where we had been frozen out as a result of this long-standing conflict.

What have been the new strategies and developments in Medgulf recently?

Medgulf adopted a new strategy at the end of last year which departs from the idea of being an integrated end to end value chain owning insurance company. We did this for two reasons. First, when you look at the role of insurance internationally, the boundaries of the industry, the classic insurance value chain are breaking apart and it is becoming more value stacked in a chain. Insurance companies have to look at how they can own all components of it, how they can hold it in different companies and it comes under the umbrella of the group. In insurance companies now, you have professional services which relates to the technical components of underwriting, capital management, investment, and other things. But we have a lot that is more akin to a factory, which is above mentioned claims, providing services, policy administration, etc.

The second reason why we disembarked from the old model is that when we look at the Saudi economy and Vision 2030, it is very clear that two things are happening very quickly. We have massive changes in the health ecosystem and we also have massive changes pending in the mobility ecosystem. These two are both suffering from a large amount of inefficiency. If you repair a car today, the cost is almost twice as high as doing the same repair in Dubai. There is a lot of money in this inefficiency. Equally, when you look at the current healthcare provision, Saudi is lacking a primary healthcare sector and everyone goes directly to the very expensive and massively overtreated. All of this is adding to significant cost which is exploding in Saudi. For a nation like Saudi, this is threatening to the economy because it becomes unaffordable. So, we have massive reform in both segments and our strategy is aligned with the idea of this reform and because we are both socially and economically forced.

The third point is that today in the nation we do not have life savings insurance. What you do have is term life insurance where you can insure your life and the consequence of losing your life and a certain amount becomes paid to your estate, but we do not have it linked to a savings account. Other nations’ main balance sheets are those of life and pensions and these balance sheets are half the size of the economy itself. We are driving and we are aligned for long term investments in infrastructure because the maturity date is 20 to 25 years out. This acts in a very stabilizing way in that if there are large pots of money, they do not care much whether the market swings up or down because you are less affected by it than a bank, for example. The insurance pension sector has a truly stabilizing force in an economy. What we realize is that when this should open up, then the regulator will force you to put it in a separate legal entity. In order to have life insurance on the same balance sheet in the same operating environment, what we are looking at now is moving to a value stack. We will move away from owning things to co-owning things, entering joint ventures, and also partnering. That requires an entirely new skill set. We will start building the speedboats around the Medgulf flagship. We know that we can put on the flagship only a certain square meter number of sails. We are moving to a fleet of activities governed and cooperated with providers outside of Medgulf. We will also become a provider of insurance infrastructure in the factory component of insurers but also to payers and to providers in the sector. There has been a recent regulatory change that insurance companies can now start owning provider components and now provide two aspects of health delivery to the population. We will do the same in motor. We will no longer only insure, but we will also be involved in the repair of cars. After an accident, we will be involved with the customer from the moment of an accident, breakdowns, replacement cars, and more. The whole product of motor insurance will separate into different things.

In the healthcare space now, there is Nphies, which is a national level of coding, treatments, diagnostics, and medications. Before, every hospital, every provider had its own coding. The government had no control over the cost of treatment and the frequency of certain treatments in the population. Now, this will change and the government will have full visibility. The government has created an agency already to start using this information. Now, the same treatment in one type of hospital costs three times as much as in another hospital because one type is a hotel that happens to provide medical services, while the other one is just providing medical services and not hotel services. The government will ask if it is their obligation to pay for the hotel or just the medical services. They will establish a range for what can be charged for the medical service and it will no longer be an arbitrary price. There will be separation between the medical service component and the hospitality component. The moment you have this, the group health product separates into two. One is mandatory, in that the employer needs to pay for your health insurance. The hospitality might be viewed by the employer as a corporate benefit. If you utilize the hotel, you pay for it yourself at the whole price without having to go through a medical exam. The product is bifurcating and the hotel component will quickly retailize and it will change the whole distribution from the product to the underwriting. You may have core provision of health from your employer, but you might buy one component from Medgulf, and some layers of dental, for example, you might buy from another insurance company yourself. That is the path to growth and maturation.

The whole sector will become much more complex, and as it becomes much more complex, all these parts will be communicating with each other to payment flows, etc., which is the new infrastructure that we want to build and co-own. We want to underwrite some risk, but not all risk. If it becomes loss making, I would like to underwrite less, but today, I cannot. But if I have an infrastructure, it will still administer risk underwriting. The amount of work does not change because people keep going to hospitals, keep consuming medical services. We are trying to be more nimble in our insurance activity as an underwriter. We cannot do this if I have an integrated value chain, so this is why we are moving in that direction, but in Saudi, it is hard to execute.

The skill and the competition among insurance companies in the future will be who can execute the thinking and there will be a fight for talent. Orchestration is very different from an integrated top down command. It requires a different type of skill which the old companies will not bring; rather, it will have to be the next generation who are more adapted to it. The pace of this developing and the leaders who we need today are those who can adapt to the operating model.

What are the competitive advantages of Medgulf? What makes you stand out from the other players in the industry?

The competitive advantage of Medgulf is in the quality of its current operations and we are working hard to improve that. In motor, in under in a year’s time we will be noticed in the market. Health is more difficult. The advantage for Medgulf is that there is a desire for Medgulf to be alternative. There is a desire for providers, there is a desire by brokers, there is a desire by those insured. This is an opportunity for Medgulf, and, of course, an obligation for Medgulf to show our true capability. You can see the diversification and the massive change in the health ecosystem. Another advantage that we have is that we are an integrated insurance company. The ability to be nimble will give us an advantage because we are smaller. The others can continue as they are for some time, but we are forced to move. The coin has two sides. My role is really to help my team understand that we have all of those things that may be viewed as disadvantages, but a lot of these disadvantages actually can become real advantages. That is where we need to look and be confident that we will emerge strong in the end.

There is beauty in challenge and there is a big learning curve in it for me as well to be dealing in a much more modern environment with much more normal ambitions and still achieve the extraordinary. Of course, we have changes in the team and we need to fortify it. We see the need to grow Saudis into senior role capabilities, and eventually even grow them into my seat because I am not meant to be here forever by design, not only by my own desires. That means that you need to have a different stance. We are still on a path where we have a mutual benefit from how we work together and we are getting stronger every day.

What message would you give to investors interested in coming into the region?

You need to look at the kind of investor. When you look at the large insurance companies globally, they are retreating from here. When you look into total insurance premium globally, Saudi is small. For this reason, it is always opportunistic. Even if you were to achieve its full potential, we would still be comparatively small. Now, there is a different kind of investor who sees opportunity in the breaking up of the value chain. There are several horizontals and verticals that you could integrate and each of them are very viable businesses with high margins. We are already seeing that there is a vibrant investment community here, young entrepreneurs who are trying to build businesses and benefit from it.

Of course, the big tech companies can be very disruptive. Amazon has just bought into health in the US. You can see Google become a financial services company, why not the regional insurance space next? You can see a utility become an insurance company. The only hurdle here is the regulator and they are protecting the sector from this revolution happening too quickly. In emerging markets, which we can still call the Gulf when it comes to insurance, you can see entry of this kind. Because the insurance infrastructure is less regulated by financial services, regulators, and the balance sheets, it is easy to expand across the nations. You can see in Kuwait or Qatar, which are fairly small in terms of market, the return on equity will be constrained and you will have locked up capital.

Now, if you are an infrastructure provider, it is much easier. Why should I not have a doctor online seeing a customer seeking advice in UAE? The infrastructure game has a different scale and a more secure return and probably better margin, particularly with less capital involved than the balance sheet. We will see this change in frequency lines globally. We can envision a future state where people and their propensity to acquire certain diseases is on a fairly granular level. The concept of insurance starts breaking down because it is pooling of risk. Now, if everyone knows the risk quite well, it is not where society wants to go. If someone has these genes, they will pay 10 times of what someone with different genes pays. When medical services become socialized, it might become a saving scheme. If you have a higher propensity, you will build up capital and society might fund it and it will be a distribution of funds. Now, insurance companies are all becoming administrators. You can see this in many countries’ health insurance schemes with mandatory health insurance where insurance companies are not assuming risk; rather, they are administrators. We are not providing the balance sheet; rather, we are providing the backbone of communication and payment flows between providers and payers. There is a lot of change coming here. The sector will become much more driven by technologies. It is a very interesting story and it remains a highly complex industry where there is reward both financially and intellectually for those engaged within it.

What is your inspiration? What drives you to do what you do?

My background is in academia. I was never meant to be nor ever entertained to be an executive. I was doing a PhD in theoretical physics in Cambridge. I had a Fulbright stipend and the expectation of family was that I would be a brilliant professor. At some point, McKinsey came along and there was a long-winded engagement. When I tried consulting, I realized that the business problem was usually less tough than the people problem because dealing with emotions and getting people behind a joint agenda is a really tough problem intellectually. What kept me going as a consultant was a capital of continued tough problems. As a CEO now, as a general, you need to be inspiring. It is something that I knew would challenge me. As a consultant, I was doing similar things in similar settings with different clients and it became boring to some extent. I truly like the challenge and that is what gets me out of bed and keeps me up late night. I know that I am at my best when I am not fully solid on something. I have acquired some expertise. I think I am also a fairly good person when it comes to striking and attacking a problem and getting to the core of things. But this is methodology. I am not an expert in all the things I need to address. Just being at this 80% keeps me going because there is that intrinsic motivation to go beyond the 80% understanding. Always having this sense of risk makes me do this extra effort. Obviously, the stress is probably still there but the stress is more on the positive side.

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