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New unemployment scheme is risk worth taking for UAE

Income protection insurance available to all residents is an enormous government undertaking

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Many UAE employers keep basic salaries low so for many the amount receivable is likely to be no more than half the monthly income

It has been reported that the recently announced proposed income protection scheme will generate money for the UAE government but I am doubtful that this will be the case, at least for a few years. 

Setting up any kind of insurance arrangement is costly and the premiums that have been announced are low, especially compared to potential benefits. 

The scheme, which will be available to all UAE residents, is due to come into effect in January 2023 and the premiums payable will be from AED 40 ($10.89) to AED 100 a year. 

Given that an employee will be able to claim up to 60 percent of their basic salary, up to AED 20,000 per month, this represents excellent value for money and I would encourage all employees to contribute. These types of arrangements are particularly necessary for the lowest paid in society.

We have yet to see the full terms and conditions and whether there will be a waiting period for claims following termination. Assuming that claims can be made immediately, or that there is only a short waiting period after paying the premium, I would expect claims to come in soon after, so that money received is then paid out. 

I cannot see that this will be profitable for the government, and I have assumed that the concept is genuinely to help those in need. My expectation is that the UAE government will have to contribute, at least at the outset. 

With the numbers as I see them, I am doubtful there will be anything left to invest as the premiums won’t even cover pay-outs for some time. 

Setting up such a scheme will be costly from an administrative point of view and there is a great deal of work to be done. If the scheme does end up in profit, it will always require a high level of liquidity in order to fund claims. That is the structure of regulated insurance companies and it would be sensible to run this on the same basis.

Given the size of the UAE, and that this appears to apply to all employees, the scheme is going to be huge. The amount receivable in premiums will be substantial. Had this been in place two years ago claims would have far exceeded payments made but that is the nature of insurance and is the risk taken by the government. They may be working with a reinsurer to offset the risk to them or it might simply be government-backed. 

If the scheme does turn out to be profitable then there may be the option to invest some money but on a low-risk basis. Given the potential call on funds, the scheme management shouldn’t be taking much in the way of risk and its cash will need to remain easily accessible. 

We know that many employers keep basic salaries low (although it should never be less than 50 percent of the total) so, in reality, for many the amount receivable is likely to be no more than half the monthly income, plus it will only be payable for a limited period – yet to be confirmed.

Where possible, employees should still have their own emergency fund to fall back on, but I very much welcome the introduction of this progressive move by the UAE government. 

Keren Bobker is an international financial advisor and senior partner at Holborn Assets. She is also author of financialuae.com 

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