Whilst the Lebanese insurance sector is quietly perched on the edge of new opportunities, such as insuring a yet-to-be-established oil industry, it currently faces a severe destabilization risk. The lack of a commissioner has disrupted the key and evolving process of supervision, and there may be concerns over who will fill the position and how. Insurance industry luminaries are reluctant to go on record to comment on the situation, but word from some of the brightest companies is that they are concerned about a vacuum in the leadership of the Insurance Control Commission after the contract of ICC head Walid Genadry was not renewed earlier this year. The ICC commissioner of 13 years left office in May without anyone appointed to replace him at time of writing.
Sitting down with Executive for a review of the challenges and achievements during his time in office, Genadry declined to discuss the relationship between politics and insurance under the tenure of various ministers of economy and trade over the years. He was, however, unequivocal on the need to decouple insurance supervision from political risks and interests. He argues that the ICC has matured to the point where it needs to be removed from the embrace of the Ministry of Economy and Trade and established as an independent regulatory entity. He further adds that the post of the commissioner needs to be shielded from becoming a trophy job for individuals with political connections.
“As long as the supervisory authority depends on a political position holder it is still too easy to inflict damages on the institution,” Genadry says. “It needs to have independence and if the culture in the political realm is such that real independence will not be granted then the best form of independence would [entail] positioning the ICC in [the] vicinity of the central bank.”
Over recent years, experiences with the establishment and the operations of independent regulatory entities in Lebanon suggest that the independence of supervisors and regulators is still treated ambiguously in the political realm. However, the Lebanese system’s precarious political processes and partisan structures make it prohibitive to operate regulatory bodies under the tutelage of a minister. Indeed there have been no fewer than eight ministers of economy in office since 2000, and the period has also seen persistent legislative paralysis. In these circumstances, for Genadry, the independence of an entity such as the ICC can be possible by institutional affiliation with Banque du Liban, the country’s most reliable and non-political public financial authority.
[pullquote]”It is going to open the doors of hell if this position gets politicized and you start seeing this or that influential figure battling to get his man the job.”[/pullquote]
An even graver danger for insurance supervision would be politicized competitions for the position of insurance commissioner. The post has recently become more attractive, being viewed less as a serious mission and more as a nice position offering prestige and financial reward, Genadry says. “It is going to open the doors of hell if this position gets politicized and you start seeing this or that influential figure battling to get his man the job,” he continues. Three year mandates for insurance supervisors would not provide enough time for political appointees to learn and manage the complexities of the role, he adds.“Also, if the post becomes a political appointment, the team under the commissioner will become de-motivated. It is the team that counts the most in the work of the ICC – you have to have those people motivated to stay.”
An institution raised from ignominy
One can make the case that the current spectre of the insurance authority’s politicization would have been unimaginable without the work that Genadry and the ICC team have done over the past 13 years.
In the early 2000s, the Lebanese insurance industry was far from being a perfect machine. Although a hopelessly outdated 20th-century insurance law had been modified at the end of the 1990s, the sector’s fragmented corporate population of about 65 insurers was struggling both to demonstrate respectability and put the plethora of problems stemming from the civil war years behind it. Insurance supervision lacked any real power, and even the face-lifted insurance law was lagging miles behind the times.
When Genadry assumed his post as supervisor under these circumstances, the ICC team initiated its activities “with a big bang” of due diligence, holding the first ever external assessement of all Lebanese insurance companies. The exercise gave the ICC an unimpeded view of the financial health of the companies under its supervision. “This annoyed a number of people but we had clear auditor reports saying there is under-reserving and inadequate capitalization,” Genadry explains.
From this, the ICC started pushing companies to comply with requirements for larger reserving and improved financial prudence. The supervisory work was carried out and gradually expanded by the ICC’s two departments, the financial control unit and the market conduct supervisory unit; but the institution was short on staff and experience, Genadry concedes. “We were not really strong. We had to act and at the same time we were learning.”
One particularly demanding and newly legislated project, which by international standards was long overdue at the time, was the introduction of compulsory third-party liability (TPL) insurance for motorists. The measure, which was limited to covering physical injury, was of great social and economic importance, but the insurance supervisor was not yet ready to deal with the various implementation issues that arose. These ranged from price dumping and cash underwriting, practiced by shady providers, to fraud.
Between illegal practices by some, the inexperience of the ICC, and shortfalls in maturity and cooperation on the part of motor insurance providers, it took several years to overcome the problems associated with applying the compulsory TPL insurance regime for physical injury. The matter still lingers on today, albeit in a modified form, as the implementation of compulsory motor insurance for material damages seems to be advancing at the pace of a particularly unenthusiastic snail. But there is no good alternative to delaying the implementation of the material damages TPL cover. “Lessons we learned in motor insurance, along with the continued existence of a weak law, make it a must to be careful about how we introduce the material damage compulsory car insurance, which is high frequency and involves much higher premiums. This is why the ICC has engaged with experts from the World Bank asking them to work hand in hand with the ICC and the insurance sector to draft the appropriate application decress,” Genadry explains.
Walid Genadry Q&A
E Based on your experience of 13 years in the position, what are your recommendations for the next head of the Insurance Control Commission and for the work of the ICC going forward?
I would tell the new commissioner that one cannot regulate insurance, and at the same time be either a close friend, or an adversary, to any insurer. The commissioner has a role to regulate and supervise insurance. Because of this requirement, the commissioner has to keep a distance, because at any time they might have to penalize someone. The commissioner also has to exercise their role fairly. This is very important not just because of the principle of fairness but also because we are in a very small country. It is a country where the whole sector will know within 48 hours if you make a decision that could be considered in the slightest way debatable. You need to keep the reputation of the commission intact.
E What does this mean with respect to issues or requests that are presented through political channels?
You cannot be unfair. An insurer may have political connections but you cannot give the impression that some insurers can obtain favors and others can’t. Giving favors would destroy supervision. Would you go to see a World Cup game and pay hundreds of dollars for a ticket if you knew that the referee prefered one football team over the other? The second very important thing is that the commissioner has to act with appropriateness and integrity, knowing that they are a controlled controller.
E In what sense and controlled by who?
The insurers are not the only ones to be observed and controlled. When the commissioner does something wrong, they intervene, complain and affect change. Respect for the institution is important and must be earned. So the commissioner is controlled, first by the insurers and then by the brokers and other actors that deal with the sector, which could be lawyers or anyone else who is helping brokers and insurers. The commissioner is also controlled by his minister, as complaints about the commissioner go directly to him. Some complaints, when properly assessed, are a positive thing for the supervisor, as they prove that he is doing his work. Finally, the commissioner is also controlled and observed by certain people inside and outside the ministry, some of whom have nothing to do with insurance, and who do not necessarily like one another. This means that if the commissioner is perceived as doing a favor to one interested person or group, all the others will go against them. They have no leeway to make a mistake. Being a referee is a thankless task; that is the way it is designed. The other thing I would tell the commissioner is that they are working within a very weak legislative framework and this means that they have very little leeway to be flexible.
E How is that?
You would like at times to be flexible and push a company or an actor in the right direction but at the same time be understanding. But how flexible can you be on something that is already very weak? If you are flexible under those conditions, it means you are not supervising, and that is one of the problems of a weak legislation. Unfortunately, their role is not to be flexible. There are a few other things that I would say. We are not auditors, we are risk assessors. This means we have to look at a company as if we were general managers of it. We are not in the job of penalizing, we are in the job of deterring, and penalizing is a tool to catch attention. Ninety-nine percent of success is in what insurers refrain from doing by the mere fact of the supervisor’s authority deterring them from violations. This is why supervisory authority is at the heart of everything.
E What is your recommendation for the insurance companies?
They should put a lot of focus on governance. This doesn’t come from the state; it has to come from them. Governance is about everything. Secondly, companies in the sector should work on their products and even on the annexed services that are attached to the products to become more sophisticated. Third, companies should merge, because the game is becoming regional. There should be mergers but it takes a new law to help with mergers.
Tough road to love
The first years in the relationship between the revamped ICC and insurance companies were often characterized by push and pull. According to Genadry, it was not the challenges inherent to Lebanon’s economic environment, or the fact that the supervisory function of the ICC did not allow it to cozy up to the insurance industry, that caused the turbulence of the first few years. Rather, he says, this was due to a clash between the regulatory culture the ICC was trying to instill and the old guard system that, since the 1950s, did business as it saw fit.
For many years, including during the Lebanese Civil War, insurers had been left to their own devices and had remained untouched by public scrutiny and regulatory intervention. To move from this state to one of compliance with a supervisory authority required a change of attitude, and was a trial and error process, Genadry says. “This process had to begin with the ICC learning what it had to do while it was doing it, and while [also] facing opposition to what it was doing.“
The opposition was “at times harsh,” he adds, and rejected several regulatory initiatives and filed administrative lawsuits against measures that the ICC viewed as key supervisory decisions. Disputes went as far as the launching of an allegation of culpability directed against Genadry personally, which was eventually thrown out in court. “The objective probably was to get me disgusted and leave,” he says.
This did not happen, however, and relations between the insurance sector and ICC improved until around 2011, when insurers ultimately came to the realization that a fundamental change was required, and accepted that supervision was needed in the sector.
Since then, the ICC has shown visible and tangible results. It enhanced and institutionalized the financial review processes of sector companies, upgraded the oversight of intermediaries, improved the complaints investigation and resolution processes, helped embellish health insurance covers for expatriate workers in cooperation with the Labor Ministry, and developed its team in size and competency.
However, there is one crucial area in which the ICC has yet to make a breakthrough: implementing a new insurance law. In one of his first acts as commissioner, Genadry collaborated with international experts in 2003 to produce a new draft law. The draft was presented in 2004 and received hefty criticism, but was altered in the process and gained increasing support by 2007. However, it then fell victim to the freezing of legislative initiatives in Parliament. “If I today have one regret, it is that we couldn’t pass the law because in the absence of this law, Lebanon is presently at the bottom of legislative frameworks for insurance in the Middle East,” Genadry says.
According to him, the current law is insufficient on many counts and even acts as a barrier against crucially needed developments. It limits options in support of mergers and insurance industry consolidation, and does not allow the regulator to impose any new corporate governance requirements on insurance companies.
It appears to be a comfort to Genadry that a World Bank assessment of the Lebanese insurance sector highlighted how the ICC has been able to achieve very respectable outcomes of its supervisory work in recent years, despite the inadequacy of the existing legal framework. But the need for a new law persists, and as Genadry reviews his experience as insurance commissioner, and the recognition he received from international peers in top-reputed regulatory institutions upon the news of his contract’s surprising non-renewal, he says his main priority is to see the legacy of fair insurance supervision preserved in Lebanon.
Executive asked Genadry how he responds to allegations that he slowed sector development down during his tenure and why he stayed on in his post despite more profitable opportunities in the private sector. He easily dismisses the first allegation by pointing out that insurance premiums nearly quadrupled in the years while he was commissioner, and that sector profits likewise improved very handsomely even as reserves were boosted more than eight times. As to the question of why he did not resign from his job despite all the challenges, he says, “I believed in the importance of what I was doing and I felt that if I left, I would be a coward. I invested myself in a way that can be done only for a mission, not for a job.”