For the Lebanese insurance industry, 2004 was a year of measured improvement accentuated by several highpoints. Visibility and transparency, regional interaction and regional opportunities, the legislative framework, and a healthier solution for social security constituted the portfolio of notable developments or prospects for the nation’s insurance companies.
These matters of domestic importance were embedded in an environment of calming international trends where the recovery from the shocks of 2001 and 2002 continued in 2004 and experts expressed a positive mood also for 2005. Sector concerns in the international insurance scene shifted from the tremors of financial markets and the dangers of terrorism back towards the vast disruptions originating from natural or less evidently man-induced disasters, such as hurricanes and floods. Announcing their global insurance outlook in early December 2004, leading international reinsurance firm Swiss Re expected the sector to operate with profits for 2005 and 2006.
As a small industry with a pronounced dependence on their contracts with international reinsurers, the rate and profitability developments in global markets are very important for the welfare of Lebanese insurers whose rate policies are greatly influenced by interaction with their partners abroad. But independently from those global trends, the local market has to deal with a range of internal issues and homegrown afflictions. One among numerous undisputed truths for the Lebanese insurance sector is that growth hinges on the ability of providers to gain the trust of consumers to larger degrees. The sector is still haunted by image problems stemming from shady practices during the conflict years, and from unsound pricing and bankruptcies occurring up into the second half of the nineties.
Much of those harmful practices have been halted, but even today, insurance managers are concerned that the growth sector motor insurance could again be hit by insolvencies of companies. The low minimum rate that insurers are allowed to sell motor liability insurance for increases the risk of defaults. This danger applies even more so to firms that sell policies below the minimum rates without considering the growing compensation amounts, which courts have begun awarding to accident victims since the introduction of compulsory motor insurance in mid 2003.
An important avenue for credibility growth of Lebanese insurers is increased scrutiny of sector players. Major steps towards a better transparency of insurance companies came in spring 2004 with the arrival of the results of the sector’s first field audits, carried out by independent audit firms on behalf of the Insurance Control Commission (ICC) at the ministry of economy and trade. The field audits allowed the supervisory authority for the first time to assess the operational financial soundness of insurers in reasonable time nearness, instead of gaining access to company results only several years after the end of the financial year. This improvement in supervisory oversight of the sector came in continuation of the measures of the 1999 revised insurance law, which over the past five years gradually increased the soundness of insurance operators and pushed the least solid firms to withdraw from the market. Based on the audits, the ICC could affirm that the remaining sector companies meet the capital and solvency requirements under the law, although consolidation of the over 50-company strong sector remains a need.
For their visibility, 2004 was a much better than average year for Lebanese insurance companies, who generally have few tools for interaction with consumers and experts available – apart from commercial advertisements and the sector’s scarce press coverage through a few specialized supplements and a small range of business magazines. After being aided early in the year through the publication of a first sector profile by a reputed financial firm, the insurance industry could bask in the light of national and regional attention in May when Lebanon hosted the 25th conference of the General Arab Insurance Federation (GAIF).
The bi-annual event’s convening in Beirut was extraordinary in that it attracted insurance managers and experts from the Arab world and beyond in larger-than-usual numbers. Representatives of the Lebanese insurance sector also noted with satisfaction that Beirut and the Lebanese insurance association ACAL was the first host to have been given the privilege of staging the event twice within 12 years.
In its presentations and discussions, the GAIF conference illustrated amply how large a gap still separates the populations of Arab countries from the ratio of “insuredness” accomplished in developed economies. The per capita expenditure on insurance premiums (insurance density) and percentage of GDP invested in insurance (insurance penetration) are only a fraction of the values reached in the highly industrialized countries where global insurance power is concentrated to over 80%.
Although Lebanon regionally ranks in the leading group for both insurance density and penetration, it achieved in recent years not more than 33% of the global average for insurance penetration and 28% for insurance density. The Arab world gap in insurance coverage is especially pronounced in the area of life insurance. Due to the interest gain component in the wealth creation model of conventional life insurance and because of other conceptual differences in regarding life coverage, the acceptance of this insurance in Muslim societies had traditionally been very low. In a development to remedy the lack of financial protection for emergencies and old age, the emergence of TAKAFUL, or Islamic life insurance models, has drawn attention from international providers and was discussed at the GAIF conference.
The 25th GAIF conference drew some criticism for what observers perceived as an intellectually anemic line-up of presentations in some of its sessions. Questions also linger over the lasting potency of the anniversary event for reshaping and focusing the Arab insurance providers towards much needed further improvements in professionalism and performance. However, besides granting opportunities to meet with international partners and the region’s insurance elite, or gain knowledge in a consecutive conference on priorities in engineering an insurance merger or acquisition, the GAIF conference also highlighted many new opportunities that are surfacing across Arab countries due to opening of markets such as Saudi Arabia and Bahrain to regional players.
Starting with market leaders MedGulf, a good number of Lebanese insurance companies are increasingly active in regional markets, especially in Gulf countries. Local insurance experts see the skill level and skill reservoir in the Lebanese market as advanced in comparison to most of the region. Lebanese insurance providers in 2004 increased their efforts to leverage this advantage in expanding their reach in the Gulf as well as in Levant countries where the emerging Syrian market is regarded as most promising.
Although disadvantageous taxes levied on premiums and life insurance payouts remained obstacles to insurance growth related to public sector fiscal policy, Lebanese authorities in 2004 took new steps towards improvement of the national insurance regime. In April, under the leadership of then minister of economy and trade, Marwan Hamadeh, an entire new draft law for regulating the insurance sector was presented to stakeholders in the sector.
The new law had been drawn up by international experts. Its protagonists, with Insurance Control Commission head Walid Genadry in the forefront, hailed the draft as an epochal chance for Lebanon to pass insurance legislation that could serve as a model for many developing economies. Even as insurance legislation here had undergone significant progress in the 1999 revision of the national insurance laws, experts and members of the industry generally agree that the revised law is not enough to address all issues important for modern insurance administration. However, Lebanon is not known for high speed processing of insurance legislation and in the second half of the year, industry leaders, including ACAL president Abraham Matossian, commented on aspects of the draft law in ways that increased doubts over the prospects of it being adopted very quickly.
Another legislative initiative of very high relevance for insurance came in the third quarter of 2004 through introduction of a national pension scheme proposal. After having kept the proposal under wraps for several months, representatives of the Hariri cabinet and president Lahoud confessed public agreement over the need to revamp the system of retirement payments, currently managed by the National Social Security Funds.
With its restrictions to one-time payments and limits on funds management, the NSSF is widely understood to be in need of substitution with a new system, which would partly involve private sector operators. Although implementation of a pension scheme also is contingent on – habitually complex – political decision making processes and rapid legislative adoption of the project thus seems overoptimistic, being able to enter the realm of compulsory pension plans for individuals and groups could open many opportunities for commercial insurers. Through life plans, local insurance companies have been active in the area of retirement provisions for years, affirming life insurance as the leading prospect for sector growth.
With annual premium volume in the range of $500 million, the Lebanese insurance sector is looking for growth in every respect. While estimated numbers for the development of insurance premiums in Lebanon in 2004 are not available before late in the first quarter of 2005, industry managers said that growth in 2004 was good by the market’s standards and prospects for insurance sales through agents, brokers and banks (bancassurance) are up for 2005.
The new draft law
Developed between September 2003 and April 2004, the new draft for a Lebanese insurance law was prepared under leadership of Canadian insurance experts and with funding support from the World Bank. The proposal stipulates a further increase of capital requirements over several stages, from today’s $1.5 million to $3.5 million. Among other regulatory innovations, it provides for a strict separation of life and general insurance business and specific audit standards. The draft also foresees an insurance control commission that is run by a board of directors and an insurance commissioner with more direct authority and accountability, making the oversight body more autonomous from potentially political decisions at the ministry of economy and trade.
As they described the draft law as complying with advanced insurance developments in international markets while being comprehensive and adapted to the needs of an emerging insurance market in a small nation, supporters of the draft pointed to the need for its quick acceptance into law. More discussion and eventual modification of the draft was urged by industry representatives who pointed to the need for making the draft more compatible to the local insurance culture and legal tradition.
The pension scheme
An actuarial plan for a scheme of continuous pension payments for Lebanese retirees was drawn up by pension and insurance advisors, Muhanna Group. The plan envisions a mandatory membership in the national pension scheme for all employees newly entering work life as well as employees born after 1969 who are currently registered with the NSSF. Optional membership is available to employees born until 1969 on condition that they did not already withdraw their end-of-service indemnities and will have at least 20 years of insured employment at their retirement.
For all members in the scheme, the minimum period of employment to qualify for a pension would be 20 years, according to the plan. Salary contributions would be collected from both employer (7.25%) and employee (5%), for a total pension contribution of 12.25% of an insured’s salary, up to a ceiling of LL 5 million ($3,340). Additionally, employers would be mandated to pay a contribution equivalent to 5% of the salary into an employee’s retirement health insurance. Under the plan, the minimum monthly pension for a retiree would be set at $120, or 60% of the salary based on steadily earning a minimum salary of $200 over 20 years of service. After 40 years of employment, the pension would reach 80% of the minimum salary. Exemplary calculations of pensions reached under the scheme allow future members to see projections of replacement rates – i.e., the share of the final salary that a pension would amount to – under a number of possible salary growth scenarios.