By all signs and measures, insurance in Lebanon remains on the slow burner. Business developments and preliminary expected results for 2003 – even a somewhat conclusive performance evaluation based on unaudited results is not possible before next April because far too few members of this sector provide half-year or third-quarter reports – indicate no significant changes or additional sector growth in comparison to 2002, when the volume of insurance premiums increased by about 6%.
Aside from stronger hopes and aspirations harbored by individual companies and for specific products, insurance managers widely expect that also in 2004, their industry will see more of the same – treading water. This is not to say that the sector doesn’t breathe easier today than it did two years ago, when operators were looking at a mountain of bad news based fundamentally on increasing reinsurance costs and faltering investment portfolios. And the industry certainly appears far healthier and more promising than in the late 90s, when it was battling to emerge from a long credibility crisis and struggling to gain firm financial and operational grounds on the platform of the gradual implementation of a revised national insurance law. This period lies now behind Lebanon’s insurers, even though some of the goals for downsizing of operator numbers and consolidation have yet to be achieved. What that leaves the sector, at this point, is a mixed lot. Firms on their protracted way out and those that in best-case scenarios are broker-sized candidates for acquisition by a viable insurer, stand vis-à-vis operators investing into their growth and increasing professionalism. The latter group comprises first of all the companies with international corporate affiliation, bank-owned firms, including life and bancassurance specialists, and Beirut-based companies with regional scope, but it also includes a share of independent local companies eager for growth. Most of the straits that plagued insurers in 2003 stemmed clearly from the prevailing of adverse economic conditions; others were related to matters of public policy and the state of government affairs. The economic environment made for few interesting projects that firms could go after. “The financial and economic crisis is continuing to take its toll by keeping the number of projects for general insurance low,” said Lucien Letayf, general manager of Libano-Suisse Insurance. The company, which has growing regional activities, could secure contracts to provide coverage for three major construction projects in 2003, he added, “but there are not many of them.” On the health insurance front, persistent problems in the public sector coverage, created through non-payment of government dues to the National Social Security Fund, derailed expectations that pressures on the sector would be relieved by stronger NSSF involvement and new public health care provisions. The much-touted introduction of mandatory third-party liability (TPL) insurance for motorists turned out to be less than companies anticipated, with a plethora of organizational and regulatory difficulties slowing the implementation process. But on the bright side, as far as the government’s work is concerned, insurers widely credited the ministry of economy and trade and its insurance control commission for doing a good job in implementing the first-ever series of complete field audits of sector companies, a task that had been outsourced to two professional auditing firms. Companies across the board furthermore confirmed that essentially, the government took an excellent step in beginning to enforce that motorists obtain compulsory TPL insurance against bodily injury.
With the prospect of increasingly thorough enforcement of vehicle inspections and insurance requirements and ongoing deliberations over the expansion of the compulsory insurance to property damage liability, the motor segment stands to be the main event in occupying the sector’s attention also in 2004. However, some insurers would rather the government not rush into making motor TPL coverage for property damage mandatory. Companies have yet to review the claims ratios and evaluations of the sector’s first experiences with the new motor liability cover. “We should initiate a dialogue with the ministry of economy and trade in order to amend the law on personal injury TPL in motor before moving to implementation of property damage TPL,” said Elie Nasnas, general manager of insurer Axa Middle East.
While the motor cover is a welcome development, “it could also be very risky,” warned Letayf, who also considered the end of 2003 too early for introduction of a compulsory TPL property damage cover. “Companies are not sufficiently capitalized to pay a multitude of claims,” he said, “especially since reinsurers mandate them to retain a large share of risk.”
Numerous managers offered anecdotal evidence for massive increases in claims amounts, in cases where the courts had issued judgments reaching multiples of what plaintiffs had been customarily awarded. One judgment this year reportedly ordered payment of $100,000 to the family of the victim in a deadly car accident, significantly exceeding a long-established practice of awards in the range of $10,000 to $17,000.
With an explosion of bodily injury claim judgments, even the most conservative insurance providers would face challenges to maintain a sustainable level of profits from mandatory motor insurance, given the low minimum premiums set by the regulators. And indeed, the reputable insurers have either discouraged clients from obtaining only the TPL cover or priced their packages considerably above the minimum. As a consequence, these companies did not see their motor portfolios grow by major percentages in 2003.
In sharp contrast to that are the practices of a handful of insurance operators that have been selling TPL motor policies not only at the $43 minimum annual premium rate but seem to have cut their effective prices even below that threshold. These unsound practices could well escalate to become the Lebanese insurance industry’s main problem in 2004. Akin to several companies that amassed unsound medical insurance portfolios in the nineties and crashed toward the end of the decade, shaky providers that are running up risk from signing cut-rate TPL coverage commitments could rapidly be facing bankruptcy, many insiders fear. “This possibility could be verified sooner than some expect,” said Max Zaccar, chairman of Commercial Insurance. If confronted with these concerns, managers of the companies in question did not respond, said Nasnas. “They don’t care.” Some in the industry observe their lesser colleagues’ game of accident roulette with a touch of social Darwinist attitude, claiming that a few insolvencies would simply purge the ranks from unfit operators. But in the opinions of outspoken insurance managers like Nasnas and Zaccar, such stoicism would be ill placed. A crash of insurance companies with big motor portfolios would lead to a loss in consumer trust, especially among the most-likely first-time clients who went for the offers of these firms, Nasnas advised. “It would shake the market.” Another weighty concern for the industry could arise from fairly widespread disparities between high increases of costs – which local insurers had to carry due to massive hikes in reinsurance rates since 2001 – and much less pronounced premium increases (in some cases, even lowered rates) they charged their clients. This could force some providers to make painful adjustments to their rate structure at moments when such sudden moves would come both late and be hard to explain. The problems that the industry could encounter in 2004 are juxtaposed by a notable share of potential growth and opportunities, some of which is outside of Lebanon. Domestically, life insurance and products optimized for the bancassurance distribution channel are the best growth candidates. “With all we hear about 2004, I don’t foresee any potential growth outside the life market,” Nasnas said. “The life business is getting better, due to bancassurance,” said Letayf.
The trend to buying more life insurance indeed seems to be on the rise in Lebanon. While the absence of tax incentives for life policy owners is still an obstacle, the country’s socioeconomic troubles have alerted larger numbers of people to the increasing unlikelihood that they will be able to rely on their families for a retirement income, thereby tempting many to buy into retirement plans and capital life policies. Companies that in 2003 overhauled their life business and stepped up their marketing, like regional player Arabia Insurance, and firms that devised new life and capitalization plans for distribution in bank branches, such as Adir (a company owned jointly by Bank Byblos and French insurer ADP), have been bullish about their prospects. Also many companies with a license to write life insurance but presently have less than extensive life portfolios, see the need to increase their relevant activities. Axa and Libano-Suisse are both firms that intend to address the market with new life products. For firms with regional ambitions, however, some of the most appealing expansion opportunities are in Arab countries, from Damascus to Doha. The Saudi market for medical insurance alone carries potential for new business worth billions of dollars, Letayf said. The parent company of Libano-Suisse insurance is engaged in a 50/50 joint venture with the El-Seif Group for an insurance company in the kingdom at a total capitalization of $27 million (SR100 million). Other Beirut-based insurance companies have equally staked their claims in the Saudi market, which is in the process of opening to greater international participation. Iraq’s insurance needs are massive and Lebanese firms aspire to play a big role in Baghdad, but most see the evolution of that market as likely to take shape at some later time. The opportunity closest to home and in time is the Syrian market, rife with high potential for insurance partnerships from both sides of the border. “What we hope to see in 2004 is opening of the Syrian market,” Nasnas said. “Lebanese insurers could offer added value here. ” As a member of the European Axa Group, the focus of Axa Middle East covers the Levant and Cyprus. If their aspirations and activities are regional or local, there are few doubts among Lebanese insurers that greater institutionalization of sector companies and consolidation of their numbers are prerequisites for their long-term developments. “We believe that even if we are a profitable and strong regional player,” Letayf said, “a partnership with a strong bank would be good news for Libano-Suisse.”
“Consolidation will happen at all levels; even the largest players in Lebanon write very little in premiums in international comparison.” said Zaccar, and Commercial Insurance, although confident of its capacities and proud of its independence, would be interested to look at merger prospects. “Our partners could be one or more banks, one or more local insurance companies, or one or more international ones,” he continued, emphasizing, “we are open but we are in no rush.” Financial standards and auditing supervision for Lebanese insurance companies will further tighten in 2004, supporting the thrust for consolidation. However, industry managers expect the process to need two to three years to gather speed and reduce provider numbers by a substantial margin from today’s some 60 companies.