Hidden pathways to wealth for the Lebanese middle class

In plain sight

Certain roads to wealth for the middle class are less traveled in some lands but well known in others. Describing life insurance as an obscure path to savings would honestly be preposterous in most developed economies. Accounting for $2.7 trillion in premiums, or about 3.5 percent of global GDP, life insurance represents well over half of the total worldwide insurance industry premiums activity (over $4.9 trillion in 2017, according to the Sigma research unit of reinsurer Swiss Re). Even when one notes that $4 out of every $5 in life insurance premiums are generated in developed economies, life insurance is actually the path most trodden to savings by millions of low-, average-, and high-income earners from San Francisco to Seoul, in Helsinki and in Adelaide.

By contrast, looking at the local demand for life insurance products, this avenue to wealth in Lebanon is underused to a shocking extent. With just over $500 million in premiums—around 1 percent in GDP—being dedicated to the three locally available life insurance varieties of term-life, savings-with-protection, and unit-linked contracts, life policies represent only around 31 percent of the insurance activity in Lebanon. This is respectable when compared with penetration rates in nearby Arab countries, but anemic in international comparison.

That insurance is a natural avenue to wealth creation in the eyes of an international insurance executive can come in no way as a surprise. But Antoine Issa, chief executive officer for the Middle East and North Africa at multinational insurer Allianz SE, offers a clear reason why. “Life insurance—and particularly life insurance coupled with savings—is a necessity in countries like Lebanon because of the lack of social security,” he tells Executive at the head office of group company Allianz SNA in Beirut.

Issa argues that having insurance contracts is a must for low- and middle-income people, but also for well-to-do professionals, such as lawyers and medical doctors, due to the near nonexistence of a social welfare system in Lebanon, and the insufficiency of the end-of-service indemnities system for funding a person’s retirement. “It is not a luxury, it is a necessity. In our opinion, the only solution to accumulate wealth for either retirement or for the education of one’s children is through life insurance,” he says.

Lack of financial education is the main reason for low life insurance penetration in Lebanon, according to Salim Yared, a veteran insurance broker in the Lebanese market and chairman of broking company Sloop—“especially if you are talking about the middle-income segment of the population. This is the segment most in need of having a life insurance policy. But there is not enough education that would teach people about the need for a life policy, which is very important for the head of a family to have, in case [his or her] death or sudden sickness leaves their family with no money or income.”

When compared with developed countries, where insurance is much more culturally entrenched in private households, many people in Lebanon are not sufficiently aware of either the protection or the savings offered by life insurance, Yared adds. In his view, even before they reach university age, young people in Lebanon should learn about insurance “as a means to take care of their own future and of their own wealth.”

The numbers talk

In terms of contract numbers, the subdivision between protection (term-life) and savings contracts in Lebanon’s life insurance market is heavily skewed toward the former, which offer protection against the financial repercussions that result from the insured event, such as an unexpected death. Typical forms of savings contracts entail monthly contributions that accrue with interest over the contract’s duration and upon the contract’s maturing are paid out as either lump sum or annuity. Annual returns are in the form of dividends paid on the basis of returns, which the insurer achieves by managing its long-term investment portfolio, or linked to the performance specific investment assets or funds. The preference for the less costly protection-only variety appears to reach a height such that up to 80 percent of life insurance contracts are bought as term-life. However, in terms of value, savings contracts account for about 60 percent of total premiums in any given quarter, according to the quarterly reports of insurance association ACAL.

There are scant indications of spectacular growth of life insurance in either absolute terms or in relation to general insurance as the share of life business in the Lebanese insurance market. According to ACAL reports, this growth has throughout this decade been hovering at around 30 percent. The two other large slices of the total market are health and motor insurance, with the pie being completed by numerous smaller and specialized lines in general insurance, from fire and cargo to construction and liability.

The Lebanese insurance sector has, for the last 20 years, been unsuccessful in closing the huge distance between the amounts of total gross premiums it collects (about LL2.3 trillion—$1.53 billion—in 2017, according to the annual report of the Insurance Control Commission) and the immense banking sector that can quantify its deposits in multiples of GDP. However, Issa and Yared both note that that life insurance savings contracts can compete with bank savings quite nicely in dimensions that are especially important to middle-class households. 

Yared explains that brokers do not strongly engage in arranging unit-linked life insurance contracts that involve large investment amounts, even as some banks do offer big-ticket unit-linked insurance contracts—commonly involving single large premiums—to help wealthy customers channel part of their deposits into policies that combine a life insurance element with indexed investment components and minimum-guaranteed components.

According to Yared, the advantages of such high-value policies include no inheritance tax on either their life component or their investment component in case of the insured’s death. Such transactions, however, require precise information on all involved fees and costs, which are not disclosed to the market. “As insurance brokers we are not very involved in this [big-ticket business]. There is no transparency in the field that allows full computation of large-ticket unit-linked contracts that you can propose to your client,” Yared says.

On the other side, the principle of life insurance investment contracts also works for members of the middle class who do not have large investible amounts that they could lock with a bank in a time deposit in exchange for a high interest rate. “Life insurance can compete with deposit offers from banks if one looks close enough. In my opinion, you should index your policy to a bouquet of [investment] components, such as having a minimum guarantee, a mutual fund, and some other investment,” he advises. “Then, if one component does not produce enough return, the other will give palliation. In the end, when you go with an indexed policy and achieve your return on the investment, you will see a higher rate [of return] than you would have obtained by putting your funds in a bank.”

As Issa explains it, the competitive edge of life insurance versus bank deposits lies in the combination of the long-term time horizon of insurance, the diversity of investment plans, the possibility to enter into a contract beginning with small monthly contributions, an approach of disciplined saving, and the protection provided by the life insurance benefits that are integral to every life insurance investment contract. While Allianz specializes in insurance risk, the group is also one of the largest asset managers worldwide and an expert in investments. “However, our core activity is the regular type of savings, and mainly addressed to the population who want to save a small part of their income,” he says, pointing to statistics that show regular investments, with the same amount or same amount adjusted for inflation, as producing the strongest yields. “The best investment ever is when you regularly invest every month into the same instruments or approximately the same instruments,” Issa says.

He notes that Allianz SNA designs many policies in partnership with banks for distribution through the bancassurance channel and says the firm does not compete with the banks. But he is confident of Allianz’s performance even under these circumstance of non-competition, where the insurance company sometimes, for many reasons, cannot beat the short-term interest rate offered in the banking sector.  “In the long run, when the client compares what we are serving [in interest] and what the bank is serving on small amounts, we are usually performing better,” he says. “For example, for the past ten years, Allianz SNA in Lebanon have never distributed less than 5 percent on the US dollar. And we are talking here about small investments of $200-$300 per month. It is the beauty of life insurance that we favor first of all small savings over big tickets and that we invest in the long run—so on the time horizon of 10 or 15 years we can achieve more than a bank’s deposit account.”

A rough road ahead, nonetheless

Apart from low awareness in the population when compared with developed countries, and misperceptions of insurance as luxury, life insurance as a savings option in Lebanon is faced with numerous other challenges. The first lies in a—fundamentally sound—pattern of people’s prioritizing of their expenditures. “People start buying with what they need the most, which means they start buying insurance with a health contract, which is becoming more and more expensive,” Yared says. According to him, the next insurance that people will think to buy in order of priority is a protection-with-savings cover under a university education savings plan for their children. Together, the health and education saving contracts will account for the main part of their insurance portfolio—and only if there is any disposable money left over will they will buy insurance for their own life.

“But as we know, the middle class does not have enough money and disposable income. So at this point they tend to buy term-life policies more than investment policies. Because term-life is more affordable [than an investment policy], it is the first precaution that people take to protect their family. This is how the market is going. However, [the pattern] should be the other way around, because people can find the money to fund an investment life policy and in this way will get more money for their retirement,” Yared explains.

Further barriers to creating a savings culture of life insurance portfolios in Lebanon might involve popular mentalities leaning toward show-off behavior and ostentatious consumption, religiously motivated reservations against insurance of “life” among the Muslim sections of the population, and the absence of state support for the development of insurance and savings cultures.

On the part of the financial sector, obstacles to an insurance culture in Lebanon might be rooted in past non-transparent behavior by insurance companies (especially during the time of the civil war, which ended over 25 years ago), and—in more recent years—in widespread consumer experiences where retail loan customers were routinely asked by banks to back up their loan contracts by committing to term-life insurance that would indemnify the bank in the event of their disability or death before the loan’s maturity. These contracts, which were in many cases issued by captive insurance companies owned by the lending banks and drove handy profits to the companies, would be perceived as an added cost burden by loan takers, but offer them no rewards whatsoever beyond the duration of the loan.   

For an observer, this practice of banks seems, at worst, likely to turn a large group of middle-class loan customers against buying life insurance contracts that they must perceive as providing them with only weak theoretical security and certainly no savings. In the best case, it looks to be a missed opportunity. “This policy is to the benefit of the bank but nobody thought about telling [loan takers], ‘If you buy a policy to the benefit of the bank for a loan period of four or five years, you[‘d be] better [to] buy it for 30 years and keep it [running] after you have finished paying back the loan,’” Yared says.

According to him, it would be perfectly possible to transfer a term-life insurance contract after a loan customer has finished paying his or her loan, thus making the customer the beneficiary. This would only require that bank loan officers, who are not insurance experts, be trained to follow up on life insurance contracts and be generally more literate in the art of insurance. One could even imagine expanding the term-life contract to a savings contract, considering that having serviced the loan could provide the customers with more disposable income, which they could allocate to savings. Yared notes, “Instead of selling the loan client life insurance to secure the credit, they could sell them an investment plan. The bank will be getting a profit from this and the loan client can keep [the investment policy] going once the credit is finished. It is to everybody’s profit, but nobody is doing it.”

To woo an uneasy state 

Now, regarding the relationship between life insurance and the state: it seems intuitive that governments would love life insurance. Schemes of private sector savings through life insurance mitigate risks and the social costs of old age that would otherwise sit heavy on the public lap. Life insurance, as a historically labor-intensive sector, is a source of jobs and creates opportunities for part-timers and the self-employed. Insurance companies also are constituents of economic formality—one can hardly imagine a life insurer that operates in the informal economy. And life insurance collects huge amounts of long-term money that is looking for long-term paper to be deployed in—which just happens to be the bonds that governments love to issue. No wonder many countries provide incentives such as tax-deductible life-insurance premiums under specific conditions, as well as exempting life insurance policies from inheritance tax, as is the case in Lebanon.   

All this notwithstanding, insurers in Lebanon have for years failed in their attempts to sway the state to offer tax incentives for insurance policy owners. Citing the tax deductibility of savings via life insurance in many countries, including, Egypt in the Arab region, Issa says, “We have been lobbying for many years with the Ministry of Finance to enact incentives for life insurance. [With incentives] we can definitely progress much faster in terms of spreading life insurance and convincing the people to buy policies.”

In many developed economies, incentives helped to develop the life insurance market, which in turn facilitated the increased participation of insurers as institutional investors in long-term markets of bonds and pension funds. Given the low direct tax rates for employees in Lebanon (which in theory encourage household savings), the deficiencies of social security, and the absence of pension funds, Issa notes that Lebanon should, in principle, be an excellent market for selling pensions to companies so that they can better retain good employees and make sure that employees have savings when they retire.

“It is unfortunate that we don’t have incentives [for corporate pension programs] but that, to the contrary, if I pay a premium as an employer for my employee to have insurance, there is not only no incentive but I have to pay all the taxes and fees to the NSSF,” Issa says. “We will continue to lobby for tax incentives that support life insurance for employees, because we believe it will be good for the insurance market, definitely for the population, and also for the economy as a whole. However, even without this incentive, as I said before, saving for retirement and education in a country like Lebanon is a must.” 

In Yared’s view, key elements missing from the Lebanese market are advice on and awareness of life insurance. “These should be given by the principals working in the sector, by which I mean the Association of Insurance Companies and the Syndicate of the Insurance Brokers,” he says. “These two organizations should start creating a movement that provides advice and awareness to the people of the middle class. [This] will also help the government because people will be better protected and the state will not have to deal with so many people who are in need at age 80 or 85. In my opinion, even the government will be interested in keeping the middle class safe from sliding into financial needs.” Yared argues that more employers should follow the example of companies like his brokerage, Sloop, where all 14 employees are part of a group health plan and are invited from the moment they join to participate in a portable life insurance investment plan.

As to the future of life insurance in a digitized world with an extremely complex and uncertain globalized investment environment, increasing life expectancies, and changing life concepts of individuals and families, Issa acknowledges that insurers have to adapt and change their behavior. He says that Allianz SNA earlier in 2018 began to use a new, digitized approach, under which the company looks at customer needs more holistically. In this process, which benefits from analysis entailing big data and digital tools, the insurance company computes information provided by the client into a profile as basis for a first draft of a life insurance proposition.

Under this concept of relying on the information wealth in the insurance company’s database and using market intelligence, it seems that the insurance seller’s role would be necessarily transformed into something much more impartial—perhaps resembling a wealth advisor for the regular customer or family. In practical terms, the insurance seller or agent and the client use a digital screen to modify and further customize the client-profile-based integrated life insurance proposal that can help the client chart their future savings path and project its outcomes. Issa summarizes his perception of future life insurance: “The sales approach of some insurance companies, or sometimes banks or brokers, was in the past a bit selfish. They were seeing an uninsured customer as an opportunity for pushing the policy that the seller gets the most profit from. Or they would read the customer’s revealed preferences and sell them the product that they are most sensitive to but not advise them about their other needs. This approach is not correct. We need to have a discussion with the customer and show them all their needs. A good advisor should look at the client and listen to their needs but also assess their profile, their assets, and real needs, and then should propose a solution for addressing all the needs with one reasonable package.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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