Assessing the insurance industry of Lebanon at the current junction of global insurance challenges, regional vagaries, domestic economic hurdles, and the country’s ongoing political issues is not without difficulty. Just as with the national economy, there are hopes and interesting prospects, but they are mainly just over the horizon—whether in the reconstruction of war-torn Syria and Iraq, in the development of an oil industry, or in the infrastructure and investment programs that are being ambitiously pursued by the Lebanese state.
In the best of all possible worlds, where “tout est pour le mieux,” as Voltaire’s Pangloss never tires of assuring us, Lebanese insurance would of course be developing relentlessly, and managers would not ask for their companies to be mentioned editorially in magazines they advertise in. Alas, the world being as it is, and the Lebanese insurance sector not having released new performance numbers for about six months, it is difficult to perceive insurance as a growth industry in Lebanon for the current period.
Much of the fog that obscures the insurance industry’s state and future prospects is not generated locally. Challenges from abroad are enough to send the whole industry, including its biggest multinationals, into deep soul-searching. “Insurance company leaders have a lot on their plates,” the accounting firm Deloitte mused at the end of last year in its outlook for the global insurance industry in 2018, pointing to intense insurance technology development, political and regulatory upheavals around the world, an “accelerating evolution” driven by innovation and higher customer expectations, and “disruptive newcomers” who are looking to take market share from incumbent insurers.
Existential challenges for the global industry are not rooted in the usual vagaries of managing the impacts of natural or man-made catastrophes. According to research estimates by Swiss Re Sigma, 2017 moved, in a 10-year comparison, from having below-average insured losses in the first six months to above-average losses of $136 billion for the whole year (out of $306 billion total financial cost caused by natural catastrophes). Besides being a testimony to the constant basic reality that the world has its annual share of natural perils, with economic costs that are largely unmitigated by insurance, the catastrophe count of 2017 only reinforces the understanding that the global insurance industry is well-prepared and fully capable of managing its insured risks.
Instead, what has the potential to rock the international insurance industry in its boots during the coming decade are not natural catastrophes, but human behaviors and fundamental changes in attitudes and habits when it comes to everyday activities, such as driving to work. Projections from industry giants such as Allianz Group anticipate that the 20th century norm of people owning cars and buying motor insurance will be replaced by models of non-ownership of cars and abstinence from conventional motor insurance coverage, where digital natives increasingly come to constitute the main economically active strata in the United States and elsewhere, from some point in the next decade onward. Thought leaders in the insurance field often discuss how digitization, cyber risk, and all the unknowns of digital capitalism are approaching their industry with the speed and mass of a bullet train.
The local insurance industry has for the past few years been listening to the messages and predictions related to digitization and cyber risks and is aware of the changes that will be imposed on their businesses. As Lucien Letayf Jr., general manager of Lebanon-based independent regional insurer Libano-Suisse notes to Executive, the spread of digitization and new insurance business models are among the main challenges for his company in Lebanon and regionally. That’s in addition to local challenges like the absence of an advanced insurance law in Lebanon, the weak growth of insurance in the county under the prevailing economic conditions, and a lack of social awareness on the importance and value of insurance.
On top of these impending changes under the digital reincarnation of capitalism, international moods in the financial industry—and one must not forget that insurers are essential cogs in the machine of global financial markets—are this year beset by political concerns over trade wars and overdrawn self-interests by important players on nation-state levels. Global trade wars are not here yet, and it is difficult to predict, as with all human follies, what courses they might run. But regionally active insurers have already been impacted by localized disturbances and trade conflicts such as the altercation between Qatar and its Gulf neighbors. One does not need to highlight that economies, and with them insurance markets, in the Mashriq region have been impacted very significantly by the various conflicts that have shaken the region since 2011. If all that were not enough, markets are showing increasing impacts this year from the slowdown in economic growth in the Gulf region that has been caused by weakening global oil prices.
As a new market report on money and banking in the United Arab Emirates by the National Bank of Kuwait notes, the effects of the 2014 plunge in oil prices and the resultant slowing of growth in key sectors to the beginning of 2018 has translated into factors such as “disappointingly weak” credit conditions. “Since peaking at 11 percent year-on-year in mid-2015, credit growth has been in more or less consistent decline, standing close to multi-year lows at just 0.5 percent [year-on-year] in January 2018,” the report reads, illustrating some of the reasons why the Beirut-based regional specialized insurance company the Lebanese Credit Insurer (LCI) says it was compelled to shift focus away from some Gulf markets. “We have scaled down our activities in the Gulf region a bit, mainly in Saudi [Arabia] and UAE, because of the problems related to dropping oil prices that led to the stop of infrastructure projects and to crises of finance and banking in Dubai,” Karim Nasrallah, chairman and general manager of LCI, tells Executive.
Several reputed Lebanese insurance-sector companies with regional business in insurance and brokerage, like LCI, tell Executive that 2017 was a difficult year for them. Lebanese insurance companies often do not report on their performance abroad, however, regional markets are very important for many Lebanon-based insurers. As Libano-Suisse’s Letayf points out, the small, crowded national insurance market in Lebanon confronts providers with high costs and low prices, plus Lebanese insurers have long-standing skills which give them an advantage in regional markets.
When taking the regional and international challenges of insurers into account, the domestic market challenges in Lebanon—which are undeniable—appear very manageable and minor, albeit with one main negative characteristic: They are thoroughly entrenched. One might compare the problems of Lebanon’s insurance industry to an annoying allergy against pollen that resurfaces every spring with violent sneezes, or to some fungus that itches under the soles of your feet and reappears year after year. Worst all, the ailments of the Lebanese insurance industry appear perfectly curable, but nonetheless do not receive proper treatment.
One example is motor compulsory insurance, which has yet to be sorted out fully, even though it was mandated four years ago by the then-new Lebanese traffic law. Specifically, third-party liability (TPL) insurance against material damages was made mandatory for all motorists in this law, which was adopted in the summer of 2014 and purportedly started to see widespread enforcement by traffic authorities three years ago this month, in April 2015.
It was clear to key stakeholders in the Ministry of Economy and Trade, in its affiliated Insurance Control Commission (ICC), and in the insurance industry why the sector was not ready to deliver the full compulsory cover in 2015: Experiences with the compulsory TPL against bodily injury, which had been implemented a decade earlier, showed that it would be necessary to modernize motor insurance processes and improve methodologies to combat insurance fraud before the industry could ramp up to the legal mandate of providing traffic participants with better insurance safety. Implementation of this compulsory TPL against material damages was pushed into the future at the time—justifiably so in the eyes of many observers.
Nadine Habbal, the acting head of Lebanon’s ICC, writes in the recently published 2016 Insurance Sector Annual Report that “work on the motor third-party liability (MTPL) track is nearly accomplished” toward aligning the MTPL with international standards. “The key drivers in this context are the adequacy of the benefits paid to the victims of road accidents, the implementation of a centralized risk database, and a sound governance for the stipulations on minimum tariffs,” she writes, affirming the ICC’s determination to combat practices by some insurance industry players that in the past undermined full implementation of MTPL.
The impression these comments give is nonetheless that almost four years after the adoption of Lebanon’s traffic law, full implementation of TPL against material damages is still not achieved. This impression is strengthened by comments from Fateh Bekdache, head of the National Bureau of Compulsory Insurance and general manager of Arope, a large motor insurer in Lebanon, who explains to Executive that this document did not obtain all the required signatures from the full Council of Ministers, so the terms and conditions imposed on citizens were voided by the Constitutional Court.
According to Bekdache, there are some positive developments in new initiatives to make sure motor vehicles in Lebanon have verifiable road identities. New license plates with tamper-resistant features were introduced just before the beginning of 2018, and these plates are bound to significantly cut down on illicit practices such as swapping plates from vehicles that are presented to motor insurers to vehicles that have been in a collision in order to commit insurance fraud. “It is definitely a plus. We have been suffering for a long time from having the same plates on two or three cars, as there were cars with fake license plates in circulation. It is a very important move to now have measures to make license plates more secure. New regulations are always helpful, but the more important thing is the implementation of such measures by the security forces,” he tells Executive.
However, Bekdache says, a combined policy for the two branches of compulsory motor TPL, sought by motor insurers, has yet to come into existence and is “in the pipeline” under a project to develop the country’s compulsory motor TPL schemes in collaboration with the World Bank. “Until now, there is nothing that can be called compulsory insurance for material damages,” says Bekdache, adding, “We have been promised that we will very soon have the report from the World Bank in order to implement [compulsory motor TPL against material damages].”
Just as the traffic law and its associated compulsory motor insurance coverage appears to not be fully implemented yet, there are other areas where old grievances seem to linger, and sound insurance development objectives have yet to be implemented. For one, bancassurance—the practice of banks selling insurance—is in need of regulation. A reminder from Banque du Liban to commercial banks at the end of 2017 that bancassurance is not currently legal triggered a curious press release by the ICC highlighting the (uncontested) fact that “insurance companies owned fully or partially by banks form a fundamental pillar of the insurance sector.”
Similarly, problems pertaining to insurance sales by mutual insurance societies that operate outside of the overall regulatory framework do not appear to have been resolved, despite many years of efforts from the Association of Insurance Companies in Lebanon, or ACAL. There are numerous further problems about Lebanese insurance practices, the most crucial of which are the failure to adopt a modern and adequate insurance law (a draft law has been in the pipeline of endless delays for almost 15 years), and the need to foster consolidation in the sector through mergers and acquisitions. Wishes voiced by insurance leaders to see the latter, overdue process accelerated with the help of soft loans and incentives from the Lebanese central bank may have been delivered by mistake to the Easter Bunny instead of Santa Claus.
With all that is not advancing, one cannot but note that there is a certain degree of exasperation in circles of insurance advocates who are desperate to see the insurance industry live up to its potential in Lebanon. However, this is not to imply that the insurance industry in this country is in a bad state when compared with the economy, a fact that has been stressed by local and foreign analysts in several reports over the recent past. BLOM Bank titled a brief on the industry last year “Robust Lebanese Insurance Sector Despite Economic and Political Challenges,” and specialized international insurance ratings agency A.M. Best last month tooted the same horn by titling a research note “Lebanese Insurers Continue To Demonstrate Resilience, Despite Challenging Operating Environment.”
The same is true for some (but in all likelihood not all) insurance companies in Lebanon. Outliers among the more than 50 sector companies innovate, perform, and deliver impressive performances, if one makes allowances for the small size of many of these companies. For example, a vocal company in the domestic market is Securité Assurance, which boasted in a recent self-description of its business of its exceptional growth. “During the first quarter of 2017, the company achieved more growth than in all of 2016,” it claimed in a profile document sent to Executive, adding that its growth in 2016 was more than 10 times industry average, at 30 percent. Securité attributed its ascent to the position of fastest growing insurance company in Lebanon to having incentivized and educated its staff, deployed new apps, stepped up its branding and, as assistant general manager Anthony Khawam tells Executive by phone, to “serving our clients in superior ways.”
Farid Chedid, chairman and general manager of the Chedid insurance group, tells Executive that a potent local insurance industry would have been a fantastic partner to the country’s current infrastructure development efforts. “The insurance industry in Lebanon is very resilient, and the problems that exist in sectors like motor and health are manageable problems. It is a very good industry,” he affirms, but then cautions that this industry is in need of “help, assistance, and support from the government.”
He explains that an insurance sector, with its need for assets with long-term duration, makes the perfect investor in infrastructure projects, and that infrastructure projects, in turn, are ideal for insurers to invest in (for more on insurance in relation to the Capital Investment Plan of Lebanon, see page 36). The problem, in his view, is that the development of insurance in Lebanon until now was subject to total neglect from the state. “If the [Lebanese government] assists the insurance companies in growing, the insurance companies will be able to invest long-term and will be able to be a major player in the economy of the country. But they are totally neglected, which is a pity,” he says.
As the Lebanese Minister of Economy and Trade, Raed Khoury, concluded in his introduction to the ICC Annual Insurance Sector report for 2016, “Profitable sustained growth in the insurance sector needs to be achieved with an objective to narrow the gap [with the banking industry] and establish a more balanced structure in the financial services sector.” Given the lack of political support and subdued growth record of the insurance industry, which would need to take 10 steps of growth for every single step of advancement by the banking industry, what remains to be added is only one question: How?