I t seems Nasser Saidi means business after all. Back in May 1999,
when the new insurance law was finally passed in parliament,
many wondered if it would be enforced. Meeting the new minimum
capital requirement of $1 .5 million, up from $200,000, and
depositing $3.3 million in order to sell premiums for all lines of insurance
wouldn’t be easy. But then again that was the intention all along.
By demanding a high capital, the ministry of trade and economy
would force financially weaker firms to merge to meet the requirements.
Otherwise, they would have to shut down and leave the sector
to those with the financial backbone to remain solvent.
Since then a wave of reform has washed through the sector, with
the number of companies unable to stay afloat gradually rising.
Insurers that didn’t already have these funds in place were given
until last June to come up with the first half of the difference needed
in order to meet the new requirements and June 2001 to come
up with the remainder. But even the first installment proved too
much for many. When the law was first issued, many expected that
the number of insurers would be reduced by at least a third. Now
that prediction is being realized.
When EXECUTIVE went to print – some firms are still under study –
29 insurers were involved in the initial shakeout. Of these, 13 had
Their licenses revoked, five merged with other firms, three transferred
their portfolios to other companies, two stopped operating, while six
more requested that their own licenses be revoked. Still others are in
the process of merging and several have been referred to the public prosecutor’s
office for not complying with current laws.
But is the new insurance law a good one? “I consider this law better
than the old one,” says Abraham Matossian, chairman of AlMashrek
and the Lebanese Insurance Companies’ Association
(ACAL). “But I believe we can do better.” Strict requirements on solvency
are essential. More than once we’ve seen companies that fell in
the maw of insolvency, like Income, Mesir, and Phoenix, and left trusting
clients stranded. The number of insurers is also too high for
Lebanon’s small market-around 75 for a population of3.5 million.
With a population of 60 million, Egypt has about ten insurance firm
Nonetheless, the stricter regulations are considered extreme by
some. “If a company has a good solvency ratio and is adequately supported
by credible reinsurers, the blocked capital wouldn’t be necessary,”
says Zareh Basmadjian, chairman of Oriental Insurance, whose
portfolio of $ l.2 million in 1999 was transferred to Al-Mashrek.
And he’s not alone. Chehade Raad, chairman of Kafra Insurance and
Reinsurance, believes that problems arise not from a comparatively
Low capital but from not reinsuring properly. According to Matossian,
“If an insurer is adequately reinsured, he will not need to liquidate his
assets. This happens with large companies in Europe, which were forced
to liquidate stock they’d been holding for a century to meet liabilities.
The risk in Lebanon is much less if things are done properly.”
Critics of the new law also suggest that capital requirements
should actually be based on the size of a company’s portfolio with
adjustments made as business grows. Basmadjian believes a capital
of $1.5 million might be necessary for insurers with large portfolios,
but not for small companies. “Each firm should have been
studied and a raise in their capital should have been required
based on its solvency and the size of its portfolios,” he says.
If a company could comply with the required capital, does it
make more sense to do so or to pull out? Companies with several
shareholders might consider injecting additional funds or bringing
in new shareholders as a good idea. Considering the relatively
small amount each shareholder has invested and how profits are divided,
boosting the capital may be the easiest and best option. Middle
East Assurance and Reinsurance Co (MEARCO), which had a capital
of $400,000, has done just that. With over a dozen shareholders,
many of them brokers, the company found it more convenient to comply
with the law’s requirements. “We paid up $550,000, the first half
on the due date, and will cover the rest by June 200 I,” says Rached
Rached, MEARCO’s chairman.
But what of those who have a majority stake in their own company,
in the case of Basmadjian 75%?
“The $1.5 million in capital I’m
required to put up could be better
invested in other ventures,” he
says. With returns of just 12% a
year, he would make $135,000:
“I’m not making that much in the
insurance business,” he says. All
this without yet considering the
necessary deposits, a total of $3 .3
million to operate in all lines of
insurance. For an individual, letting
that kind of money sit idle
isn’t too appealing.
But in the end, the insurance
sector is moving toward greater
discipline – even if some are
being dragged, kicking and
screaming. The law itself is an
improvement, providing more
security for the consumer and
even for the insurer. It’s true
many of the smaller firms are
being hit hard, but adhering to a
strict regulation policy is the
ministry’s only recourse to keep
insurers in line.
