Lebanese insurance companies these days marvel that theyhave fared better than feared in the past 18 months, butknow that nearly a year of economic paralysis has not passedthem by. The woes range from corporate clients that reduceor renegotiate their policies to individuals who stop payingtheir premiums because they are leaving the country. Thisbrain drain of the best talent is also affecting insurancecompanies directly, putting strain on their human resources.
Sector results for 2006 were respectable because the firsthalf of last year was a bumper period and the optimistictime immediately after Israel’s summer war against Lebanonalso brought good business for insurers. With the recentseries of bomb attacks against commercial areas aroundBeirut, demand for war and terrorism covers has kept thephones ringing — although many companies looking for theprotection quickly drop their inquiries as soon as the firstshock from a bomb wears off and, more importantly, when thehigh costs for those special covers sink in.
Downsizing insurance covers
Jamil Harb, secretary general of the Lebanese insuranceassociation ACAL told Executive the insurance industry issuffering the same stagnation in the economy in general hasseen since the 34 days of war between Israel and Hezbollahthat began last July 12.
“In figures, there’s been zero growth for the sectorstarting in the middle or end of 2006 until now,” Harb said.“Growth is zero as it is for the whole economy. The wholesituation is blocking the economy. You have no newbusiness.”
The downsizing of insurance covers affects retail andsmall business policies such as clients switching to alesser care class in their hospitalization plan or trying tocut costs on motor insurance by going with third-partyliability insurance instead of all-risk, said FatehBekdache, general manager of Arope Insurance.
“The problem is the lack of confidence. People don’t see theend of the tunnel and have put everything on hold until theend of the summer,” he told Executive.
According to Bekdache all major trade and industrialcompanies have been shopping for terrorism and war coversbut the rates, which are dictated to at least 90% byreinsurance companies abroad, are so steep that only a verylimited number of companies sign up for policies, oftencoming with restrictions that need careful examination ontop of requirements to pay upfront for a substantial period,such as a full year.
Insurance experts said they had not heard of any majorclaims related to damages from the bomb blasts in May andJune. Five of the six blasts that have rocked Beirut and thenearby towns of Aley and Zouk Mosbeh since May 20 mainlydamaged businesses. If the cost of rebuilding after a blastis too high for already cash-strapped shop owners,businesses might be forced to close and cancel theirpolicies, said Ibrahim Muhanna, managing director ofinsurance consulting and ratings firm or Muhanna & Co.
Despite the admitted setbacks the industry will face inlight of the economic stagnation, Bekdache called it tooearly to forecast results for 2007. Much will depend on thesecond half of the year, he said, pointing to the trackrecord of insurance companies who have kept working throughthe thick and thin of last year’s war. Other insurancemanagers agreed, telling Executive that sector companieswill remain profitable and stressing the readiness of theLebanese to return to an optimistic mood on short notice.
The Lebanese insurance sector is something of an anomalyin the Arab world. The small Mediterranean nation is home to55 insurance companies, or nearly 14 for every one millionpeople. That is 10 more per million than in Jordan.
The industry in Lebanon is rife with minimally capitalizedsmall companies controlling slivers of the market, Muhannaexplained. “You have almost 30 companies (out of 55) thathave less than 10 percent of the premiums in the market,” hesaid.
According to data researched by his firm, the insurers inLebanon’s fragmented market are spending more onadministrative costs and client acquisition than otherinsurance companies in the Arab world. The expense topremium ratio for Lebanese insurance companies was 48% in2004 and 47% in 2005, compared to the 32 and 31% Arab marketaverages for the two years. Lebanese insurance companiesalso pay much higher commissions, 19% of premiums in 2004and 21% in 2005. The Arab market average was 6% in 2004 and8% in 2005.
The sector is also the least transparent in the Arabworld, Muhanna argued, pointing to insufficient disclosurerequirements. A very large share of local companies whichthe ratings firm approached with information requests overseveral years did not provide data that met the firm’srequirements for a rating, resulting in the fact that only18% of the 55 companies are rated, compared with 90% in bothJordan and the United Arab Emirates.
ACAL — which has long made it its target to improve theinsurance awareness of Lebanese consumers and lift thesector’s image to new heights — is alert to enter 2007 withnew determination to make the sector more transparent andenhance corporate governance.
In a practical measure of promoting corporate governance,ACAL in May organized a workshop where representatives ofthe Lebanese Transparency Association and the InternationalFinance Corporation discussed the Lebanese Code of CorporateGovernance and the benefits of more transparent businessleadership.
The workshop’s presentations showed that best practices arelinked to structural issues such as proper registration ofshares, board composition, and auditing practices which allcan have positive implications for sourcing funds andfinding investors. The legally driven arguments forcorporate governance were backed by practical examples. “Anycompany is lucky if it goes through the corporate governanceexercise before it is obliged to do so by the authorities,”the general manager of a regional insurance company toldindustry colleagues, adding that improvements in corporategovernance enabled the head office to expose a case ofinternal fraud at a branch office with at least $5 millionin damage to the company.
ACAL takes action
Lebanon’s insurance association has ambitious plans inmore than one direction, which it hopes will strengthen thesector and improve its internal communication andinteraction with the country’s public. Steps in the newdirection were agreed upon last year and included a revisionof ACAL bylaws to establish the position of secretarygeneral, enhance the work of technical committees, andstreamline election procedures.
To ease the collaboration of insurance stakeholders, theassociation is working on projects for arbitrationprocedures and on hammering out a voluntary code of conduct,in addition to seeking an increasingly proactive role inrepresenting insurance interests to ministries and theInsurance Control Commission. For a beefier interaction withthe public, ACAL this summer revamped its website andstarted publishing regular annual reports, flanked by anewsletter.
Although insurance performance in Lebanon made decentprogress in the past decade, aided by a gradual overhaul andrenewal of the relevant legislation, greater progress wasblocked by fragmented interests and extraneous factors.Insurance industry leaders say they don’t want to blamecircumstances and are aware that more can be done.
“We have a clear view on what our sector should provide toLebanon,” ACAL president Elie Nasnas told Executive. Thesector, which has pioneered so many insurance products andservices in the Middle East, wants to initiate solutions athome and, in a spirit of realistic targets, re-establishitself as insurance hub if not for the whole region then atleast for the Levant.