Insurance companies in Lebanon may have a future filled with potential but their presence is also stacked with risk. Although sector growth in 2011 to date has not been bad at all — data for the second quarter imply 17 percent expansion of premiums in the first half of the year (see story on sector statistics page 56) — growth in key segments of domestic insurance demand raises questions and interaction with global partners is also set for some challenging times.
In an interview with Executive, Assaad Merza, the president of the Association of Insurance Companies in Lebanon and chairman of Capital Insurance, said that although the sector shows good numbers in terms of the underwritten premiums that represent the industry’s turnover, “all insurance companies do not write large profits.” He added that a majority of people in the population tend to buy only medical insurance because of its importance for their families and themselves but do not have, or can not afford to buy, other needed policies.
As Merza further pointed out, insurance companies have been impacted this year by slowing sales of homes and cars. As with personal loans in general, lenders require that buyers of homes or cars back up the loans they take with a life insurance policy that will cover outstanding payments in case of the buyer’s death. This tying of insurance to provision of credit has generated profitable business for insurance companies but providers, especially firms linked to banks by ownership, feel it when the loan markets slow.
“Insurers and banks definitely go alongside [one another] and all the retail lending products have insurance embedded in them. So it is normal that insurance will be affected if the economy slows down and this affects lending, especially in retail,” commented Fateh Bekdache, general manager of Arope Insurance.
BLOM Bank-owned Arope, whose continuous growth in the past few years has propelled the firm into the top tier of Lebanese insurance companies in terms of turnover and profits, saw its premiums rise in 2011 but expects 2012 to be a more challenging year, said Bekdache. Another bank-owned insurer, Byblos Bank’s Adir, has enjoyed premium developments this year in line with those of the same period in 2010, according to remarks General Manager Jean Hleiss made to Executive on the sidelines of an insurance conference in Beirut last month.
While medical insurance has led to growth in premiums in 2011, the increases were not from new business, said Edward Traboulsi, general manager of Lebanese insurance firm Assurex: “Looking at the statistics for the first two quarters we have seen market growth mainly coming from medical insurance. The main driver behind that is the increase in prices or premiums which have to follow the increases in medical cost.”
Real, that is inflation-adjusted, growth rates will be hard to achieve for 2011, agreed Elie Nasnas, general manager of AXA Middle East. “I think the sector is improving but growth this year will be less than two digits and the driver will be inflation much more than new business or increases in the number of insured.” According to Nasnas, insurance activity in the region is generally following trends in economic development and the concept that the sector itself would be sending impulses for growth into the wider economy is currently a dream.
“Unfortunately, the insurance sector is not yet driving the economy, definitely not,” he said.
Insurance activity in Lebanon is very sensitive to fluctuations in the economy as the reach of mandatory covers for companies and individuals is small. Even the compulsory third-party liability policies for motor vehicles are still limited to covering bodily harm instead of material damages and a mandatory insurance for buildings, the so-called decennial insurance introduced several years ago, has so far not been implemented because the legal requirement mandated an earthquake cover and insurance companies refuse to cover such acts, as they cannot obtain reinsurance.
Across the entire Middle East and North Africa (MENA), risk mitigation levels in society are tied to the presence or absence of compulsory insurance schemes. These schemes, plus the prevalence of life insurance as savings and wealth-building instruments, constitute a large portion of insurance spending in developed economies, which in 2010 were reported at $3,724 per capita in North America (United States of America and Canada) and up to $6,633 in Western Europe. In addition to macroeconomic factors, the absence of compulsory lines contributes significantly to the far lower degree of insurance spending in emerging economies, which for 2010 was preliminarily calculated at $110 per capita by a report for global reinsurance firm Swiss Re.
In comparison to developed economies, MENA populations have a high tolerance for personal risks and relatively high reliance on familial support networks. The introduction of new mandatory insurances would be a key requirement to facilitate premium growth in any country of the MENA region.
“I expect an overall increase in premiums of between 12 and 17 percent in the Arab world for 2011. For 2012 I have some doubts,” said Fady Shammas, chief executive of Arabia Insurance. He added that, “Unless there are compulsory insurances that are agreed upon and legislated, I don’t expect major growth. The more compulsory, the more premiums. But as long as the people of the Arab world are poor and disposable incomes do not exist, many governments will be very reluctant to come up with laws of compulsory insurance, very reluctant. I don’t expect any introduction of compulsory insurance in 2012, because the governments are afraid of the people.”
The region’s upheavals thus figure indirectly in lowering the business outlook for insurance companies, at least in the short-to-medium term. As Lebanese insurance firms have established subsidiaries in countries affected by the Arab revolutions, their businesses in these countries have also seen a direct downturn. According to Arope’s Bekdache, 2010 was a very good year for the company’s regional subsidiaries in Egypt and Syria but this year is not. The manager did not disclose, however, how sharp the decline in each of these two countries was in the first nine months of 2011.
In Bekdache’s view, however, insurance expansion in under-served regional markets is not going to be derailed. Unrest in single countries will delay the implementation of expansion projects but insurers who ventured into these markets did so with a long-term perspective and are confident that the market growth will restart after the societal changes.
That sentiment echoes with Assurex, the first Lebanese company to acquire a license to operate in the Iraqi market. According to its General Manager Traboulsi, there is no doubt that the rationale for expansion remains sound. “We need to look at other markets in order to grow. We have the know-how and the capabilities and there is business out there, so it is very important for us to grow our business to look outside the borders. Iraq was a country where we thought there is potential for us,” he said, adding that although it is very challenging to write new business in Iraq, the country offers a rare combination of an established insurance tradition and while being a “virgin market”.
One reason Traboulsi cited for the pressure on Lebanese insurers to venture outside is the intense competition in the crowded domestic market. “The pie is just not growing in Lebanon. We are competing against ourselves to grow our market share or increase our volume of business,” he said.
The same sentiment was voiced by Max Zaccar, chairman of Commercial Insurance and one of the sector’s longest-standing leaders of a family-owned insurer. Aggressive competition over the very few profitable lines in general insurance, including marine hull and cargo business, has intensified further in recent years, he told Executive.
The problem of competition is endemic even at a regional level and fragmentations of the industry play a large role in lowering the strength of sector companies, said Farid Chedid, chairman of Chedid Re, one of the largest brokers in reinsurance services in MENA.
The most problematic side of the intense competition among Arab insurance companies is that, “unfortunately most of the competition is based on price,” Chedid said.
The tightness of insurers’ profit margins is an issue that influences negotiations between them and the international reinsurance companies to whom they hand portions of risk to limit their exposure to manageable levels. Due to pressures that global reinsurers face from high catastrophe losses, (according to Swiss Re, the first half in 2011 was the second worst year in reinsurance history with a loss of $70 billion) and from difficult financial markets that impair their investment incomes, regional insurers are now caught in a quagmire. “On the one hand we have reinsurers who are trying to raise prices and improve terms and conditions [to their advantage] and on the other hand insurance companies are in severe competition with one another and are trying to pull prices down. This makes things very difficult because each group is looking at the business from a very different angle,” Chedid added.
He believes that the Middle East’s insurers may be forced to rethink their strategies. “Our region cannot live without reinsurance. Reinsurance cession is one of the highest in the world. Why is there so much reliance on reinsurance? Because insurance companies are too many — over 500 companies in MENA — and because there are so many, they do not have the capacities for higher retention of risk.”
This tight squeeze on the industry can, Chedid argues, help make the sector more efficient. “The smaller insurance companies that rely heavily on reinsurance will definitely be left behind if they don’t increase their capital bases and upgrade their underwriting and risk management expertise. We are moving toward a trend of more consolidation in the industry, more expertise in the industry, more capital in the industry and therefore more retention of risks in the region.”
Negotiation of contract renewals with reinsurance companies is one strong concern of sector companies, but an even larger concern is the development of investment portfolios and investment incomes, Arabia’s Shammas said. Between the impact on underwriting from reinsurance tightening and the impact on investments, the greater impact is “definitely on investments. If your results are good and you are profitable, the reinsurer will not put pressure on you when terms for renewals are negotiated — whereas your investments are at risk at any point in time.” He added that Arab insurance companies are impacted by the performance of their investments in European bonds and equities, and are furthermore exposed to the effects of turbulent global conditions on countries in the Middle East.
The region’s insurers will not escape the impact of the latest financial woes in developed economies, said Ibrahim Muhanna, a Lebanese insurance consultant. “The insurance industry in the Arab world always has a delayed effect from financial developments in global markets. When in 2008 everybody said we were immune, I told them we are going to feel it and they felt it a year later.”
Even insurers without direct exposure to the European crisis will feel an impact because they have investors who are exposed, albeit with a delay of a year or two, Muhanna told Executive. “If one of their big policy holders, for example, is exposed, this policy holder’s business will go down in the second year and his premiums will go down and the insurer’s business will go down. It has a delayed effect. It takes a good two years to feel it in the Arab world. The results reported in 2011 are not as bad as anticipated but in 2012 and 2013 we will definitely feel the results.”
A final duo of items weighing on the balance sheet of insurers in the Middle East are the issues of regulation and cooperation. Fairly advanced regulations have been introduced in some countries but there are major differences, and in Lebanon the adoption of a new insurance law has yet to happen (see interview with the Lebanese insurance commissioner on page 64).
Mention of regulatory intrusion into their established ways still has the ability to raise the hackles of insurance managers and the implementation of regional insurance regulation remains something of an illusion, although it would facilitate important progress in regional sector growth in the views of many region-wide actors such as Chedid.
“Today, each country has its own regulation and different regulatory requirements beginning from very basic things [such as] policy wordings, risk management, capital base. Some countries are moving towards risk-based capital, others are using minimum capital with guarantees,” he said. “We need to move to more homogeneity in the region by regulators so that the market can develop and the insurance companies can develop on regional basis and therefore grow. Then they will be able to retain more risks in the market and be able to afford better underwriting expertise and better IT systems. No country in the region today can on its own provide enough volume and enough business to create economies of scale. As a regional company, you can create economies of scale and you are able to compete with international giants,” he said.
As major stakeholders in the Lebanese insurance industry emphasized to Executive, the country’s insurance sector can only blossom with regional cooperation. This, however, means that issues that reside just below the surface in regional dialogue — including misgivings, jealousies, territorial thinking and distrust of the other stakeholders’ intentions — need to be mastered by companies, brokers, regulators and all practitioners of insurance.
A conference bringing together insurance regulators and insurance companies at the end of October in Beirut was the first initiative to provide an equal and open forum for all stakeholders. Although Sharia-compliant insurance, or Takaful, has no significant representation in Lebanon, the forum even drew the attention of an insurance regulator from Senegal who attended with the specific aim of meeting Takaful companies.
Although, or perhaps even because, discussions at the forum had their moments of clearly opposing views, the event was hailed by participants as a great step forward in improving relationships among the region’s insurance stakeholders.