Deal or no deal

Insurance policies post-Beirut explosion

Photo credit: Greg Demarque

The Beirut port explosion on August 4, 2020 resulted in the loss of more than 200 lives, countless wounded, and also massive insured losses now estimated to range between $1 billion and $1.5 billion by the website ReinsuranceNe.ws. While some of the damages have been repaid, according to the specifics of insurance policies, others have not, awaiting for an official report pertaining to the causes of the Beirut port explosion.

The damages to insured properties, in principle, would be subject to reimbursement by private insurance companies, in accordance with the insurance policies signed between property owners and the said companies. Though from legal and contractual aspects, this would appear to be a straightforward matter, the reality is far from being so, in part due to the unclear reasons behind the blast and the economic situation in Lebanon which has resulted in policies having to be readjusted to take into account the difference between “real” dollars and dollars held in banks and subject to capital controls.

Lollars and dollars

The first issue that has been at the forefront of the reimbursement of policies has been that of the payment of the insurance policy in local dollars or “real” dollars. As the Lebanese dollar (dollars held in bank accounts before the beginning of the financial crisis and capital controls) has lost in value in comparison to real dollars (the current discount as of February 24, 2020, being 30 percent for real dollars to 100 “lollars”) due to informal capital controls and a lack of liquidity, the underlying asset being insured could no longer be paid in local dollars, should the insured party be paid in full in the occurrence of damages. A good valued at $20,000 pre-crisis, should it need to be replaced, would require either the same amount in cash or a cheque with a higher value in lollars to be discounted for cash. This has resulted, over the past year, in insurance policies being readjusted for their fair value. In addition, the Lebanese Association of Actuaries in a report dated February 16, 2021, recommended “a review of the Pricing approach, including matching the premium with the allocation of costs by currency,” and the introduction of an Inflation Index to properly reflect the value of assets and costs of claims.

According to Elie Hanna, former president of the Lebanese Insurance Brokers Syndicate, if the insured have readjusted the insured sums in their insurance policies to account for the real value of the underlying asset, and if the policy covers the cause of the damage, then they are repaid, in full, by the insurance company. According to Hanna, this follows law and logic, “but since it is the first time that we had different exchange rates, judges may rule otherwise.” This payment can occur in cheques taking into account the discount of dollars to lollars. In addition, according to Elie Torbey, president of the Association of Insurance Companies of Lebanon (ACAL) in a TV interview dated February 12th 2021, insurance companies have sent experts on the ground, in the aftermath of the blast, to evaluate the damages. According to him, 50 percent of reported damages have resulted in experts being set to investigate, and insurance evaluation will be conducted in real dollars in order to account for reconstruction fees.

In conclusion, the value of underlying assets has had to be readjusted to account for the presence in Lebanon of a non-transferable currency being sold on the black market at a discount for real dollars. Insurance companies have managed to readjust these policies for many of their clients. For clients who did not choose to renegotiate their policies and accept paying elevated premiums, payments are to be made in local dollars. The difficulty with regards to many non-adjustments is due to the higher cost of living: with a depreciation of more than 85 percent of the Lebanese pound to the dollar since the beginning of the crisis, many Lebanese simply cannot afford to readjust their insurance policies. In addition to the need to adjust for the massively depreciated lira, the cost environment of insurance has internationally been hardening, which translates into upward pressure on insurance premiums in most markets.

Vehicle damages and other property damages are covered under different policy terms. Most insured car damages have been paid back, according to Hanna. “Others have paid on a compromise basis,” he says, when adjustments of the sums insured have not taken place, and when the policies do not cover all causes (especially war and terrorism) taking into account the difficulties in renegotiating policies in a time of scarcity. With property insurance, on the other hand, settlements have occurred in small amounts but not large ones, as insurance and reinsurance companies are still waiting for an official report.

Reinsurance and official reports

A thorny issue that is blamed for holding up the settling of larger property insurance claims from the port explosion is that of dealing with international reinsurance companies. According to Torbey, in the same TV interview, most insurance companies are reinsured with regards to the Beirut damages, with international reinsurance companies, and with reinsurance companies covering over 95 percent of the insured damages. The main concern with regards to reinsurance companies is the need for an official report as to the causes of the Beirut port explosion, as the report would then clarify whether or not such cause is included in the reinsurance policy or not, and therefore would result in repayments by said reinsurance companies to the local insurance companies.

There are two basic types of reinsurance arrangements: facultative reinsurance and treaty reinsurance. Facultative reinsurance is designed to cover single risks or defined packages of risks, whereas treaty reinsurance covers a ceding company’s entire book of business, for example a primary insurer’s homeowners’ insurance book. Facultative reinsurance is typically used for high-value or hazardous risks because the policies can be tailored to specific circumstances.

With regards to repayments, according to Hanna, it would all depend on the insurance policies, terms and conditions, and modes of payment: some reinsurance companies have negotiated with local insurance companies a certain amount of reimbursements, others are still waiting for an official report, while some have partly repaid according to premiums and on a compromise basis. In addition, self-imposed capital controls by banks since the end of 2019 have resulted in local insurance companies not being able to transfer money to their reinsurers. For those companies who already made those transfers to their reinsurers, the latter have proposed to deduct these amounts from their repayments due to their local clients instead of cancelling the reimbursement policies, taking into account their long-term relationships with the local counterparties.

An official report is still to be published, to allow for reimbursement from international reinsurers. It is still undetermined whether the Beirut port explosion resulted from an act of war, terrorism, negligence on the part of port and/or governmental authorities, or a combination of these factors. Some insurance policies mention these specific acts as causes for reimbursement, whereas other policies exclude them. The responsible reinsurance companies would therefore ask for an official report that would follow a judicial investigation to determine the causes of the blast. To date, no official reason was given with regards to the causes of the Beirut port explosion, therefore, many reinsurance payments are still in limbo.

Business interruption

Another side of the damages is that of business interruption, which is typical in case of large hotels or other businesses relying on a steady supply of clients. Distinct from property insurance, business interruption would include coverage over a certain amount of time not for the damage caused to the property per se but for the loss of clients resulting from the damage. In the case of a hotel, for example, such insurance would cover part of the losses stemming from the lack of clients who would have otherwise spent time at the hotel. 

Again, in this case the devil is in the details: each insurance policy would have to be examined. Unlike property damages that require official reports, business interruption insurance is more straightforward and therefore most businesses that have signed up for such an insurance will manage to be repaid. The amounts will depend on whether they have readjusted their policy for the depreciation of the Lebanese dollar, and whether they can in some cases negotiate the amounts due to some reinsurance companies not having repaid full amounts due in case of a lack of transfer from their Lebanese clients.

According to the latest report of the Lebanese Insurance Control Commission, the amount of outstanding claims regarding the Beirut port explosion reaches 1.5 trillion Lebanese pounds, with estimated insurance losses at 1.6 trillion Lebanese pounds. Overall, the damages of the blast have resulted in partial payments of 74 billion Lebanese pounds, with some reinsurance companies still waiting for the official cause of the blast in order to assess whether or not the policies would cover the cause of the explosion. Nevertheless, should this occur, most of the damages will not result in payments, as Lebanon does not mandate insurance on housing, unlike other countries. According to Torbey, most houses are not insured, and only companies and owners having taken property loans have been fully insured, while property owners are mostly not insured. Therefore, should repayments occur fully, the Beirut port blast will most likely result in most Beirut homeowners having to pay for the damages themselves.

In conclusion, insurance after the blast will be different. International reinsurance companies will become wary, deeming that Lebanese insurance companies should have been aware of the risks, and therefore reinsurance premiums will probably rise and, in turn, impact the price of insurance premiums in Lebanon. Insurance companies in Lebanon are regulated financial companies and therefore cannot exchange money on the black market and are forced to function within the banking sector for transfers; they are therefore heavily impacted with regards to paying reinsurance premiums abroad (they are not allowed to discount cheques in Lebanese dollars for real transferable dollars). Insurance, after the blast, might become a luxury when it is in fact and first of all a necessity.

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