Lost in the fog

by Thomas Schellen

Lost in the fog

Lebanese insurers seek to ward off economic pressures and evil opinion spells

The best thing to say about the performance of insurance companies in the year to date is that they are slowly reappearing from what seemed an organizational stupor that during the past year enveloped the sector up to the level of the regulator, the Insurance Control Commission (ICC). In the first quarter of this year, a few insurance companies have become newly active in terms of communicating with their market, and the insurance association has begun strategizing on how to re-assert the sector’s public perception, which had taken several beatings during the past year. After a period of providing information very haltingly, the ICC as the presently sole source of quotable data on Lebanese insurers, has released its quarterly report on sector results in Q4 of 2020 on March 15.

Such accumulation of vital signs can be observed from a financial sector that was impacted very badly by the liquidity crunch and economic implosion which Lebanon underwent in 2019/20 – certainly as badly as banking and financial intermediaries but with almost no attention given to insurance in the past year’s various rescue plan drafts for the nation and restructuring debates about the banking sector.

Causes for concern

But despite the sector’s slowly returning vitality symptoms noted above, at least equally many signals in the first few months of this year have been screaming out to the contrary – arguing that insurers are still deep in the financial woods, life-threateningly entangled in the brambles of the economic crisis. The numbers in the ICC’s quarterly report are neither clear nor comforting, several insurance providers and intermediaries are not returning phone calls or responding to interview requests, and those who have lately agreed to talk, offer more by way of hope and personal determination to improve the state of insurance in 2021 than they can point to in terms of positive economic indicators and effective support by political or monetary authorities.  

In the ICC quarterly report for the fourth quarter of last year, gross premiums written in 2020 for the fourth quarter and for the year to date (ytd) are respectively stated as 570,421 million Lebanese pounds and 2,357,090 million Lebanese pounds. The most important business lines identified in the report in terms of premiums generation were medical, life, and motor, followed by property and casualty at some distance.

In terms of claims, paid benefits amounted to 1,613,509 million Lebanese pounds for the ytd and 438,534 million Lebanese pounds for the fourth quarter. To this the annual total, property and casualty claims contributed little over 9 percent.

In comparison to these results, gross premiums written in 2019 according to the  previous fourth quarter report show the following: Gross premiums written in Q4, 2019 were 530,524 million Lebanese pounds, with life insurance contributing slightly under one third to this total, followed by health, motor, and property which each accounted for between approximately 17 and 30 percent of the insurance market.

In the preliminary end of year tally (the ICC annual report for 2019 has yet to be published), total gross premiums were stated as 2,428,967 million Lebanese pounds. In this total, the breakdown of market shares by insurance lines for the full year was similar to the fourth-quarter results, but differed in the fact that medical insurance came out on top for the full year as the largest business line by premiums.

In terms of gross claims, life payouts in 2019 accounted for close to 40 percent of the total 413,450 million Lebanese pounds that were settled. Collated over all four quarters, the total was 1,580,971 million Lebanese pounds in gross claims settled, with the medical settlements accounting for the highest share of 40 percent, followed by life with 32 percent. Like in 2020, property and casualty claims have contributed about 9 percent to the year’s settled claims in 2019.

Nominal net investment income of nearly 300 million Lebanese pounds for the insurance sector by end of 2019 vanished entirely in 2020. The ICC report showed a loss of 89 million Lebanese pounds for the year in net investment income, notwithstanding the microscopically encouraging note that the net investment income in the fourth quarter was positive at 82 million Lebanese pounds.  

In other observations, the ratio of paid claims to gross written premiums in 2020, while little changed for the industry at 68 percent (2019: 67 percent), revealed indications of claims exceeding premiums which were more pronounced on company level than in the previous year. Companies Allianz SNA, United, Adir, Bancassurance, AIG, and LCI showed paid-claims-to-gross-written-premiums ratios above 100 percent after four quarters. LCI, the sole credit insurance provider based in Lebanon, witnessed ratios of more than 200 percent for both the fourth quarter and the full year of 2020. 

A darker picture yet

After several years where gross premiums growth was in the single digits in nominal terms but often was seen by insurance sector insiders and analysts as insufficient to maintain sector profitability levels, the reported trend of increasing claims and decreasing premiums fails to impress and does not look hopeful, even in Lebanese pound figures. When adding a mental note of the Lebanese pound destruction in 2020 and 2021, the incomplete data picture darkens by several orders of magnitude.

Discussing the troubled 2020 and uncertain 2021, Fateh Bekdache, general manager of Arope Insurance, does not mince his words in saying that the last year was “damn difficult.” Going through the list of problems and challenges that have been afoot in 2020 and still are pressing on the sector, he first mentions that insurers took large provisions towards the settlement of claims, which was the necessity resulting from the magnitude of the August 4 Beirut port explosion. Bekdache next names as problems the lollar/dollar and Lebanese pound currency conundrum and the issue of having to settle claims in the same currency and same category (cash or check) in which a policy premium had been paid; the painful cost inflation of imports that is reflected by the increase in costs related to medical covers; and challenges on how to pay reinsurers. “So far we don’t have answers to most of those issues,” he tells Executive. 

Instead of sector participants getting help in solving the issues, blame games and accusations abounded when the insurance sector’s role was brought to the table, says Jamil Harb, the secretary general of the Association des Compagnies d’Assurance au Liban (ACAL). Counterproductively, the industry has been under outright mental assault from many sides, he tells Executive: “We are being attacked by the public, by the market, and by the press. But we are doing our best to provide the service of insurance.”

Bekdache likewise sighs that insurance companies are attacked all the time on all domestic fronts, with nobody in a public position and power to support the sector apparently taking insurers seriously – despite the proven need for insurance protection in days of escalating risks. “I don’t know what people really want,” he comments.

The historic catastrophe event of the past year was the Beirut Port explosion. It had obvious implications for life, medical, motor, catastrophe, and property covers held by commercial and private insurance clients. The problems of settlement delays and yet unsolved liability and negligence issues that are affecting settlement of catastrophe and property insurance claims more than seven months after August 4 have splattered the most visible stain on the sector’s reputation and credibility (see our story Deal or no deal on the complex issue). It left a dark mark on insurance in the local public perception but also was seen as a stain by reinsurance partners abroad whose trust in the ability of assessing risks in Lebanon was utterly shaken. “It is a gross negligence issue that really scared the reinsurers. We were faced with many questions during negotiations of reinsurance [contracts],” Bekdache explains.

Other spots on the vests of insurance companies – reputations that market players had been building in arduous efforts over the last twenty years – are tied to the litany of liquidity problems that every Lebanese has become a knowledge expert on. For insurers in particular, acute currency problems and cash flow challenges translate into much more than reputation risks, because their operations are dependent on fairly managing risks, pricing of premiums, and settling of claims in the dichotomous currency environment of the Lebanese pound, the crippled local dollar, and the increasingly dear “fresh” dollar, or any sound money.

As highlighted in a paper by the Lebanese Actuarial Association (LAA), insurance companies in 2020 resorted to hardly sustainable measures and steps. Saying they are very concerned with the “challenging risks that the Lebanese insurance industry is undergoing,” the actuaries pointed to ongoing market practices that include imprecise remedies such as programs of issuing policies in multiple premiums in efforts to reduce currency and underwriting risks, or inflating sums insured in order to increase premiums. Having observed such artificial increases at margins from 30 to 300 percent in motor all risk (30 to 100 percent) and property (200 to 300 percent) in dollar, lollar, and Lebanese pound covers, and also having witnessed substantial increases in minimum premiums for motor all risk covers, the LAA notes potential problems in relation to those practices, namely deficiencies in defining insured sums, issues that could arise with regard to cessation to reinsurance, inadequate frequency of pricing reviews, and upward distortions of dues in distribution and taxation.

Add global and regulatory detriments

Stirred into the foul mix of sharply increased costs, obscure financial risks and destruction of purchasing power that insurers are faced with at home, have been hardening – which in insurance speak means increasingly expensive – international markets for insurance and reinsurance. Although international reinsurance profitability outlooks for 2021 and the coming years have during the recent reporting season been painted in rosy colors in expectations presented by reinsurance giants the likes of Swiss Re, SCOR, and Munich Re as well as research reports by specialized and universal ratings agencies such as S&P and AM Best, the field of insurance is seen as being forced into many changes and strategy revisions, including adjustments to health insurance, retirement, and numerous other life and non-life product lines.

To cite just one source that has been elaborating on insurance uncertainties that loom ahead, the Organization for Economic Collaboration and Development pointed out last June during the first wave of the COVID-19 pandemic and recession, “This global health and economic crisis is also set to have an impact on insurance companies. They are likely to face changes in the demand for insurance policies and claims experience as well as impacts on the value of the assets that they hold to meet their obligations to policyholders.”

Facing more immediate problems than global insurance outlooks and long-term strategy concerns, local insurers have already seen clients who sacrificed their life contracts and canceled dollar-denominated policies that they could not find the dollars to pay the premiums for, have downgraded vital medical policies to lower class covers, or have been unable to renew motor insurance. Globally induced upward pricing pressure on insurance premiums is the last thing they need.

“I don’t know how people will renew motor insurance in 2021 if they are faced with struggles to put food on their tables,” comments Bekdache, while confirming that strong upward price pressure is in force across insurance lines. “There will be hardening conditions, and this will apply especially for catastrophe cover which [the port blast] falls under. It is a big problem but you have to face it,” he says.

As the rotting cherry on top of this indigestible looking insurance cake, the ICC regulator appears to have been backsliding in its efficacy as far as keeping tabs on a troubled sector that is overcrowded with distressed providers, some of which have long been operationally shaky and under-capitalized, evoking analyst views that there are insurers in operation today that must be considered as technically bankrupt.

Gradually building competencies and expanding its supervisory activities in the 2000s and 2010s, the ICC over the years succeeded to narrow and then close a problematic time lag of issuing its annual and quarterly reports. Until the departure of the institution’s head nearly one year ago, the ICC also appeared to advance incrementally in building a competent authority that in the late 2010s functioned as independent regulator and only nominally was positioned under the Ministry of Economy and Trade. 

However, for almost a year now, it has not been clearly visible who was in charge at the institution. The ICC website does not show a profile of a new commissioner or acting commissioner, and insurance observers and company managers tell Executive that they don’t know who is really running the ICC and making the decisions. People who know the institution moreover say that even before the economic shocks of 2019/20, personnel decisions have not been morale or capacity boosters. “The Insurance Control Commission should have grown in the last five years and hired people, retained talent and developed competencies. The opposite was done,” comments the ICC’s head in the 2000s and early 2010s, Walid Genadry.

The challenge of reinventing opportunities

Lebanese insurers, hard pressed for economic survival and habitually tending more to be followers than inventors when it comes to designing new and revolutionary services, can be assumed to have very limited abilities and room for reinventing themselves in the expected crosswinds of global insurance market changes, as the outlook for insurance business lines in Lebanon is more than elusive. Arope’s Bekdache, while enthusing at the end of December to Executive that after the very difficult past year, “we are looking forward to a better 2021,” continued by saying “the year ahead will be very delicate and we are very cautious in drawing up our strategy for 2021.”

Noting that widely used insurance covers in motor and medical protection are still as vital as before the Lebanese crisis and adding that insurers have been obliged last April by a ministerial decision to provide, to a degree, coverage of COVID-19, ACAL’s Harb acknowledges dejectedly that as of early 2021, “the industry has no sweeping news, and this is bad. There is regression in all lines of business.”

Corroborating the validity of the example of their reinsurance treaty’s redesign for improving the market situation of LCI, the LAA paper proposes that securing a very high level of trust with all of an insurer’s stakeholders and that “adequate pricing, equitable claims handing, and solid risk management are key to ensure sustainability of the Lebanese insurance market.” To move in this direction, the paper recommends that the insurance industry should pursue five solutions to improve its current survivalist practices. These proposed solutions involve, among other things, the creation of an inflation index, changes in product designs, and the application of transparent and controlled processes to avoid litigation.

All in all, it cannot surprise that the mood in the Lebanese insurance sector is glum, with some interspersed lights of hope. 

What about trade credit insurance?
One insurance business line that sits pretty in economic realms but commands little attention from consumers concerned with protecting themselves against risks of car accidents and medical emergencies, is trade credit insurance. This specialty niche, which has exactly one Lebanese provider in the Lebanese Credit Insurer (LCI), has seen demand growth in many countries because companies everywhere worry increasingly about risks that trade partners, especially smaller companies, might go bankrupt in the long economic aftermath of the global COVID-19 pandemic. To protect their deliverables and invoices, sophisticated corporate clients across diverse economies are thus stepping up their usage of trade credit insurance, explains Karim Nasrallah, the general manager of LCI.
He tells Executive that LCI benefits in some sense from the corporate demand for securing their assets in trade but admits that the market outlook of trade credit insurance in Lebanon, while perhaps not as downcast as that for mass insurance lines, is nonetheless challenging. “There is not much growing demand but there is a strong willingness [by large corporate clients] to stay insured,” he tells Executive, explaining that the market on one hand has moved to shorter term or cash invoicing and overall shrunk due to increased reliance of traders on cash in the absence of credit and banking facilities. On the other hand, “volumes have gone up because of increasing prices [of traded goods]. Thus for us premium income is stable or slightly growing but this is mostly due to our stable portfolio [of corporate clients],” he adds.  
In the economic crisis of 2020, “we have suffered, like most in the sector. [It was] not too dramatic but we had bad results,” he concedes before explaining that the best outlook for his insurance specialty now is in exportation focuses and aspirations of Lebanese manufacturers and producers. “People see the necessity to grow exports and bring fresh currency into their businesses. Demand for export credit has been growing and this is the only thing that we have been able to grow our business in,” he says.
Changing products and service structures allowed LCI to better satisfy market demand in the new economic situation of Lebanon and increase the insurer’s ability to serve exporters with adequate protection of their invoices and not erode the value of an eventual claim when an invoice in hard currency might be insured by a premium paid in local dollars. LCI to this end has redesigned a formerly combined export and domestic credit reinsurance treaty into a more attractive treaty split into export and domestic coverage terms. This treaty, which has been in force from January, has motivated clients to activate pending policies, Nasrallah says: “We had to adapt to the market to keep business going.”  

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