The hopes of insurers go up in smoke

Expectations for growth in the insurance sector are dashed in 2005

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Insurance industry representatives in Lebanon recently acknowledged that they expect 2005 to end pretty much as a lost year for business, in line with the “no-growth” environment for GDP and overall economic performance. However, the detailed impacts on sector profits this year cannot be tallied for several more months – with the additional caveat that credible assessments of cumulative performance by all the 50 registered insurance and reinsurance companies still remain elusive in a sector which continues to keep even experts guessing on the real positioning of many companies.

On the national level, the November 2005 research figures released by international reinsurance firm, Swiss Re, assess Lebanon’s premium production at $577 million in 2004, comprised of $180 million in life and $397 million in non-life insurance. With an average of 15.5% annual growth from 1999 to 2004, the 9.3% inflation-adjusted increase between 2003 and 2004, represented a decent result for the year 2004, and expectations for 2005 had initially been for good continued development.

Sclerotic growth

Rates of insured-ness have undoubtedly progressed over the half-decade since antiquated Lebanese insurance laws of the mid-20th century were revised in 1999. But as the practices of local insurers stand, public disclosures of financial results are not a given and the numbers that are available are often inconclusive as to the industry’s health, profitability and growth.

The large estimate range on Lebanon’s macroeconomic parameters – beginning with population size and GDP – does not help much either, as demonstrated by the variance between the Swiss Re assessment of Lebanon’s insurance density and penetration and that of other authoritative sources. Swiss Re gave figures of a per capita expenditure on insurance of $163.8 (density) and a 2.82% share in GDP (penetration) for last year, while the 2005 DAIR handbook by i.e. Muhanna ratings services, quoted a lower density of $144.25 but a higher penetration of 3.04% – not insignificant variations of 13% in one and 8% in the other direction.

However, such variations in evaluating insurance results are actually common for many developing countries and more than exposing information gaps on a market like Lebanon, they may say something about the need to improve research methodologies and form global institutions for this financial sector, which shows less worldwide independent monitoring than banking. But by the undisputed baseline understanding that Lebanon has about a 0.02% share in global insurance premiums, it clearly remains weak in many insurance areas, although according to Swiss Re’s numbers, Lebanon’s life insurance market improved significantly more than the non-life sector in 2004, increasing by 27.4% versus 2.6% for general insurance. But if measured by expectations voiced by important insurance minds four years ago, life insurance growth is still a disappointment. Where managers had hopes of achieving a premium portfolio of $1 billion in the second half of the decade, the real growth of the past three years falls significantly short of this.

Insurers that are owned by banks or affiliated with international sector firms are often viewed as the companies best positioned to survive in the Lebanese market, yet not all perform equally. In 2004, some bank-affiliated firms were presenting outstanding results in comparison to their peers while some players in the same segment saw their claims’ ratios grow much more than their premiums.

In this context, it is worth noting that the banking industry’s performance split is by and large top-down. Large banks essentially set the pace for the industry for both quality and compliance with international standards, while a handful of the smaller banks may be withering on both counts. But although the concentration of market shares at the top of the insurance sector is similar to that in banking (a few banks and insurers account for over 80% of activities in the respective realms), experts frequently caution that mere size of a Lebanese insurance firm does not provide a high certainty of across-the-board quality.

Neither premium volume nor data currently available on capitalization, reserves and total assets offer enough information to determine the sector’s leaders and losers as long as asset quality or loss ratios can be obfuscated in resistance to public scrutiny.

An unsettling reality in this regard is that the Lebanese insurance sector is still as far away from effective consolidation as it was five years ago and that transparency is largely amiss. Questions over advancing regulations and the monitoring of firms loom as large as ever and there is much room for improvement in promoting insurance awareness and governance quality gains within private and public protection providers.

Much-needed initiatives for the advancement of insurance did not progress in the political arena in 2005. The issues of pension planning and reforming the national social security network received no legislative attention, nor did tax benefits for life insurance or the 2004 draft for a new insurance law.

No sign of leadership

The latter issue is not of little concern – and it is also an indicator that the insurance industry itself is not just a victim of political foot dragging. The new law, said its advocates in the spring of 2004, would make Lebanon a role model for insurance legislation in the region, and allow the country’s insurers to reap the benefits.

The private sector insurance stakeholders, who have tried for years to repair the sector’s image, thus are still some distance away from projecting a cohesive front. This inertia could have consequences for the perception of Lebanon as a regional insurance power, based on the fact that insurance reforms and regulatory improvements in other markets appear to be taking effect.

The sector’s outlook is not without question either. By the track record of industrial and consumer behavior in Lebanon over the past five to ten years, corporate and retail customers have been inclined to treat insurance as expenditure during hard economic times. This dampens expectations that the industry will achieve strong improvement until the general economy shows some real gains.

The friendliest short-term prospect for local insurers could be profitability from their secure underwriting business. This is in the context of increases in global reinsurance rates. Although a cost factor for insurance companies, the last major incline in reinsurance rates at the end of 2001, allowed local companies to even out rate structure imbalances by hiking rates up under reference to the hardening of the international insurance market. This, say local analysts, has resulted in stronger underwriting profits in the past four years than companies were able to realize before 2001.

While the 2001 to 2002 reinsurance rate hikes were triggered by 9/11, the possibility of newly softening rates this year was voided by the natural catastrophes of the past 12 months. For the Lebanese market, analysts said that while it is too early to tell if local providers would notch up their rates once again by pointing to international conditions, the hard global market would be helpful in maintaining profitable underwriting rates.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail