When economic times are tough for Lebanese companies, insurers get singed.
Less international trade means fewer cargo insurance contracts. Less hiring means fewer premiums invested in employee needs. Fewer overland deliveries to domestic and neighboring markets means less insurance of commercial vehicles, whether due to smaller fleet sizes or to dropping demand for coverage while driving through the region under the Orange Card scheme.
Lebanese insurers have nonetheless maintained fair public levels of calm when compared with the swelling choirs of doom that one hears intonating economic laments about banking, hospitality, retail, industrial manufacturing and, most recently, real estate markets.
The most recent Quarterly Report, a statistical compilation of insurance data, issued in February and covering the fourth quarter of 2012 in a full-year context, showed that total gross premiums came in just below $1.3 billion. This voided some mid-2012 statements by several sector leaders who at the time told Executive of hopes for double-digit premiums growth for the entire year.
However, the overall insurance sector performance in 2012 was satisfactory, as implied by the Q4 Quarterly Report figures. Taking the report’s preliminary full-year figures, gross insurance premiums (premiums before cessation of risk and revenue portions to reinsurers) grew four percent for life and five percent for non-life business. Claims expanded by six percent to $650 million and reported investment returns from insurance portfolios increased by 28 percent year-on-year to $121.7 million. Over two-thirds — $84 million — of these investment returns were achieved in the life insurance business.
Doing well under the circumstances does not equate to reaching baseline targets. The Q4 report also revealed that the Lebanese market’s insurance demand was weaker in the third and fourth quarters of last year when compared with the first half of 2012. In life insurance, accounting for 29.1 percent of 2012 premiums, the fourth quarter appears to have fallen into a lull as the full-year premiums growth rate of five percent was half of what was reported for the first nine months.
Although no data for 2013 are available yet, the possibility that domestic insurance demand will suffer this year can certainly not be denied.
Academic papers on the positive correlation of insurance growth with gross domestic product (GDP) growth have been published on the basis of research in markets as diverse as China and old and new member states of the European Union. The negative effects of slowing economies have also been demonstrated, not least in the impacts of the 2008-2009 downturns on insurance premiums in industrialized nations.
The repercussions of a weak domestic market for Lebanese insurers deserve to be viewed in conjunction with the sector’s fragmentation and its development pattern, which is sharply divergent from that of commercial banking. Whereas banks, with considerable prodding from Banque du Liban, Lebanon’s central bank, went through a period of consolidation in the 1990s, insurers have not.
With many small, family-owned companies, the majority of insurers did not push into new territories to any degree comparable with banks. Having not consolidated or diversified into other markets, insurance companies that have sustained their positions exclusively as domestic players until now may find it much more challenging to remain profitable this year and perhaps years to come as the Syrian crisis impacts Lebanon.
Rocky in the region
When viewing the situation of the Lebanese insurance industry, it is also to be noted that analysts have recently been less exuberant about regional developments. Beirut-based ratings organization i.e. Muhanna has just lowered its ratings on 28 out of 75 reviewed companies in six countries — Egypt, Jordan, Lebanon, Qatar, Saudi Arabia and the United Arab Emirates — while it hiked ratings for 23 companies and kept 24 ratings unchanged. Due to the changes, 17 companies, or 22.7 percent of the total 75, were shown in the “uncertain” ratings range for 2012, among them six Jordanian, five Emirati and three Saudi insurers.
At the end of May, international ratings agency A.M. Best diagnosed the Kuwaiti insurance sector as facing regulatory uncertainty and volatile growth, and only a few weeks prior warned of shrinking margins for insurers operating in the important Saudi market. There is a consensus view among industry leaders interviewed by Executive that intense competition beleaguers all insurance markets in the Gulf Cooperation Council, where some 198 companies are now chasing policy buyers, according to numbers published by A.M. Best.
Growth of premiums portfolios is still not a problem under these conditions, but healthy profit margins are very difficult to achieve and it is becoming untenable to operate as a company that has a strong size in only one country, according to Farid Chedid, chairman and chief executive of Beirut-based reinsurance company Chedid Re.
He says, “Only very specialized niche players and regional companies will survive. You have to become regional because the large clients in each country are becoming regional players and you need to service their needs throughout the region.”
This has implications for Lebanese insurers as regional markets are being cornered by international players and domestic consolidation opportunities are few. In the view of Fateh Bekdache, general manager of Arope Insurance, it is “still far-fetched to expect mergers” in Lebanon’s insurance sector.
In recent years, mergers and acquisitions in the Lebanese insurance industry were generally not a winning proposition. Only two significant consolidation moves have been recorded since 2010; both were acquisitions of local companies by foreign firms. However, one of the two acquisitions, the buyout of Compagnie Libanaise d’Assurances by multinational firm Zurich Insurance Group, was recently marred by a court dispute, where insurance industry sources told Executive that both sides were suing the other.
Reviewing their options for 2013, Lebanon’s insurers would be well advised to use this time of very limited domestic and regional opportunities to upgrade their processes and strengthen their ranks. This could include exploring new needs such as cyber-insurance and enhancing corporate governance, but also improving sector collaboration on risk assessment.
Two years ago, one such effort was initiated: a database that would help companies to identify bad risks in motor insurance and combat auto insurance fraud. However, this project appears to be in danger of stalling, which would remove the most effective deterrent against risky traffic behavior — risk-adjusted pricing of motor insurance — and thus could only serve to further embolden unsafe drivers on Lebanese roads.
As the regional insurance industry is entering a phase where experts such as Chedid expect consolidation of sectors anywhere but in Lebanon and foresee a maturing of markets, the egocentricities and lack of transparency found in the national insurance industry may prevent consolidation by mergers and acquisitions, but economic imperatives of limited opportunities may very well shrink the provider ranks and separate the wheat from the chaff.
However, the realities that are pushing multinational insurers into emerging markets are also working in favor of Lebanon, says Fady Shammas, the chief executive officer of Arabia Insurance. Growth potential in the Lebanese market “is larger than in Europe and larger than in the United States. We are still showing a higher growth in percentage terms.”
