The global disaster count was going so well. Throughout the first 10 months of 2012, the financial tally of natural catastrophes for international reinsurers and insurers was a fraction of the horrors of 2011. Even a tsunami alert that had reporters spending anxious hours watching the beaches of Waikiki in late October 2012 turned out to offer doomsday journalism nothing more exciting than a 2.5-foot (0.76 meters) wave after sunset, with less insured damages than a major highway crash.
But then, within 48 hours after the Hawaiian micro-tsunami, Hurricane Sandy rolled in and CNN audiences were treated to hours of live reporting by rain-drenched ‘global news leaders’.
With this tropical storm came a big wave of insurance claims, first estimated at $6 billion, but those assessments were upped to $20 billion to $25 billion within one month. By December 2012, the insurance industry was yet to have the final insured cost of Sandy because of overlapping damage events. What was clear by that time, however, was that Sandy’s freakish convergence of weather patterns into a catastrophe for the immensely populated Eastern Seaboard of the United States was not enough to make insurance giants stumble on their profits path.
According to numbers for the first nine months of 2012, published by the world’s two largest reinsurers in November, profit expectations for the full year represent strong increases from 2011 due to a combination of better investment performances and lower catastrophe counts. Munich Re, the world’s largest reinsurance firm, surpassed its 2012 profit expectation of 2.5 billion euros ($3.2 billion) by end of the third quarter. The company revised its full year net profit expectation to 3 billion euros ($3.84 billion).
Swiss Re, the world’s second-largest reinsurer, reported a 68 percent year-on-year profit leap to $2.18 billion in the third quarter of 2012 alone, though this included a $626 million one-off gain related to the sale of the US business of Admin Re, a Swiss Re unit. Evaluating 2012 until November, Swiss Re Group Chief Executive Michel M. Liès boasted of “very good financial results in a volatile environment” and “excellent performance in [property and casualty] reinsurance”. The company said in the same statement that it was ahead of its return-on-equity targets for the first nine months of 2012.
The relevance for the Middle East, and for Lebanon, in the natural catastrophe story of Sandy is the insurance industry’s ability to handle it. This story draws attention to the business and economic importance of insurance, and that’s difficult in Lebanon — while the region saw a new generation of gripping industry headlines, the insurance sector’s year in Lebanon was frankly described as “dull” by the country’s insurance commissioner.
One lesson to remember on natural catastrophe insurance after the experiences of 2012 and 2011 is that the very nature of disasters precludes short-term expectations. Natural perils as well as man-made catastrophes are the biggest challenge the insurance industry has to deal with, said Farid Chedid, chief executive of regional reinsurance brokerage, Chedid Re. Reinsurers take these risks carefully into account in pricing the covers they offer insurance companies for assuming parts of their risks from catastrophe underwriting.
“The problem is how to open the client for taking into consideration that this has to be priced in. You can have 10 years of no losses and the client is saying, ‘I am spending too much money on insurance, what am I getting in return?’ But the idea is that you accumulate premiums over 10, 20, 30 years to compensate for a major loss. If these companies [were struck by a disaster and did] not have insurance, they would be wiped out,” Chedid said.
“The insurance industry, as well as the governments, have not done enough to create the real need and awareness for insurance,” commented Fady Shammas, chief executive of Arabia Insurance. “Insurance awareness is non-existent in some Arab countries and in some circles in the Arab world, insurance is even considered haram, or wrong.”
The negotiations with reinsurers have been getting more complicated for Lebanese insurance companies, confirmed Fateh Bekdache, chief executive of Arope Insurance. Everybody in 2012 showed more concern about the possibility of a major earthquake affecting Lebanon, he said, but potentials of social unrest and labor turmoil — subject to insurance clauses known as ‘SR&CC’ for strikes, riots and civil commotion — also became a big issue in the region and were of much larger concern than ever before in reinsurance negotiations in preparation for 2013.
The worst 2012 surprise for the Lebanese insurance industry and especially for Beirut-based regional companies with subsidiaries operating in Syria, however, was the conflict that ravished Lebanon’s eastern neighbor. On the business side, revenues contracted significantly. Arabia Insurance, one of the few truly regional players in the Middle East, witnessed a 25 percent drop of premiums written by its Syrian unit, according to Shammas.
Yet even as premiums contracted sharply, the group’s profitability in Syria edged higher. Apart from that, the company’s main concerns in 2012 were not the numbers. “Our fears are over the physical security of our employees,” said Shammas. “We are concerned about our branches and our head office and also about the cash we carry in the banks in case there is devaluation of the Syrian pound.”
Arope, which followed its parent Blom Bank into the Syrian and Egyptian markets, also had to wrestle with a backlash from the Syrian crisis. The company was not yet ready to disclose annual results on Syria. “We hopefully will not have losses in Syria but we have to wait and see,” said Bekdache.
However, both companies told Executive that their business in Egypt was regaining momentum. “Egypt is definitely looking up,” Bekdache said and Shammas said that Arabia’s premiums in Egypt rose 13 percent in the first nine months of 2012.
Woes of sanctions
A second unwelcome implication of the Syrian crisis for Lebanese insurers in 2012, and one which is likely to be obstructing business flows even more in the coming year, is the need to comply with a vast array of international sanctions against Syria.
The same business barrier of course applies to interaction with Iran. Cargo insurers, for example, do not normally have all the information available to them that the sanctions regimes require, and could unwittingly be subject to repercussions if those they insured violated the sanctions and the insurers were unable to prove they had made reasonable efforts to comply. According to Malek Costa, the head of group compliance at Blom Bank, Lebanese insurers should urgently invest in a compliance department, even if it is a one-person operation.
The third negative impact of the Syrian crisis is on the sale of cross-border covers for motor vehicles, the so-called ‘Orange Card’. Demand for the Orange Card dried up in 2012 and while representing a small portion of the motor insurance business, the revenues drop cut deeply into the cash flow of the scheme’s manager in Lebanon, the insurance association Association des Compagnies d’Assurances au Liban (ACAL). In planning for 2013, the association announced that it would have to tighten its belt on projects, such as helping to sponsor insurance practitioners for professional qualification programs.
All three impacts of the Syrian crisis on Lebanon-based insurers in 2012 did not translate into huge cuts in corporate bottom lines — Arope is expecting another record year in net profits and Arabia is looking at 10 to 15 percent growth in 2012 net profits. But the Syrian spillovers do increase costs and could be harbingers of more detrimental impacts in 2013, especially in indirect repercussions if the Lebanese economy suffers from further slowdown next year.
On the other hand, a recovery of business activity in Syria would mean that insurers will see their business scale up very quickly. Shammas said, “If Syria sees more imports or exports, the insurers will issue more policies immediately. Insurance providers are very closely linked to the economic cycle; if there is more banking activity, we will sell more. As soon as there is a positive change in the Syrian economy, we will benefit.”
The divisions of mandatory
Across the Middle East region, the experience of the past few years has proven that the only way to increase insurance in wider populations is to introduce compulsory insurance schemes, such as mandating employers to register their staff with a health insurance scheme.
The introduction of compulsory lines in Saudi Arabia, and regulations requiring Shariah compliance of all insurance companies, have expanded the kingdom’s insurance market and played a large role in enhancing the Islamic insurance practice, takaful.
However, according to Chedid Re’s Farid Chedid, the sword of mandatory insurance is double-edged. “Motor and medical across the region today represent 60 to 70 percent of the business. These are the two most challenging lines of business and the most volatile. Having the two most difficult lines of insurance as compulsory and leaving the rest apart — is that to the benefit of the industry? I don’t know,” he said.
A minor boon for Lebanese insurance in 2012 was based on a new compulsory insurance requirement. Ministry of Industry regulation, phased in mid-year, that all industrial establishments have to show proof of a fire insurance package when renewing their annual licenses played out promisingly, said Abdo el-Khoury, executive board member at United Commercial Insurance (UCA), which according to him is the third-largest provider of fire policies in Lebanon.
“Fire insurance will advance further due to the Ministry of Industry’s decision to force factories to have obligatory insurance against fire and liability,” he told Executive, “but as things have just started moving in this regard, it will need at least two years to show good results on fire risks.”
Cranking up the engine of motor
A much weightier, and riskier, field of mandatory insurance in Lebanon will have to be ploughed and planted in the motor business line. In late October 2012, a new traffic safety law went into effect in Lebanon including a clause that motor vehicles must be insured, not only for third-party liability (TPL) against causing bodily injury but also against material damages.
Whereas insurance motor premiums underperformed both the market and historic trends in 2012, the coming year could therefore see a bloom of a thousand new TPL products. It could. But as things look at the end of November 2012, the issue could also reveal itself to be a field infested with sickly tumbleweeds.
Running a sustainable scheme of compulsory TPL for material damages will require providers, intermediaries and supervisors to improve aspects of the business that have been fraught with remarkable dysfunctionalities this past decade. “We must not repeat the mistakes,” insurance commissioner Walid Genadry told Executive.
The opportunity for fraud was demonstrated in a case uncovered not long ago: the supervisors and the National Bureau for Compulsory Insurance (NBCI) caught on to a practice where apparently four providers, or some of their agents, took to the blatantly criminal practice of faking Mecanique vignettes and selling these fakes to motorists to display in their vehicles. Genadry said, “After the withdrawal of the license of American Underwriters Group insurance company, we noticed a marked increase in declared and legally bought compulsory car insurance vignettes.”
The insurance industry has made efforts to install technical tools to eliminate cheats on TPL policies and vignettes at the points of issuance, through a control system using online linkages between the Mecanique inspection stations, the relevant ministerial departments and insurance providers.
Other efforts are ongoing to more effectively combat motor insurance fraud by policy owners and identify drivers with extreme risk profiles. The tool for this is the Motor Risk Center (MRC) project, a database where insurers can share and access the relevant information. When and with what degree of voluntary participation this MRC will be running is a different question.
Perhaps quite fortunately from the insurance industry’s perspective, the implementation of the compulsory TPL scheme for material damages is a Lebanese process. It has specificities. The traffic safety law acknowledges that design of the TPL scheme is the domain of the Ministry of Economy and Trade (MoET). The ministry logically empowers the NBCI to propose tight or broad policy options and prepare the needed sets of tariffs, coverage terms and ceilings and standard policy documents.
“It will be a good step for the assured parties to have material damages cover but we still need ACAL and all insurance companies to put up criteria and facts based on the statistics on hand,” commented UCA’s Khoury. He emphasized that the scheme will not represent completely new ground as Lebanese insurers have been underwriting material damages covers since many years, albeit not in a compulsory setting. “If we can study the risks well, it will be a plus and provide premium income to the insurance companies,” he added.
As the new reality will require motorists to have covers for bodily injury TPL and material damages TPL, another question is if the new TPL should come as one uniform policy, a policy package with two sections or two wholly separate policies that motorists will need to buy.
The NBCI has a lot on its plate. According to Arope’s Bekdache, who was reelected in October to another three-year term as the NBCI head, it asked the motor committee of the insurance association immediately after the traffic safety law’s coming into effect to work on all the issues that need to be solved in devising the new compulsory scheme.
In conclusion, the signing of the traffic safety law signifies no automatism in the implementation of the new compulsory TPL. However, as all insurance stakeholders Executive queried affirmed, there is now a real push to get to the new reality.
No deadline for the implementation of compulsory material damages TPL seems to have been set under the framework of the traffic safety legislation, or by the MoET, and Executive found no evidence of a schedule for the scheme’s finalization. It is certain that, after agreements are reached by concerned parties, NBCI will submit the scheme to the minister of economy, whose simple signature then will put the new rules into effect. Stante pede. Immediately.