As the insurance world braces itself for a year or more of depressing outlook in terms of investment revenues, Lebanon’s insurance sector appears to be in a bullish mood as many industry insiders show little sign of worry. The confidence of Lebanese insurers is surprising given the extent to which the international markets they invest in have been affected. One of the premeire victims of the ongoing financial earthquake was the American International Group (AIG). AIG’s forth quarter 2008 losses are reported to have hit the $60 billion mark; that means they lost the equivalent of about $660 million per day. Accordingly, AIG’s local Lebanese arm, the American Life Insurance Company (Alico), may loose its big brother. “One of the things that AIG is trying to do now is to sell off Alico to get cash back and divest off profit making companies because they have to shrink the whole thing,” says Thomas Schellen, publishing editor and head of the insurance opportunities program at Zawya.
Roger Zaccar, assistant manager at Commercial Insurance, says there are three main areas that insurance companies around the world are concerned about in the current economic climate: “One is the assets invested by the company in the different financial instruments; two is the endowment policies which are linked to international investments; three is rate increases and commission reductions from international reinsurers.”
No crisis here
Yet Lebanese insurers hasten to add that despite the turbulent international environment, they have been able to avoid the short-term adverse affects of the global financial crisis. René Klat, CEO of Adir Insurance, states, “in my personal opinion I do not think that Lebanon will be affected by the global financial crisis that much… I am not scared about this crisis — Lebanon has suffered much worse [than this].” Indeed, the fact that Lebanon has been so far behind the rest of the region in terms of economic growth and is only now starting to show signs of promise is a major factor spurring on growth in all industries, including insurance. But the main reason that Lebanon has been spared the worst of the economic downturn’s consequences is its prudent and seemingly anticipatory financial policies that applied not only to the banking sector but to the insurance industry as well.
Lebanese insurance companies have been restricted in the “variety of investment categories accepted under admitted asset parameters,” says Mounir Kharma, the CEO of Med Net Liban. Zaccar goes on to explain, “non-life [insurance] companies like ours… are mostly invested in the local available financial investments… i.e. cash deposits, treasury bonds and very little in the limited stock exchange. This is the reason the insurance industry will be minimally affected.” Thus, instead of the insurance industry seeing regression, the industry expects continued strong growth.
Klat states that Adir insurance achieved growth of 38 percent in 2008, with further growth expected in 2009, albeit at a lower rate due to losses in policies linked to the stock markets. This growth figure, however, needs to be taken with a grain of salt. “The crisis has affected those portfolios that invest in the stock market such as retirement plans and this has seen a 20 percent reduction. We sell retirement plans, for instance, that give the opportunity to invest up to 50 percent on the stock exchange,” says Klat.
Whatever the claims of insurance providers regarding their relative immunity to the afflictions of the wider insurance industry, there is no hiding from the fact that the outlook for investment revenues in 2009 is nothing short of dismal.
“Compared to the size of the industry and the premium volume, the investment volume is pretty significant and the indicators pointing to the sensitivity of non-underwriting practices is very strong today,” says Schellen. Although figures for the whole of 2008 and 2007 have not been released by the Lebanese Ministry of Economy, the total assets for insurance companies in 2007 is estimated to total around $1.55 billion, of which $850 million were in investments according to research conducted by Zawya. Given that global markets were still stable until the fourth quarter of 2008, surely many of Lebanon’s insurers tapped into investments and were exposed to losses. Currently, companies are reorganizing their strategies until things start to pick up again on the international markets.
“The average rate of investment income will drop heavily and become very conservative. Companies will start to think in terms of the bottom line… as well as practice further cost cutting,” says Elie Nasnas, director general of AXA Middle East. “Clients will expect the same level of service if not more and you will have to cut your costs accordingly.”
The insurance sector must do its utmost to produce technical results as opposed to financial returns
Covering the risk
Insurance clients in Lebanon, however, may be in for a big surprise when it comes to how much they will be asked to dish out in order to cover themselves for various risks. As investment revenue no longer represents the beefy figure that it used to on the income statements of most Lebanese insurers, they may have to look for other ways to compensate for a lack of revenue streams. “Some part of the burden will definitely fall on the consumer,” says Schellen. Accordingly, Zaccar warns that due to the reduction in interest rates on investment and pressure from reinsurers, the insurance sector must do its utmost to produce technical results as opposed to financial returns. “As a result, insurance rates must increase in all lines of insurance,” he asserts.
Indeed, the pressure on reinsurance agencies to tighten their belts has never been greater with some of the biggest names beginning to falter. Moody’s Investors Service has recently cut its rating on Swiss Reinsurance Co (SwissRe) from Aa3 to A1 because of concerns about weaker profits and lower capital. However, from a reinsurance perspective it is not as simple as raising prices. “Reinsurers are becoming more selective on the risks they insure. So rather than demanding higher rates across the board they have reduced their willingness to cover certain risks,” says Schellen. This tightening of standards will invariably affect Lebanon at some point.
“We have seen the reinsurance market become much more rigid and very focused on underwriting profits. In turn, this will necessarily impact the insurance sector throughout the world, including Lebanon. Reinsurance cover will become more difficult to come by,” adds Kharma.
Insurance companies will have two choices: either they calculate their risks more carefully and adjust their premiums to fit, or they will have to find other reinsurers who will provide them with lower prices but may not be rated as highly as their previous provider. Hence, the consumer will either have to pay more in terms of premiums or lose out on quality. Yet some insurance providers see a third option.
“The biggest reinsurers were affected by the global financial crisis, causing a price hike. We will try to carry this burden instead of increasing our prices and affecting the purchasing power of the end consumer,” assures Fateh Bekdache, general manager at Arope Insurance.
Tapping the breaks on growth
Although Lebanon has the highest level of insurance penetration in the region, registering around 3.4 percent, this does not necessarily indicate that there has been a boom in the country’s insurance industry. Compounded with the prospect of insurance becoming more expensive, this will certainly have a knock-on affect in terms of industry growth. Nasnas explains that in order to have higher penetration rates, the economy has to contain a larger middle class who can afford these products — something Lebanon has yet to enjoy. Moreover, the decrease in oil prices as a result of lower demand has crippled the region’s most profitable asset and affected the Lebanese market through a decrease in remittances.
“If you have a drop in oil prices, there is a slowdown in the regional economy… Therefore with less disposable income there will be less demand for insurance,” says Farid Chedid, managing director at Chedid Re.
Ironically, the fall in oil prices may also be a source of growth for the insurance industry in the form of Lebanese returning from the Gulf countries. However, the insurance industry appears not to be taking this prospect seriously. Most in the industry seem to believe that Lebanese in the Gulf that have lost their jobs have been able to obtain jobs in less affected markets.
“The Lebanese are quality people and those that have lost their jobs in Dubai, for instance, have found jobs elsewhere in the Emirates,” Klat states.
Kharma adds that, “regional employers see an opportunity, at this time, to consolidate and improve on the talents available to them. The Lebanese expatriates should continue to be well sought after. In general terms, my feeling is that there is more talk and fewer Lebanese expatriates returning.”
As the throngs of repatriating Lebanese have yet to materialize at Rafiq Hariri International Airport, the country remains without what is arguably its most precious asset.
“In Lebanon, we had a huge human resources problem in 2008 because all the people we train get great offers from the Gulf and they leave… I still see people leaving Lebanon and going abroad,” says Nasnas.
A further avenue for growth — regarded as a potential panacea for the Lebanese insurance sector from the stagnation of the past few years — was the country’s booming real estate sector. That notion, however, seems to have been short-lived as systemic and natural factors have contributed to stifling the potential this industry once possessed.
“It did not take off as much as it was expected. This is particularly linked to the fact that the comprehensive construction and building insurance has not been legislated and is still not mandatory,” says Schellen. Moreover, the growth of the Lebanese real estate sector has leveled out somewhat over recent months curbing the growth scenarios that it was promising.
An opaque industry
All other considerations aside, perhaps the most debilitating and unrelenting factor halting the growth of the Lebanese insurance industry today is the lack of transparency and adequate legislative framework to support the industry.
“The success of the insurance industry is linked to its transparency,” confirms Farid Chedid. The Association of Insurance Companies in Lebanon (ACAL) used to publish an annual report on the Lebanese insurance industry, but has been unable to do so since the Lebanese Ministry of Economy stopped releasing annual figures on the insurance industry in 2006. According to the ACAL, when the association requested the figures from the Lebanese Ministry of Economy they were told that the government would be producing the report for 2007. The report is still not available to the public.
Nasnas believes that the lack of transparency in general has dissuaded many regional and international insurers, reinsurers and groups from taking the Lebanese insurance industry as seriously as they would if the figures had been available. Additionally, the government only requires insurance companies to provide their financial statements and not their breakdown figures, which further impedes accessibility to industry wide data. Moreover, there is some favoritism at play.
“In Lebanon the government is too concentrated on the banking sector. We have to diversify the importance of all of our sectors, especially in the financial sector, which includes insurance. In developed countries it is as important as the banking sector. So they [the government] should pay more attention to it,” concludes Nasnas. The Lebanese government has drafted a new insurance code but it has yet to be ratified and is still being tossed between political heavyweights and industry leaders.
“The draft law that started to be circulated around three years ago was never ratified. Last year there was a back and forth between the insurance industry and the regulator of the Ministry of Economy,” says Schellen. “As long as you don’t have political stability nobody really takes the time to discuss these things,” he adds.
Lebanon still operates under the insurance code drafted in 1977 by a legislative decree based on the old French insurance code. The code obliges the association of Lebanese insurers to insure the majority of passenger vehicles present in the country, as well as those entering the country from outside Lebanese territory. Accordingly, another decree issued by the government in 2003 aimed at implementing the law was passed.
However, according to Antoine Chedid, president of National Institute of Obligatory Insurance (NIOI) in Lebanon, the government has fallen short of its obligations to insure all vehicles inside Lebanon. “There are between 1.3 million and 1.4 million cars [in Lebanon and] only 750,000 of them are insured,” says Chedid. “We tried to develop the ‘105 regulation’ to include mandatory insurance on the material damages, but how could we move on this project if we can’t make sure that the one million… cars are not covered?”
The NIOI is not about to sit by and twiddle their thumbs while the untapped potential of the Lebanese market passes them by. The Lebanese NIOI launched an awareness campaign in late February urging the government to apply the 1977 decree. The campaign seeks to use a variety of media to encourage the government to apply decree 105/77 and specifically the clauses that are associated with insurance of bodily harm. The NIOI claims that for passenger vehicles the cost levied on the consumer to protect against the infliction of bodily harm would range from $40 to $60.
At the end of the day, the ability of organizations to pullout of investment and concentrate on technical underwriting will be the defining element in the Lebanese insurance industry. Remaining stationary is no longer an option in the current global economic climate as businesses turn inwards and shed the excess they were carrying through the recent period of growth. Hence, Lebanese insurers would do well to take advantage of Lebanon’s relative cushion from the global financial crisis to expedite the shift from investment to underwriting.
“We are back to the old school, which preaches adapting an acceptable risk factor and not relying solely on return on investment or financial income,” says Bekdache. However, as Kharma, the CEO of Med Net Liban stated, when all things are considered the global financial crisis is probably not the most important thing going, “other issues in Lebanon are likely much more profound.” With rockets fired across the border into Israel and elections coming in June, he may just be right. For now, it seems the most prudent course of action for Lebanese insurers’ is to do what they can and leave politics to the politicians. And it looks like they will do just that.
