The insurance penetration rate in Lebanon for 2014 was $557 premium per capita or 3.3 percent of GDP and very low for personal lines. Hence, there is much room for growth. However, if the insurance sector continues to grow without enforcing the appropriate solvency adequacy and corporate governance reform, the possibilities of default would certainly increase.

Vulnerabilities of insurers to default are not automatically tied to the size of the company but such risks do increase when insurers lack transparency in their financial disclosures and operate below the size thresholds that commonly define viable providers. The World Bank pointed this out in December 2013 in a technical note on the Lebanese insurance sector. “Small insurers, family owned and operated, might well be more like family brokerage firms in other jurisdictions, with limited risk retention and a focus on simplest low risk products,” said the World Bank’s market and risk-based review, which overall highlighted potentials in the sector and noted the good quality of supervision.

Since the publication of the above mentioned World Bank’s technical note, the Lebanese insurance sector has not seen major changes to its structure – with 50 active companies, there are still more providers than the underlying economy appears to justify, especially when noting that economic growth in the past few years was impeded by external and internal factors. However, the Insurance Control Commission (ICC) as supervisory authority has since that time enabled analysts and market participants to gain a much improved view of sector companies by releasing the revenue accounts in addition to the balance sheet information on a company level in the Annual Sector Reports for 2012, 2013 and 2014.

Finding transparency

On the basis of its own methodology and analysis of Arab insurance companies in the annual Digest Arab Insurance Rating (DAIR) and in the ICC annual reports, the company i.e. Muhanna rating services is now able to shed light on the Lebanese Insurance market in comparison to the insurance sector in the Arab World that is covered in DAIR. We present these findings that are based on the companies’ 2014 audited annual accounts, noting that DAIR has obtained most of the 2015 figures but we have limited the period of comparison to the years 2012-2014 in order to coincide with ICC’s most recent annual report.

This brief, which was prepared for Executive as an exclusive contribution, covers the 50 Lebanese insurance companies. It is important to note that 11 companies out of the 50 are referred to as “transparent companies” for the purpose of this article (see figure 1), since they voluntarily made their annual audited accounts public well before the ICC started fully disclosing company results with the publication of its annual report in 2013.

In analyzing all the companies in the Lebanese insurance sector, we defined three categories in which companies are clustered for the purpose of this article: transparent, unrated but secure, and unrated and uncertain (see figure 2 for the number of companies in each category).

Although 60 percent of the insurance companies in Lebanon fall within the uncertain range, 80 percent of the insurance coverage in 2014 originated from secured insurance companies as far as their financial strength are concerned. This should give some comfort among the insured. It is worth noting that the largest 10 Lebanese companies dominate the market with a 64 percent market share.

The satisfactory proportion of insurance business by secured companies notwithstanding, the large number of unsecured companies, 31, (see figure 3) – meaning providers which a full rating would place below investment range – brings attention to the importance of introducing transparency among the Lebanese insurance companies. Based on the ICC reports, the i.e. Muhanna rating services has rated the 39 companies which do not voluntarily publish their accounts. However, in the absence of full disclosure of the audited accounts, we have refrained from publishing the results in DAIR. We urge the insurance companies to respond to this concern for transparency and make their complete audited financial statements public, including their income statements, revenue accounts and notes.

Financial Highlights on the insurance companies in Lebanon:

Total shareholders’ equity of the 50 Lebanese companies amounted to $1.053 billion in 2014 against $981 million in 2013, an increase of 7.4 percent. Total Net Premium Written amounted to $1.15 billion in 2014 against $1.1 billion in 2013, an increase of 4.2 percent. As a result, the risk of underwriting exposure measured by net premium written over shareholders’ equity for the Lebanese companies reached 109 percent in 2014, similar to the 110 percent figure in 2012. The rate in Lebanon compares positively with the Arab World average of 176 percent (see figure 4). However, the Arab World average is distorted by the underwriting exposure of four companies with extremely high rates of this risk. If we exclude the four outliers, the Arab World average would stand at 117 percent.

The insurance business is unlike any other business: as the risk expires, the collection of premiums becomes harder. Hence, bad debt or inadmissible assets are common among companies with Premiums Receivable in excess of 30 percent. In this context, it needs to be pointed out that Premiums Receivable for the cluster of companies labeled “Rest – Uncertain” represent 44 percent of Gross Direct Premiums, which is well above the average ratio for the two other company clusters and the sector overall (see figure 5).

While the Management Expense Ratio is reasonably stable over the 3 years, it was noticed that the cluster of companies labeled “Rest – Uncertain” are spending more than double on their Management Expenses when compared with the secure and transparent companies (see figure 6). This could be for two reasons; the first is due to the economy of scale since most of those companies have very small portfolios. The second, since all the companies are family-run insurance companies, the structure of expenses is set by the owner/management.

Although it is imperative to separate the cost of doing life insurance business from the non-life business, the data provided proved difficult to analyze bearing in mind the existence of composite companies. In spite of that, it is clear that the acquisition cost among the non-life companies in the “Rest-Uncertain” cluster is well above the others in Lebanon (figure 7).

Capital vs. equity

The following table sheds some light on why very small insurance companies still exist in the current business environment (figure 8).

The World Bank’s comment on the current insurance solvency position in the insurance sector in Lebanon is to the point: “Solvency margin requirements are out of date and low by international standards. Local and foreign insurers and reinsurers (if any) are subject to the same minimum capital requirements. At 2.25 billion Lebanese Lira ($1.5 million), the absolute minimum is not out of line with international norms or a barrier to entry. An out of date solvency margin requirement at 10 percent of premium is required. As part of the future development of the sector, a more risk based regime should be explored. Initially, this could be developed as a risk assessment tool for the sector and the ICC before it is implemented as a solvency regime under a revised insurance law with appropriate transitional arrangements.”

So, it is not the capital requirements which count but rather the shareholders’ equity. The difference between the policyholders fund and the shareholders fund should be in access of the solvency requirements in order to allow for all the risks associated in calculating the provisions, as well as to allow for the company to grow or to close down. In short, the shareholders of the insurance companies have co-owners i.e. the policyholders.

Thirty-five Lebanese companies, which constitute 70 percent of the Lebanese insurance market, and 55 Arab companies, which represent 36 percent of DAIR, have shareholders’ equity that amounts to less than $25 million. It is unfortunate to note that three Lebanese companies have a negative shareholders’ equity. In addition, 15 Lebanese companies, which represent 30 percent of the Lebanese market, have shareholders’ equity between $25 million and $300 million.

As the World Bank commented, “it is not necessary to reduce the number of insurers to unleash further development,” we were reminded of sector development in one European country, Denmark. Denmark, with a similar population to Lebanon, is home to over double the number of insurance companies, yet it is a solid, well developed and properly managed insurance market. At the same time, consolidation has streamlined the Danish insurance market since the country felt the impacts of the global financial crisis in 2008/2009. Due to the crisis and as a result of the low interest rate environment, the number of insurance companies operating in Denmark declined from 174 at the end of 2008 to 115 in 2013. Compared with best practices and country examples such as Denmark, the Lebanese insurance sector can still cover much ground.

E   Can you confirm data suggesting that AROPE Insurance maintains a leading role in underwriting comprehensive motor insurance, meaning insurance that covers the risks of owning and operating a car?

Yes, and we are the most profitable company among composite insurers which provide both life and non-life insurance, as per the 2014 Annual Report published by the Insurance Control Commission (ICC) on the Lebanese insurance sector.

E   Would you update us on the company’s results for 2015?

If we talk about consolidated figures, we had $109 million in gross premiums with $19 million in profits. Our shareholders’ equity stood at $126 million. The group is healthy.

E   Did you see any particular changes in your market share?

We can’t tell yet, but I think that we are still leaders in motor insurance and one of the major players in life insurance. Our business is growing across the board, despite what is going on around us. There were some impacts that we had to adjust to in 2015, such as the central bank circulars that mandated borrowers to put down 25 percent of any loan as well as the premium [of insurance related to the loan]. This led to a small regression in our life insurance portfolio but this will be better over the years to come, because the business is now more sustainable.

E   Banks also now have to offer loan customers a choice of five providers for the insurance that secures their loans. How did this innovation impact you?

This is a good thing. Banks have to offer more choices to their clients and for us at AROPE it was a win-win situation, because while other insurance companies are on the list [at our parent bank, BLOM] we are on the lists of other banks.

E   In its recent annual report for 2014, the ICC showed separate but very similar underwriting results for compulsory motor insurance in the two coverage areas of bodily injury, which has been imposed since the early 2000s, and material damages, which is quite new as a requirement under the 2013 traffic law. Are the growth rates aligning?

As you know, the only cover that was compulsory was for bodily injury. One of the articles in the new traffic law mentioned two years ago that insurance against material damages was required and we started to finalize this but there was no decision to go ahead with implementation.

E   So it is still not enforced?

No; all relevant decrees have not yet been issued.

E   You are bank-owned. Is the expansion into other countries driven by BLOM Bank?

As you know, we are in Egypt with life and non-life insurance. We usually follow in BLOM’s footsteps.

E   Apart from risks such as the currency risk, the Egyptian market has a large share of local insurers. How does this work for you?

What you are saying is 100 percent right but to look at it from the other side, before we arrived, there were companies in the market [which invested in Egypt]. Our penetration is good, there is a problem with monopolistic and big properties, which is not our cup of tea. Our strategy is to go toward personal lines – such as life insurance, medical, personal accident, all these policies which we love to sell. And we follow BLOM’s footsteps and we go after their customers.

[pullquote]I think we are still leaders in motor insurance and one of the major players in life insurance. Our business is growing across the board, despite what is going on around us.[/pullquote]

E   Would AROPE aim to become more of a regional company in its profile? Do you have a strategic aim on how much of your business should be generated outside of Lebanon?

We were aiming to have a company that is bigger than the one we have in Lebanon when we entered Egypt. Our business plan was based on personal lines and bancassurance and when the government changed, the central bank stopped bancassurance agreements and it wasn’t until 2014, a year and half ago, that they issued a decree on how to do bancassurance. We applied and waited for the approvals and if I’m not wrong, we started selling the bancassurance [in Egypt] by the end of 2014.

E   Do you have a current target on how much of your revenue you want to generate outside by 2020?

If you asked me this question in 2010, it would have been much easier to answer. It is no secret that we had a lot of ambitions. Now, with everything that is happening around us, you have to be very careful. Play it by ear.

E   We talked some years ago about the role of insurance regulators and the need for a unified MENA market to make it easier to do intra-regional activities. Is this happening?

I can tell you that things are much better now in Lebanon [as far as dealing with regulators], because things are run very smoothly and we have new instructions every few days, which is good as long as they are good instructions.

The Lebanese insurance industry is enigmatic in the sense that numerous companies – 50 – share $1.5 billion in gross premiums but that not one of the companies is listed. For a considerable time – at least in the era of the current insurance law which was updated almost 20 years ago – the country’s insurance sector has also been characterized by a dichotomy between on the one hand being among the largest insurance industries in the Arab world in terms of insurance penetration, meaning the role of insurance in percentage of gross domestic product, and on the other hand being overshadowed by commercial banks in their contribution to jobs and to the economy in general.

Insurance providers count among the pillars of developed economies because of their stewardship of the people’s pension money and thereof resultant long-term investments. This role of institutional investors is largely absent from the Lebanese market as the Insurance Control Commission (ICC) noted in its recently published annual report for the sector.

Additionally, the Lebanese insurance market has seen numerous opportunities for development that have not been utilized. As insurance executives confirm, passing interests in the newer lines of business – whether insurances in case of riots and civil commotion or unrest (which are types of property covers), kidnap and ransom policies, or liability insurance for directors and officers of companies – are specialties that do not gain more than fleeting demand in Lebanese and regional markets.

Some insurance innovations will make their way into the Lebanese market – whether because of the internet of things, the shift of economies (and of economic confrontations) in the digital and cyber security world or because of the issues related to our climate and need of insuring alternative energy generation and preservation.

Life, motor, medical dominate

According to the records published by the ICC, the number of insurance providers which underwrite risks in the six different categories that require licensing under the existing law ranges from 45 in general accident insurance (which includes motor and medical) to 10 in credit and zero in agricultural underwriting. For life insurance, 36 companies are licensed of which all but a handful of firms can act as composite companies that offer non-life coverage alongside their life insurance licenses.

[pullquote]Numerous companies – 50 – share $1.5 billion in gross premiums[/pullquote]

However, for the time being the Lebanese market is still best described in terms of the market shares for the different insurance volume specialties, namely motor and health insurance in the non-life or general sector and life insurance with the varieties of protection only, protection with savings, and unit-linked (with risk participation) lines. Life, motor and medical insurance account for around four in every five dollars in coverage sold by insurance providers in the local market.

It is instructive to see that in the life insurance sector the split between the three sub-specialties is tending toward growth of protection-only policies which, according to the ICC, rose from 9.4 percent to 11.3 percent of total premiums written in the years 2010-2014. Protection-only covers played main roles in bank-induced insurances of loan takers in the retail segment. Over the same time period, the issues of wealth-building insurance through protection-cum-savings contracts stayed comparatively stable, whereas unit-linked products saw both fluctuation and degradation as uptake of such contracts fell to 8.1 percent in 2014, compared with 9.9 percent of the market in 2010.

Demand still limited

From an operational perspective, the demand for life insurance is therefore a reflection of investment needs in the rather limited segment of society where such needs are present and on the other hand the needs and realities of people in the wider Lebanese economy, which in recent years suffered a downturn from the growth of incomes that was seen in the period prior to the outbreak of the Syrian crisis and other crises affecting Lebanon.

This also correlates with the growth concentration in general, or non-life, insurance lines where the five years from 2010 to 2014 saw a shift to medical insurance as the number one category in written premiums, moving ahead of motor insurance where demand for vehicles stayed buoyant but customers often opted for new cars that were less costly in acquisition, upkeep and maintenance, including insurance. Fire insurance saw increases amidst new ministerial scrutiny over policy requirements for enterprises but other branches of general insurance, including professional liability and similar covers, did not witness expansions that would have been intuitive in markets with more developed frameworks and stronger economies.

According to the annual report on the sector, it is now possible to see which companies exactly are leaders in underwriting of the various business lines.

The market is served largely by three types of companies: local firms that associate with international companies, local firms that are owned by local banks and firms that are local and independent. The local firms serve the long tail of the market while firms with regional or international ties often have stronger opportunities for product diversification and size-wise development. The question is what insurance companies are financially secure (see story page 64) and how to encourage greater financial and operational transparency of insurance companies in Lebanon.