One would have expected insurance companies to jump for joy when the parliament passed the 2012 Traffic Law, extending the current third party liability (TPL) for bodily injury to also cover material damage. This would undoubtedly give insurance companies the chance to increase their market in compulsory motor insurance. At Q4 2013, turnover for motor was $338.7 million with compulsory insurance making up just $56 million, equivalent to16.5 percent, according to ACAL (Association des Compagnies d’Assurances au Liban)’s quarterly report. Total premiums for motor insurance made up the third largest market share in 2013 at 23.9 percent. The new law would increase the market share of compulsory motor insurance, but would also add an unknown amount of risk.

But compulsory motor insurance for TPL covering material damage, while enacted in law, has not been extended to practice. The implementation of the Traffic Law awaits a series of decrees from the Ministry of Economy and Trade for specifics in execution.

This sluggishness is caused by a cautionary approach that the relevant bodies have adopted in putting this law into effect, after a clumsy implementation of the first compulsory law for motor insurance in 2003 that covered TPL for bodily injury. The latter was plagued by many woes such as cash underwriting, which was met with few checks from the weak control of the Insurance Control Commission (ICC) and ultimately saw insurance companies unable to pay claims and going bankrupt. Cases of fraud and evasion that surfaced during implementation of the first law have also caused wariness among stakeholders in the execution of the second.

“We need to take our time to study how to introduce it,” says Walid Genadry, head of the ICC under the Ministry of Economy and Trade. “You can introduce it today, but we will have real problems.”
The debacle of implementing compulsory insurance for  this kind of TPL has led the National Bureau for the Compulsory Insurance (NBCI), the body in charge of suggesting the policy’s pricing, coverage and conditions to the ministry, to tread gingerly in implementing the second, seeking the World Bank’s advice over the best practices in the sector. Lack of sectorial data further compounds the slow implementation of policies.

Unethical players

The implementation of the 2003 law saw many actors engaging in inappropriate behaviors to the detriment of both the insured and the industry. Cash flow underwriting became a way for insurance companies to attract a larger share of the market to generate investment capital by pricing premiums lower than the legal rate set by the NBCI. In many cases the price at which they sold premiums did not generate enough returns, and their inability to pay claims quickly, or at all, gave the industry a bad reputation. Many companies went under or lost their licenses due to cash underwriting. American Underwriting Group (AUG), for example, was writing this kind of business and went bankrupt from bodily injuries claims leaving some of their clients with nothing, laments Fateh Bekdache, vice Chairman and General Manager of AROPE Insurance and head of the NBCI.

The Insurance Control Commission (ICC) did not then, and still does not have, enough power to properly enforce compliance. “We still don’t have an insurance law that lets the [ICC] intervene quickly and effectively for stopping such behavior,” says Genadry. According to Bekdache, the law prescribes two extremes in types of penalties, but is missing many intermediate penalties which are the most important to deter disobedient behavior.

To deal with the issue of cash underwriting, the ICC proposed that reserves should be taken from each company based on their loss ratios, the difference between a company’s premium income and claims settled. In the event that they don’t have enough money to pay their claims, companies could use the fund, preventing them from non-payment of the claims. This could also increase the ICC’s control over insurance companies, forcing companies to increase their premiums in the event that they don’t have enough money to contribute to the fund.

Fraud is another serious concern for industry supervisors. Though there were substantial cases of fraud under the compulsory TPL for bodily injury law, it was investigated by the NBCI, and according to Bekdache has improved since the beginning of implementation of the 2003 law. “You can tell from the volume of vignettes that are sold every year.”  They were able to implement some control over falsifying papers, where some brokers were falsifying vignettes,” he says. The situation improved after the NBCI made it mandatory to get policies and vignettes directly from them.

According to Jamil Harb, secretary general of ACAL, fraud is even more common in the compulsory motor insurance industry for TPL in material damage. He cites the case of Jordan in which compulsory insurance in this sector was badly applied, resulting in many companies facing bankruptcies linked to fraud where companies were paying claims that didn’t exist. Fraud is a serious concern for insurance companies, particularly those that deal in compulsory insurance. “We are always worried about fraud,” says Naji Sultanem, general manager at Victoire Insurance Company. “When there is something obligatory, people most of the time think that because I paid it, I want to do something with it.”

Evasion could also put a weight on the industry. Bekdache estimates that 20-30 percent of cars are not insured for bodily injury, with a total of 1.3 million cars in Lebanon covered. When an uninsured car gets into an accident with an insured car, this places the burden on a single insurance company.

Steering away from compulsory

Despite some improvements since 2003, the experience of insurance companies with compulsory motor insurance for bodily injury has made some of these companies move away from this remit. Victoire’s Sultanem complains that the lack of consensus on the price of an indemnity to pay for someone who has lost their life to a car accident is a burden on the insurance company. He says that claims are often decided by lawyers and can range from as low as $5,000 to as high as $200,000.

The high cost of some claims, is what led Victoire to steer away from the compulsory motor business altogether. “In the past 15 months we have modified our strategy in the bodily injury,” he says. “Our target was to lower our bodily injury impact on the company.” Victoire is a small insurance company with a large share of its business in compulsory motor insurance. According to the ICC’s Insurance Sector Annual Report for 2012, Victoire had the third largest share of compulsory motor insurance with $3.4 million in gross written premiums. In addition to their $2.5 million in gross written premiums in non-compulsory motor insurance, motor insurance makes up almost half of the total $11 million for their non-life insurance premiums.

Premium Pricing

Setting a price for the new premium, a responsibility of the NBCI, is hindered by lack of sectoral data on profits and claims for each segment of motor insurance. While a central database was called for as early as 2003 that would collect data on the sector and historical claims on a car, it has not seen the light of day. Besides an NBCI initiative to bring insurance companies together to share data, the NBCI is still setting premium prices mostly in the dark. The NBCI is moving to collect sectoral data to help price the product. “This is one of the main points that we are trying to clarify now, in order to see what is the actual impact of TPL on the market. Based on that, you can define the price,” says Harb.

Currently, premiums for bodily injury are priced by tranche, depending on the type of vehicle, rather than on the risks calculated for each driver. The premium is made up of the technical premium and an additional percent that covers the broker’s commission, together ranging from $50 to $100. Like the premium for bodily injury, the premium for material damage is to be a flat fee.

Pricing the new premiums will be a challenge. There is some data available in the market regarding motor claims, but it is for total claims rather than product-specific claims. ACAL’s last Quarterly Report for 2013 pegs claims at $188.6 million year to date. However this data does not distinguish compulsory from other types of motor insurance. It lumps together compulsory, TPL for material damage, full motor coverage including self-inflicted damage, as well as total loss — products ranging widely in both premium prices and amount of claims.

What is known is only that material damage will likely involve more claims, based on the higher frequency of accidents that incur material damage in contrast with accidents incurring bodily injuries. “Insurers witness a 25 percent accident rate. If you take 1.3 million cars you are talking about over 300,000 accidents per year,” says Genadry. At Arope Insurance, Bekdache claims that they get 110-120 new claims every day in material damage, whereas accidents claims with bodily injury only surface once or twice per week. According to Harb, the claims ratio between compulsory and non-compulsory claims is one to 50.

Not all insurance companies, however, see the benefit in collecting data. “It’s expensive, you have to have a full-time job for someone just to input data,” says Victoire’s Sultanem. To effectively move insurance companies to compile the relevant data, the ICC would likely have to make this mandatory by law.