It has been said with some justification that the global economy could be saved from recession if enough people collectively started believing that the end of the world was upon us. Pre-apocalyptic consumer spending would skyrocket and blow the lid off all current growth restraints. But it is questionable if people would think to spend any money on insurance at the end of times.

Coming out of 2012 summer vacation, Lebanese insurance sure could use a boost, though. Collapse of economic confidence, shrinking payment morale, untrustworthy policy making and regional upheaval — all the things that are bad for business in Lebanon this year are especially bad for insurance.

Insurance premiums achieved fair growth of 9 percent year-on-year to $681 million by June 30. The growth rate after the second quarter is up from 4 percent in the first quarter, according to the Statistical Quarterly published by the Association des Compagnies d’Assurances au Liban (ACAL). However, the growth figure, which is not fully audited, does not account for inflation and also may still see a bit of correction — in 2011, the nine-month nominal growth was reported at 14 percent while full-year rates came out lower, at 12 percent. Furthermore, the indicators for the total number of insurance contracts (down 5 percent year-to-date) and motor insurance premiums, which have contracted for the first time in years and are down by one percent year-on-year, spell a worrisome slowdown in activity and could imply real trouble for some insurers.

A more collective, transparent industry

Probably the best things that can be said regarding the advancement of insurance in Lebanon to date in 2012 are that insurance stakeholders have started to sit more often at the same table and that transparency of the industry is making further advancements. Divergent positions of interest and mutual misunderstandings between regulators, insurers and intermediaries seemed to smolder unremittingly in earlier years behind a thin façade of cordiality; the last few years have seen a positive climate change to more genuine communication. Recent interaction between representatives of all sides in the National Insurance Board offers hope that, through greater collaboration between these and other participants in the collective insurance game, Lebanon’s insurance needs on a socioeconomic level will be better safeguarded.

On account of transparency, the availability of real insurance sector performance data has made great strides from being virtually inaccessible five years ago. The  first annual report by the Insurance Control Commission at the Ministry of Economy and Trade, which covered 2007, was issued after a several year lag. This delay has shrunk dramatically, with reports providing audited information now issued much more promptly. The Quarterly Reports by ACAL, issued since beginning of 2011, are augmenting this and starting from this year will be expanded further by an annual report of the association.

The picture is further sharpened by the Lebanese Insurance Brokers Syndicate (LIBS), which in July presented its first-ever study on the contribution of intermediaries in the insurance economy.

On the negative side, it appears that insurers in Lebanon this year can do little more than put a good face to a period that has been both tough and uneventful.

“For me personally, the time since the beginning of this year was the slowest and most boring period since I first became manager in an insurance company 16 years ago,” sighed an insurance leader in conversation with Executive, asking that he not be quoted by name.

2011 performance in the global context

The stage for insurance in 2012 was set by Lebanese insurers’ performance numbers in 2011, which were mellow, but proved better than many in the industry had anticipated. At the end of 2011, Lebanese insurance premiums stood at $1.2 billion, up from $1.1 billion in 2010.

Small as the gain was, it looked pretty good against the backdrop of worldwide insurance premiums contracting in 2011, by 1.1 percent in advanced markets and by 0.8 globally (inflation adjusted). The comfort of this “outperformance” is, of course, not exactly gargantuan when one notes that Lebanon has a 0.03 percent share of world insurance premiums of $4.597 trillion (nominal) according to the Sigma research unit of reinsurance giant Swiss Re.

Taking the dialectic to the next step, the national insurance performance again deserves respect when considering that insurers here faced not only the local impacts of European economic problems, and global financial jitters but also harder financial conditions in the insurance market because of humongous natural catastrophes of 2011 — the disaster tally came financially to $380 billion in total economic damage and $105 billion in insured economic losses, according to reinsurer Munich Re.

On top of being exposed to all that global trouble, local insurers also had to deal with severe regional political developments that drove the discipline of Lebanese risk management into the wall of Syria’s realities.

Costs rise, excitement lags

In regional comparison, Lebanon today is still ranked at the top for the percentage of gross domestic product spent annually on insurance. This ratio, known as insurance penetration, is seen to indicate if a country has sufficient strength of protection or if it is underinsured.

With 2.9 percent insurance penetration, Lebanon ranks ahead of the emerging markets average of 2.7 percent and more than a full percentage point ahead of most other Arab markets.

However, while the robust GDP growth of Arab oil exporting countries explains why insurance growth in those markets has not been reflected as higher insurance penetration, stagnant insurance penetration rates in the slower growing Lebanese market over the past five years give reason to ask if the country and its relatively well-developed insurance industry need to do more to keep protection adequate.

Life insurance is a segment that, because of its facilitation of clients’ long-term savings and contribution to financial preparedness in old age, should be a growth market. Some years ago, when the country was starting to come back from the depressed economic mood that had ruled between 1998 and 2002, insurance industry optimists would speculate that collective life premiums should be worth a billion dollars, or more, today.

In reality, life premiums came to about $350 million in 2011 and have seen growth rates varying from 10 percent last year to 23 percent in the first half of 2012, according to ACAL.

Fluctuating between 25 and 30 percent of the national premiums volume, life insurance is by regional standards healthy, but long-term growth rates and levels of life premiums are substantially below where they would need to be if private savings, by way of insurance, are to help relieve Lebanon’s stressed social networks.

Life insurance volumes also don’t look all that promising when the business of coerced life policies in consumer borrowing is taken into account. The requirement by all banks that loan customers have to buy life insurance with coverage for the loan amount — to indemnify the lender if the borrower cannot fulfil her or his obligations due to death or permanent disability — is a staple source of premiums income for bank-owned or affiliated insurance providers.

However, while the practice offers insurers good risks and fine premiums at very little work, and is a factor in making life insurance by far the most profitable line in Lebanon (according to data by the ICC), there are no indications supporting an assumption, frequently voiced by managers of bank-owned insurers, that the forceful practice helps in increasing awareness of the benefits of life insurance among Lebanese consumers.

According to the new LIBS study, the total number of life insurance contracts sold in 2011 via ‘bancassurance’, the distribution channel where people buy insurance from an agent situated in a bank, was equivalent to 46 percent of all life contracts.

“People don’t go to the bank to buy insurance. They go to the bank to get a loan,” commented LIBS President Issam Hitti.

If term-life, protection-only contracts sold via bancassurance are overwhelmingly tied to lending agreements, it ought to be a much more significant concern for the entire Lebanese insurance industry how to improve genuine demand for both savings and protection-only life insurance contracts.

In the property and liability insurance business, the best perspective is for growth in property premiums from corporate clients, led by industrial companies which are newly required to contract a basic fire insurance package.

Medical insurance — which alongside motor-related business constitutes the bread and butter of Lebanese and regional non-life insurance — has seen profitability resurge in 2009 and 2010 when compared with previous years, according to the ICC. However, members of the industry attributed growth of medical premiums in the past two years largely to premium hikes imposed to balance rising hospitalization costs. Recent trends in medical insurance showed negative developments in the number of issued contracts and growth of premiums by only 4 percent in the first half of 2012, 11 percentage points below the full-year growth shown in the ACAL Quarterly Report for Q4 2011.

The outlook for medical is further shaded by insider observations that corporate group clients are going down the road of cost cutting, reducing the scope of employee health insurance purchases or making employees pay for their dependents.

Retail clients of medical insurance have limited recourses when faced with rising policy costs, except for complaining to the provider — and insurance managers are hearing a lot of complaints this year.

Motor insurance quagmire

Motor insurance has a questionable outlook this year. Not only did premiums contract by one percent in the first half of the year and speciality coverage for cross-border travel slump because of the Syrian situation, but the combination of rising claims costs and shrinking premiums makes it likely that 2012 will see the bottom-line of motor insurance further in the red, after already incurring losses in previous years.

Given that falling demand for comprehensive or no-fault insurance of motor vehicles was behind the contraction of motor premiums, compulsory third-party liability (TPL) motor insurance is where the market can grow in months and perhaps years going forward.

For almost a decade Lebanon has had mandatory motor insurance. But the coverage, which represents 17.1 percent of all motor premiums, so far only indemnifies injury or death of accident victims. Now, clauses in a new traffic law propose that mandatory insurance will soon apply to both bodily injury and material damages, while the National Insurance Board is deliberating on how to best implement the new coverage.

The expansion of mandatory insurance protection to material damages caused by motorists will bring relief to society, as it will moderate the risks of suffering financial losses just from driving in Lebanese traffic. For insurance providers, the introduction of the wider mandatory cover is a mixed bag. An impending problem of mandatory motor liability insurance against material damage is abuse. Different to accidents with personal injury, deliberately staging an accident with some material damage to another car is an easy ploy in Lebanon’s environment of lousy roads and inconsistent enforcement of traffic discipline.

The combination of having a large number of competing car insurance companies and no system for identifying high-risk drivers means that Lebanon has the potential to become an Eldorado for automotive accident scams as soon as a compulsory, inexpensive TPL coverage for material damages is in the market.

A central issue for providing society with the advantages of full TPL motor insurance will therefore be the empowerment of a motor risk database with full participation by the industry. A motor risk center (MRC) has been under development where insurance companies supply accident and claims data on voluntary basis; it has undergone test runs but scepticism that the MRC will function as needed has been prevailing from the ranks of insurance managers right to the top people-in-the-know in motor insurance.

As noted by the head of the National Bureau for Mandatory Motor Insurance, Fateh Bekdache: “If it is not compulsory, I personally don’t believe it will work.”

Lebanese entrepreneurs traditionally have approached risks with the attitude that they prefer to carry them themselves rather than pay for risk transfer, unless there is a compelling reason to buy insurance. Companies insure their vehicle fleets and some contract medical coverage for staff as add-on benefits beyond the obligatory payments to the social security system. Larger companies are usually more insurance-aware and acquire basic asset protection, such as property, fire, and cargo insurance. But the vast majority of commercial enterprises are small ventures and their insurance blankets reveal more risks than they cover — small and medium-sized Lebanese companies are underinsured on several and perhaps even most fronts.

The only insurance that has been compulsory for Lebanese companies until now, with some level of enforcement, has been workmen’s compensation, a basic accident policy for employees. This year, the Ministry of Industry introduced a new requirement for industrial establishments, which from this summer on have to obtain a fire insurance policy in order to renew their industrial licenses.

Interestingly though, demand for fire insurance has already been on the rise before the Ministry of Industry introduced its decree. According to the quarterly statistical report of the Lebanese insurance association, ACAL, premiums in the fire business increased 14 percent to $81.7 million in 2011 and represented a 9.3 percent market share of non-life insurance.

The corresponding numbers for the first and second quarters in 2012 show continued growth at 14 percent for January to March, and 16 percent for April to June. According to the report for the second quarter, the share of fire premiums in total non-life premiums has expanded to 10.3 percent of non-life premiums in Lebanon.

One factor that insurance leaders say influenced the demand — and also the consideration to create a mandatory fire package for industrial establishments — was a $12 million industrial fire that was settled by the insurer, Arabia Insurance, with quite some public fanfare in November 2011.

An unsure fire-sale

The latest statistics on insurance sales in the first half of 2012 do not necessarily enable growth estimations for fire insurance in the coming years. On one hand, implementation of the decree requiring coverage in industrial establishments still has to be shown in practice; companies in Lebanon are noted for their inventiveness when it comes to cost avoidance. On the other hand, the insurance providers do not have market data that would reveal how many industrial establishments and of what sizes are currently lacking fire coverage.

The new requirement, which insurance companies — no surprise — are supporting enthusiastically, has already generated applications from industrial companies that never before felt the need to buy fire insurance. The application surveys of these companies have shown that many do not conform to important standards, said Fateh Bekdache, general manager of Arope Insurance.

“Every insurance company has its own strategy on this but the companies that look for fire insurance have some risks that they need to work on, a lot, in order to be insurable,” he said.

It is a different case with managerial and professional liability insurance coverage in Lebanon, where growth is not led by any new regulatory initiatives. A discussion at the Ministry of Tourism regarding the introduction of mandatory liability coverage for restaurants and hospitality enterprises, to protect patrons if they suffer an accident or a food-related illness, was recently aborted.

But some factors have sparked interest in liability covers. When judicial authorities in Mount Lebanon ordered a doctor arrested in a dispute over medical treatment in June, it was the first case where alleged negligence and malpractice by a physician resulted in such action by the public prosecutor. According to Bekdache, the doctor’s arrest triggered inquiries by medical practitioners asking for quotations on malpractice insurance.

In parallel to newly malpractice-risk aware physicians, lawyers are also asking for professional liability coverage, but do so mainly for reasons of wanting to enter international partnerships. “A month ago I got a call from a prominent law firm which asked about the price indication for this kind of professional indemnity cover,” Bekdache said.

Demand for professional liability insurance by a law firm is attractive for the insurer, but these inquiries cannot be answered with a ready-made policy, he added. “It is a big proposal,” said Bekdache. “I have to know the track record of the law firm, how many cases were lost and won, what kind of litigation they do and what their turnover is.”

D&O’s and Don’ts

Another complex need is management liability insurance. Directors and officers, or D&O in insurance-speak, are today held responsible for a growing range of risks that range from unintentional errors and omissions in delivering projects, as well as products for financial and managerial liabilities. Regulators, shareholders and stakeholders such as employees and competitors represent a pool of litigation threats for both companies and directors as individuals.

Cases, which can be both civil and criminal, are brought for issues as diverse as a violation of anti-money laundering rules, failure to fulfill duties, keep adequate records or apply regulations, harassment, wrongful termination, or abuse of power. The range is so broad that insurance covering corporate errors and wider management liabilities, subsumed under the term D&O insurance, is “a must for any large company in Lebanon,” according to Bekdache.

Against the severity and frequency of this risk, however, the number of D&O policies issued in Lebanon is falling seriously short and the market is underpowered. Chartis, a prominent name in global D&O insurance that has presence in each of the six Gulf Cooperation Council countries and Lebanon, has seen demand for D&O coverage grow in some Arab markets. The United Arab Emirates and Saudi Arabia are leading demand developments for D&O insurance, said Muhannad Abdul-Majeed, an expert on financial insurance lines with Chartis Middle East.  “Unfortunately, Lebanon is a challenging market for management liability covers.”

Roger Zaccar, business development manager of Commercial Insurance, an independent Lebanese insurer, was blunter. “There is no demand [in the Lebanese market]; you have only two or three clients who are buying [D&O]. People don’t know why they need it and insurers don’t have the volumes to create specialized departments for it” he said.

Local providers are not equipped to assess and underwrite corporate liability policies, said also Arope’s Bekdache. “Nobody has a facility on those policies so we go via international brokers. It doesn’t make sense to have facility for such a product.” Among the reasons why D&O insurance in Lebanon is a tougher sell than in the GCC is so few companies are publicly traded on the Beirut Stock Exchange and very few international investors are looking to acquire stakes in Lebanese companies, according to Abdul-Majeed.

Regional D&O growth

At Chartis Middle East, 61 percent of premiums underwritten on management liability coverage in 2011 came from first-time buyers, evidencing demand growth, he said. “The majority of buyers were companies that were publicly listed, and/or had exposure to international jurisdictions via their customers, shareholders, suppliers, and so forth.”

However, the insurer also found that regional D&O insurance demand is still mostly reactive, as companies respond to demand from international investors and business partners, or to high-profile incidents where executives and corporate officers are scrutinized.

In the UAE and other GCC countries, regulators are popularizing D&O as they are stepping up investigations of corporate managerial liabilities. Chartis observed 20 percent more notifications of claims brought against D&O in 2011 when compared with 2009 and 2010.

Corporate and managerial liability insurances are just some of the protections that companies in Lebanon and the region will need more of in future if global markets are the guidepost. While no concise data on the presence of D&O insurance is available, Chartis estimates that current premium volumes invested in D&O liability protections is no more than 5 percent of non-life premiums across the GCC and Levant.

The level of coverage in the region is definitely lower than in more mature economies, Abdul-Majeed noted, even though corporate liability protection is anything but a than needless luxury.  “In terms of [a] corporation’s budget, a D&O policy is usually much cheaper than other more traditional insurances, such as property insurance or group medical, but whereas companies are prepared to pay the higher premiums for these covers, they unfortunately do not give much thought to management liability insurance.”

Circumstances could however boost adoption of some insurance policies for corporate decision makers and key persons. Besides seeing more corporate demand for insurance against terrorism, political violence and war risk, insurers in Beirut and the Middle East have been starting this year to get more calls asking about kidnap and ransom policies.