The Buzz

Revolution’s next level

by Sarah Lynch
written by Sarah Lynch

"Since February 11, Tahrir has been taken to the factories,” says workers’ rights activist and blogger Hossam al-Hamalawy. “The barometer for progress has been [thought of as] how many people gather in Tahrir, but that’s not true. The labor strikes that have taken place after former president Hosni Mubarak’s fall are phase two of the revolution.” 

Egypt has witnessed more than 120 different labor strikes since March this year, according to data from the Egyptian non-governmental organization (NGO) Awlad El Ard Association for Human Rights. This is in addition to over 490 sit-ins, demonstrations and protests. Experts estimate that roughly half a million workers participated in strikes in August and September alone.

The current wave of labor actions found its roots in December 2006, when the nation’s center of textile production in the industrial city of Mahalla El Kubra saw an outbreak of wildcat strikes. These protests in many ways helped pave the way for this year’s 18-day uprising and its perceived success after workers took to the streets during the final days of the revolution, ensuring Mubarak’s dethroning.

Unions unquelled

Labor agitation escalated in mid-September, most significantly when tens of thousands of teachers descended on downtown Cairo as part of a larger strike calling for increased wages. That same week, hundreds of thousands of doctors, nurses and health technicians walked out of public hospitals, while transportation networks ground to a crawl when workers from 25 bus depots across Greater Cairo staged a partial strike.

“The organization and awareness of workers is in itself outstanding,” says labor activist and journalist Moustafa Basyouni. “I think in the future, these workers will lead the way to change.”

Egypt’s labor force is more than 25 million people and worker protests have affected all sectors of the economy, most occurring in the public sector. Acting government officials eventually negotiated with teachers and transport workers. However, other strikers have been completely ignored.

“It just depends on the power of the strike,” says Hamalawy. “Look at the aviation workers; you can’t mess with them. They brought Cairo to a halt.” When air traffic controllers went on partial strike in early October, hundreds of flights were delayed and travelers stranded, forcing officials to address their concerns.

In what human rights activists consider among the more troubling responses to the strikes, workers have been arrested and tried in military courts. Many cite the authorities’ failure to address workers’ concerns in a consistent manner as an obstruction to a return to normalcy, wreaking havoc on the economy.

The government’s projected 3.5 percent economic growth rate for 2011-2012 is unrealistic given the unstable political and social environment, according to Magda Kandil of the Egyptian Center for Economic Studies.

“We know that growth rate has slowed to 1.8 percent,” she says, “and I’m not confident at this point that it’s back on track. The private sector remains at a standstill and foreign investors are concerned [about financial risk], so they’ve scaled down involvement.”

“The military is not dealing well with the labor strike movement,” she adds, referring to the Supreme Council of the Armed Forces (SCAF), the ruling junta that rose to power following Mubarak’s ousting.

“I think the frustration in the labor movement reflects [the fact] that many people are not happy,” says Kandil. “The best thing the ruling council can do is ensure a swift transition.” Parliamentary elections are slated to begin on November 28, but SCAF says it will retain power until a new president is elected, with this ballot now expected as late as 2013.

SCAF’s bludgeon of ‘justice’

Within the confines of a military prison, Khamis Mohammad was stripped and beaten brutally. “I was treated as an enemy of the country, as if I was the reason for the poor economy,” says the young Egyptian who is one of many arrested on charges of public assembly in violation of an anti-strike law.

After being plucked from a 200-man sit-in outside Cairo’s petroleum ministry, Mohammad remained in a dingy jail cell for weeks until he was given a one-year suspended sentence by a military — not civilian — court. Such trials are just one aspect of post-revolution governance by the ruling military council that human rights organizations claim undermine a smooth transition to democracy.

“Military trials are a way of intimidating the opposition and are counter-revolutionary by nature,” says Shahira Abu Leil of the human rights group No Military Trials for Civilians. “The revolution was about freedom of expression and free speech. And the military has tried people who were exercising these rights.”

“SCAF is doing this because it’s a way to put people back into a disciplined state,” she adds.

Some 12,000 Egyptians have appeared before military courts since the start of the revolution; roughly 8,000 remain in prison and 4,000 have been released, according to Abu Leil. Courts have acquitted 795 of the total number of cases, equating to a conviction rate of 93 percent, Human Rights Watch (HRW) said in a September 2011 report; 1,836 individuals, like Mohammad, were released on suspended sentences.

“The judges are in a clear hierarchy, so one of the concerns we’ve had with the military justice system is there have been cases of clear political instruction,” says Heba Morayef of HRW. “In your average [civilian] courts judges make independent decisions, but in these cases SCAF is making the decisions.”

The ruling council has held their ground on the judicial system refusing calls to end military tribunals, citing increased crime rates and the need to prosecute baltageya — or thugs — who have been on the prowl since the January uprising.

“Military trials are easy and efficient,” Morayef says. The average length of each trial is between twenty and forty minutes and civilians are sometimes tried and sentenced in groups. “But decisions are often not based on proper examination of the evidence,” she argues.

The number of civilians subjected to military tribunals since the ruling council rose to power on February 11 exceeds the total number of people tried this way under Mubarak’s 30-year rule. Those convicted range from laborers to activists, such as blogger Maikel Nabil who went on a hunger strike after being sentenced to three years in jail for “spreading false information” and “insulting the military establishment”.

In early October, seven demonstrators were plucked from a protest in the Nile Delta city of Shabin El Koom while demanding improved factory conditions and increased job stability for workers at the Turkish textile company, Mega Textile. Those arrested were given 15-day jail sentences while investigations took place, an act allowed under Egypt’s Emergency Law.

“This needs to be changed because the people are considered guilty until they’re proven innocent,” says Egyptian lawyer Mohammad Hassan as he stands among a group of workers in the city.

Egypt’s widely reviled Emergency Law has long been a hot-button issue for activists because it gives the military government the right to detain people without charge and criminalize mass gatherings. Emergency law was to expire at the end of September but was renewed following a violent attack on the Israeli Embassy in Cairo.

“The recent crackdown is on political protests, labor protests,” HRW’s Morayef says, “and from a freedom of assembly standpoint, that’s very serious.”

SCAF is refusing to repeal emergency law despite requests not only by enraged activists but also by the Obama administration. United States Defense Secretary Leon Panetta raised concerns about the Emergency Law while visiting Egypt in October, and US President Barack Obama is urging Field Marshal Hussein Tantawi to repeal the action and put an end to military trials. As part of the widening crackdown, SCAF has placed a firmer grip on civil society, restricted press freedoms and carried out arbitrary arrests — all characteristics of Mubarak’s regime.

The Egyptian cabinet announced in September that more than 30 Egyptian NGOs are being investigated for receiving foreign funding without being properly registered. Should these groups be found guilty of “treason”, Egypt’s human rights network could effectively be shut down.

Silencing the press

Additionally, the military council is censoring media following months of relative press freedom. In mid September, plainclothes police  stormed the offices of Al Jazeera’s Mubasher Misr Channel , taking equipment and rouging up staff. Two weeks later, an edition of the weekly Sawt Al Umma and the daily Rose Al Youssef were prevented from going to print allegedly over controversial stories. In a subtler form of censorship, a writer at a popular Cairo-based magazine says management was told specifically not to write articles that criticize the military, or they would face punishment.

Most severely, military forces clashed with civilians on October 9 during a demonstration by Coptic Christians, leaving 24 dead and hundreds injured. The same evening, the US-funded Al Hurra television station was raided by military forces brandishing automatic weapons. Telephone, electricity and Internet services were also cut to one of Egypt’s leading newspapers, according to the Committee to Protect Journalists.

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Finance

Executive Insight – Rise of the Chief Risk Officer

by Shane Phillips
written by Shane Phillips

Revolutions, rogue traders and roller coaster markets have one thing in common: They make risk professionals fashionable. While the fourth quarter of 2011 will see bloodletting in the front offices of many high street banks, risk professionals will sit comfortably and benefit from what is now being coined as “The Rise of the Chief Risk Officer (CRO)”. 

As globalization gathered steam in the early 1990s, corporations began to realize that managing their downside had a huge upside and so began to anoint executives with the remit of ensuring their organizations had the appropriate risk controls. This innovation has taken hold of the global corporate community with breathtaking speed. In 1993 James Lam was hired by GE Capital as the world’s first CRO. Since then the role has spread to all four corners of the earth, across industries and sectors, and is now being considered the fourth C in the C-suite.

Risk has experienced explosive growth over the last 10 years. In 2000 only 45 percent of financial services companies had a CRO, now more than 80 percent do. Companies are hiring risk professionals both vertically and horizontally throughout the organization. 

Risk teams were first assigned to cover critical areas such as liquidity risk, market risk and credit risk. Since then the spectrum has broadened and today risk teams deal with operational risk, enterprise risk, industry risk, investment risk, political risk and many others. In fact new areas of risk are probably being created as you read this article. 

This translates into an ever-growing demand for risk professionals in every world region, including the Middle East. In the Gulf Cooperation Council (GCC) we have seen a steady increase in the number of CROs on the ground, with most high street banks having one for each country, where previously there was one for the region. In 2000 there were less than 20 CROs based in the United Arab Emirates, whilst today there are more than 100. 

Culture clash

Unfortunately it is not enough that organizations hire risk professionals and create risk policies and procedures. Most organizations had risk professionals among their staff in 2006 and 2007. When the financial crisis struck, the problem was that they did not have risk cultures. An organization’s culture is dictated by the values of its leadership and the preponderance of chief executive officers (CEOs) coming from the front office means middle office and back office staff are the underdogs in any boardroom discussion.

The 2010 Dodd-Frank Act in the United States requires banks with $10 billion or more in assets to create a board level risk committee. This marks an important step forward in developing risk cultures where the authority of the CRO is underpinned with direct access to the board, enabling him or her to circumvent the CEO and highlight risk issues. In early 2000 only a minority of CROs had access to the board and CEOs could easily mute, or in extreme cases remove, their CROs if they did not march to the sound of the boss’s drum. This change in legislation and reporting line will cause a cultural change and require the front office to adapt a more risk-conscious approach to their work or face the wrath of a CRO.

There were a few brave candidates, both CROs and chief investment officers (CIOs), who resigned from their posts in 2007 and 2008 because their leadership refused to listen to them. These men and women were facing extreme pressure to fall in line as their organizations gorged themselves on risky derivatives. Standing up for what was right was a fatal strategy in these companies. We all saw the effects of such cultures as Bear Sterns and Lehman Brothers came crashing down, causing unprecedented damage.

A growing trend

A recent study by Deloitte has shown that more than 50 percent of CROs are currently reporting to the board. This is an improvement on 2008, where that figure was 37 percent. This represents a gradual shift in the skill sets an organization requires at its helm and also raises questions about whether we have the right kind of leadership in the CEO seat. CEOs of the future will be required to have an understanding of risk, compliance and legal in order to effectively manage their organizations in the new market place. 

This change was not sudden and contrary to popular belief it is not the love child of a vicious bear market. While the correlation between tough economic data and the increase in risk professionals over the last three years suggests a causal link between increased economic risk and the corporate demand for CROs, this demand is in reality a long-term trend of risk management that has been growing steadily since the late 1980s. Behind what seems like a recent phenomenon of CRO empowerment we have been witnessing the ascendency of the middle office as operations, information technology, compliance, legal and risk have all been slowly growing in influence over the last three decades. 

What we are experiencing now is a trend which really began in the late 1980s and was first felt in the early market crash of the 1990s. At that time globalization and technology first began to change the way we did business and several mammoths such as IBM almost went bankrupt because they were not quick enough to adapt. In the 1990s companies had to think globally but act locally as clients wanted standardized services across the world. This is the tail of the same trend that is now past its tipping point. Throw increased volatility into the mix and large companies now have a significantly increased risk profile, a risk profile which has been slowly inching higher for the last 30 years. 

In conclusion, the rise of the CRO is a trend with a convincing track record, bound to accelerate further as it is authenticated with legislation and enforced with new regulation. Stanton Chase International has seen a 400 percent increase in demand for risk professionals over the last five years and we predict a further 44 percent increase in 2012. As organizations strive for better corporate governance and move to defend their profit pools from downside risk, CROs will continue to see their equity price rise.

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Finance

Teamwork to the top

by Executive Staff
written by Executive Staff

Insurance companies in Lebanon may have a future filled with potential but their presence is also stacked with risk. Although sector growth in 2011 to date has not been bad at all — data for the second quarter imply 17 percent expansion of premiums in the first half of the year (see story on sector statistics page 56) — growth in key segments of domestic insurance demand raises questions and interaction with global partners is also set for some challenging times.

In an interview with Executive, Assaad Merza, the president of the Association of Insurance Companies in Lebanon and chairman of Capital Insurance, said that although the sector shows good numbers in terms of the underwritten premiums that represent the industry’s turnover, “all insurance companies do not write large profits.” He added that a majority of people in the population tend to buy only medical insurance because of its importance for their families and themselves but do not have, or can not afford to buy, other needed policies.

As Merza further pointed out, insurance companies have been impacted this year by slowing sales of homes and cars. As with personal loans in general, lenders require that buyers of homes or cars back up the loans they take with a life insurance policy that will cover outstanding payments in case of the buyer’s death. This tying of insurance to provision of credit has generated profitable business for insurance companies but providers, especially firms linked to banks by ownership, feel it when the loan markets slow. 

“Insurers and banks definitely go alongside [one another] and all the retail lending products have insurance embedded in them. So it is normal that insurance will be affected if the economy slows down and this affects lending, especially in retail,” commented Fateh Bekdache, general manager of Arope Insurance.

BLOM Bank-owned Arope, whose continuous growth in the past few years has propelled the firm into the top tier of Lebanese insurance companies in terms of turnover and profits, saw its premiums rise in 2011 but expects 2012 to be a more challenging year, said Bekdache. Another bank-owned insurer, Byblos Bank’s Adir, has enjoyed premium developments this year in line with those of the same period in 2010, according to remarks General Manager Jean Hleiss made to Executive on the sidelines of an insurance conference in Beirut last month.   

While medical insurance has led to growth in premiums in 2011, the increases were not from new business, said Edward Traboulsi, general manager of Lebanese insurance firm Assurex: “Looking at the statistics for the first two quarters we have seen market growth mainly coming from medical insurance. The main driver behind that is the increase in prices or premiums which have to follow the increases in medical cost.”   

Real, that is inflation-adjusted, growth rates will be hard to achieve for 2011, agreed Elie Nasnas, general manager of AXA Middle East. “I think the sector is improving but growth this year will be less than two digits and the driver will be inflation much more than new business or increases in the number of insured.” According to Nasnas, insurance activity in the region is generally following trends in economic development and the concept that the sector itself would be sending impulses for growth into the wider economy is currently a dream.

“Unfortunately, the insurance sector is not yet driving the economy, definitely not,” he said.

Insurance activity in Lebanon is very sensitive to fluctuations in the economy as the reach of mandatory covers for companies and individuals is small. Even the compulsory third-party liability policies for motor vehicles are still limited to covering bodily harm instead of material damages and a mandatory insurance for buildings, the so-called decennial insurance introduced several years ago, has so far not been implemented because the legal requirement mandated an earthquake cover and insurance companies refuse to cover such acts, as they cannot  obtain reinsurance.

Across the entire Middle East and North Africa (MENA), risk mitigation levels in society are tied to the presence or absence of compulsory insurance schemes. These schemes, plus the prevalence of life insurance as savings and wealth-building instruments, constitute a large portion of insurance spending in developed economies, which in 2010 were reported at $3,724 per capita in North America (United States of America and Canada) and up to $6,633 in Western Europe. In addition to macroeconomic factors, the absence of compulsory lines contributes significantly to the far lower degree of insurance spending in emerging economies, which for 2010 was preliminarily calculated at $110 per capita by a report for global reinsurance firm Swiss Re.

In comparison to developed economies, MENA populations have a high tolerance for personal risks and relatively high reliance on familial support networks. The introduction of new mandatory insurances would be a key requirement to facilitate premium growth in any country of the MENA region.

“I expect an overall increase in premiums of between 12 and 17 percent in the Arab world for 2011. For 2012 I have some doubts,” said Fady Shammas, chief executive of Arabia Insurance.  He added that, “Unless there are compulsory insurances that are agreed upon and legislated, I don’t expect major growth. The more compulsory, the more premiums. But as long as the people of the Arab world are poor and disposable incomes do not exist, many governments will be very reluctant to come up with laws of compulsory insurance, very reluctant. I don’t expect any introduction of compulsory insurance in 2012, because the governments are afraid of the people.”

The region’s upheavals thus figure indirectly in lowering the business outlook for insurance companies, at least in the short-to-medium term. As Lebanese insurance firms have established subsidiaries in countries affected by the Arab revolutions, their businesses in these countries have also seen a direct downturn. According to Arope’s Bekdache, 2010 was a very good year for the company’s regional subsidiaries in Egypt and Syria but this year is not. The manager did not disclose, however, how sharp the decline in each of these two countries was in the first nine months of 2011.

In Bekdache’s view, however, insurance expansion in under-served regional markets is not going to be derailed. Unrest in single countries will delay the implementation of expansion projects but insurers who ventured into these markets did so with a long-term perspective and are confident that the market growth will restart after the societal changes.

That sentiment echoes with Assurex, the first Lebanese company to acquire a license to operate in the Iraqi market. According to its General Manager Traboulsi, there is no doubt that the rationale for expansion remains sound. “We need to look at other markets in order to grow. We have the know-how and the capabilities and there is business out there, so it is very important for us to grow our business to look outside the borders. Iraq was a country where we thought there is potential for us,” he said, adding that although it is very challenging to write new business in Iraq, the country offers a rare combination of an established insurance tradition and while being a “virgin market”.

One reason Traboulsi cited for the pressure on Lebanese insurers to venture outside is the intense competition in the crowded domestic market. “The pie is just not growing in Lebanon. We are competing against ourselves to grow our market share or increase our volume of business,” he said.

The same sentiment was voiced by Max Zaccar, chairman of Commercial Insurance and one of the sector’s longest-standing leaders of a family-owned insurer. Aggressive competition over the very few profitable lines in general insurance, including marine hull and cargo business, has intensified further in recent years, he told Executive.

The problem of competition is endemic even at a regional level and fragmentations of the industry play a large role in lowering the strength of sector companies, said Farid Chedid, chairman of Chedid Re, one of the largest brokers in reinsurance services in MENA.   

The most problematic side of the intense competition among Arab insurance companies is that, “unfortunately most of the competition is based on price,” Chedid said.

The tightness of insurers’ profit margins is an issue that influences negotiations between them and the international reinsurance companies to whom they hand portions of risk to limit their exposure to manageable levels. Due to pressures that global reinsurers face from high catastrophe losses, (according to Swiss Re, the first half in 2011 was the second worst year in reinsurance history with a loss of $70 billion) and from difficult financial markets that impair their investment incomes, regional insurers are now caught in a quagmire. “On the one hand we have reinsurers who are trying to raise prices and improve terms and conditions [to their advantage] and on the other hand insurance companies are in severe competition with one another and are trying to pull prices down. This makes things very difficult because each group is looking at the business from a very different angle,” Chedid added.

He believes that the Middle East’s insurers may be forced to rethink their strategies. “Our region cannot live without reinsurance. Reinsurance cession is one of the highest in the world. Why is there so much reliance on reinsurance? Because insurance companies are too many — over 500 companies in MENA — and because there are so many, they do not have the capacities for higher retention of risk.”

This tight squeeze on the industry can, Chedid argues, help make the sector more efficient. “The smaller insurance companies that rely heavily on reinsurance will definitely be left behind if they don’t increase their capital bases and upgrade their underwriting and risk management expertise. We are moving toward a trend of more consolidation in the industry, more expertise in the industry, more capital in the industry and therefore more retention of risks in the region.”

Negotiation of contract renewals with reinsurance companies is one strong concern of sector companies, but an even larger concern is the development of investment portfolios and investment incomes, Arabia’s Shammas said. Between the impact on underwriting from reinsurance tightening and the impact on investments, the greater impact is “definitely on investments. If your results are good and you are profitable, the reinsurer will not put pressure on you when terms for renewals are negotiated — whereas your investments are at risk at any point in time.” He added that Arab insurance companies are impacted by the performance of their investments in European bonds and equities, and are furthermore exposed to the effects of turbulent global conditions on countries in the Middle East.

The region’s insurers will not escape the impact of the latest financial woes in developed economies, said Ibrahim Muhanna, a Lebanese insurance consultant. “The insurance industry in the Arab world always has a delayed effect from financial developments in global markets. When in 2008 everybody said we were immune, I told them we are going to feel it and they felt it a year later.”

Even insurers without direct exposure to the European crisis will feel an impact because they have investors who are exposed, albeit with a delay of a year or two, Muhanna told Executive. “If one of their big policy holders, for example, is exposed, this policy holder’s business will go down in the second year and his premiums will go down and the insurer’s business will go down. It has a delayed effect. It takes a good two years to feel it in the Arab world. The results reported in 2011 are not as bad as anticipated but in 2012 and 2013 we will definitely feel the results.”

A final duo of items weighing on the balance sheet of insurers in the Middle East are the issues of regulation and cooperation. Fairly advanced regulations have been introduced in some countries but there are major differences, and in Lebanon the adoption of a new insurance law has yet to happen (see interview with the Lebanese insurance commissioner on page 64).

Mention of regulatory intrusion into their established ways still has the ability to raise the hackles of insurance managers and the implementation of regional insurance regulation remains something of an illusion, although it would facilitate important progress in regional sector growth in the views of many region-wide actors such as Chedid.   

“Today, each country has its own regulation and different regulatory requirements beginning from very basic things [such as] policy wordings, risk management, capital base. Some countries are moving towards risk-based capital, others are using minimum capital with guarantees,” he said. “We need to move to more homogeneity in the region by regulators so that the market can develop and the insurance companies can develop on regional basis and therefore grow. Then they will be able to retain more risks in the market and be able to afford better underwriting expertise and better IT systems. No country in the region today can on its own provide enough volume and enough business to create economies of scale. As a regional company, you can create economies of scale and you are able to compete with international giants,” he said.

As major stakeholders in the Lebanese insurance industry emphasized to Executive, the country’s insurance sector can only blossom with regional cooperation. This, however, means that issues that reside just below the surface in regional dialogue — including misgivings, jealousies, territorial thinking and distrust of the other stakeholders’ intentions — need to be mastered by companies, brokers, regulators and all practitioners of insurance.

A conference bringing together insurance regulators and insurance companies at the end of October in Beirut was the first initiative to provide an equal and open forum for all stakeholders. Although Sharia-compliant insurance, or Takaful, has no significant representation in Lebanon, the forum even drew the attention of an insurance regulator from Senegal who attended with the specific aim of meeting Takaful companies.

Although, or perhaps even because, discussions at the forum had their moments of clearly opposing views, the event was hailed by participants as a great step forward in improving relationships among the region’s insurance stakeholders.

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Finance

In from the dark

by Executive Staff
written by Executive Staff

The most significant innovation in the Lebanese insurance industry this year is transparency in on-time delivery. For the first time in roughly 60 years of collecting premiums and paying claims, the majority of insurers have made their quarterly headline numbers available for evaluation.

Starting with the first quarter 2011, Lebanese insurance industry data is published in a statistical review by the Association des Compagnies d‘Assurances au Liban (ACAL). They cover overall trends for premiums, claims and ratios as well as trends per business line — including life insurance, motor and others — for a total of nine areas of insurance activity.

“The insurance control commission at the Ministry of Economy and Trade started publishing the annual report on the insurance sector in 2005 and it was an important initiative,” said Jamil Harb, secretary general of ACAL. “However, we realized that it would be better for the companies and the public interest to gain faster access to this statistical information, so the ACAL Board proposed to the member companies to find an independent and trustworthy company to carry out the publication of the quarterly report.”

Harb told Executive that ACAL committed itself to the project as the two-year time lag in issuance of the official reports greatly reduced the usefulness of the information. The association commissioned reputed local auditing firm Fiduciaire du Moyen Orient to provide the analysis of data, while guaranteeing the full confidentiality of it to each individual company.

According to second-quarter data, Lebanese insurers underwrote risks represented by $623.3 million in gross premiums in the first six months of 2011. This compares with $1.11 billion in premiums in the whole of 2010 and when compared with the first six months of 2010, represents a year-on-year growth of 17 percent.

The trials of transparency

It is a common problem in international insurance markets that sector players are often more reluctant than other financial companies to disclose their information. Underwriting performance in terms of gross premiums is generally easiest to obtain, but an insurance market’s performance can really only be understood if information is available on aspects such as the net premiums after cession of risks to reinsurance companies, technical reserves, ratios and other issues.  

On the upside of transparency, however, sector companies can only assess their real positions vis-à-vis their peers and the actual market trends if comprehensive data is available quickly. Lebanese insurance leaders have so far reacted well to the first two editions of the report.

“It definitely helps to have the statistics,” said Fateh Bekdache, general manager of Arope Insurance. Before the introduction of the reports by the association, sector companies were limited to data the Arabic business magazine Al Bayan collected annually from the companies, and Bekdache noted that this was not always reliable given that they were unaudited.

Edward Traboulsi, general manager of Assurex Insurance, said statistics help to benchmark it against its peers. He hailed the reports as “an excellent tool which we didn’t have before. There are so many questions that are left unanswered if you don’t have benchmarking statistics.”

Claims & benefits 2011

The report for the second quarter of this year showed that Lebanese insurers paid out $258.5 million in claims and benefits to their policyholders by June 30. Like premiums, claims and benefits were up from the same period in 2010. However, the rate of increase in claims was 10 percent, notably below the rate of premiums growth. The year-on-year increase in claims and benefits at the end of the first quarter stood at 4 percent.

The two dominant business lines in terms of total turnover in the first half of the year were, as usual, medical and motor insurance, 33.4 percent and 25.7 percent, respectively. Life insurance was the third largest sector, representing 23.1 percent. The combined market share of the three lines left the other lines in general insurance — from workmen’s compensation and fire to marine and engineering — vying for less than one fifth of the total premiums pie.

The data on paid claims shows that motor and medical claims represent nearly 75 percent of everything paid out by insurers. The gap between the shares in total premiums and total claims payments for the two lines was thus about 15 percentage points in favor of claims. While illustrating the extreme importance of the two largest business lines for the industry’s revenues, the overweight of motor and medical claims in percentage terms also underscores the volatility of those lines.

In the smaller, more profitable lines such as fire, marine cargo and hull, engineering and construction, general liability and others, the statistics illustrate that these lines — due to their small size of total premiums — can be exposed to significant fluctuations on the claims side when just one major case occurs, such as an industrial fire destroying a multi-million dollar manufacturing facility.

The analysis of the insurance sector still has lots of room for improvement. Part of this evolution will occur naturally, as with the flow of time the issuance of reports will make the information published in the first two quarters more relevant and comparable.

Another value boost will come from increasing participation from insurance companies that have committed themselves to provide the quarterly information on a voluntary basis. The second-quarter report already reached a comprehensive 95 percent coverage of all non-life premiums, based on data reported by 42 of ACAL’s 53 members. However, the absence of one major life insurer’s data meant that the report’s figures captured a lower 80 percent of the activity in that sector.        

Insurer investments

One area in which the association is currently working to extend the statistical report’s coverage is in gaining a view of investment portfolios which insurance companies hold. The importance of insurance companies as institutions in financial markets is directly related to their muscle mass as investors. Wielding this investment power essentially on behalf of their policyholders, insurance companies provide a component of stability to both financial markets and society. 

The size, allocations to investment classes and profitability of the insurance sector’s investment portfolios are thus of interest to the public as indicators of the companies’ financial health. The portfolio data is also of interest to professional analysts across the entire finance industry as, for example, growing investment power by local insurance companies could provide a telling hint on the possibility of seeing more liquidity in Lebanon’s financial and equity markets.

Investments by insurance companies in relation to their insurance business play a preeminent role in developed insurance markets and estimates are that sector companies in Lebanon invest more than two dollars tied to their life insurance business for every dollar they invest related to non-life business.

Inclusion of insurance sector investment portfolio data overall, and their correlation to each business line, is on the agenda of the ACAL quarterly report for upcoming editions. According to Harb, the compilation and analysis of this data is still being worked out, as extrapolations of totals are not possible when analyzing investment activities that are distinct for each company.

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Finance

Q&A – Assaad Merza

by Executive Staff
written by Executive Staff

The Association of Insurance Companies in Lebanon (ACAL) is the leading voice representing insurance providers in the country. Executive sat down with ACAL president Assaad Merza to learn about the challenges facing the industry.

E  What are the plans of ACAL, especially after we witnessed the passing away of former ACAL President Abraham Matossian in May?
What we are doing is always a continuity of what Mr Matossian was doing. He was a great man and it is very important to us to follow what he did. [However], every person has a different idea of how to develop the association. What we are doing now started with the statistics on the website, which is a very nice thing. We also have very good relations now with the Ministry of Economy and Trade and are working on the new insurance law with the ministry.

E  Are there any specific changes that you are seeking to implement in relations with the insurance commissioner at the Ministry of Economy?
There has been some trouble in the past [between us and the commissioner]. Now we are open for discussions, which is very important.

E  What other plans does ACAL have?
We are going to convene conferences within the association; [international reinsurance company] Munich Re is coming to do a conference and perhaps Swiss Re and Partner Re will be coming. We are going to do conferences with the big insurance companies, which is very important. We are activating ACAL more and more.

E  Global financial markets are in upheaval. In light of this uncertainty, what is the outlook for the Lebanese insurance sector?
[The uncertainty] is also on a regional level. We are concerned with what is happening in the Gulf and we are concerned with what is happening in the countries next to us — Syria, Egypt and Jordan. The situation in all these countries is bad for us.

E  How does the situation in neighboring countries affect Lebanon’s insurers?
Many Syrian people used to come [to Lebanon] to do shopping and many things but today we feel that even the car market is reduced. The statistics show that [sales of] expensive cars are much lower and the import of goods is lower. On the transport side, this reduced our production [of insurance premiums] and on the motor side, our production was reduced.

E  How are the developments in other insurance lines?
What is up a little bit is the medical but this increase is because we increased our premiums a little since hospitals have increased their rates. On the life side, there is a bit of an increase but it is still not a healthy business. I hope in the long run that the economic situation will be much better, we will do better and all the companies will be healthier.

E  You addressed the production of premiums, or turnover of the industry. How are things going in terms of profits?
Premiums are high but profits are not good. If we say that according to the commissioner’s report from 2009, we have about $40 or $41 million in profits — this is nothing; 51 companies with $40 million, this is peanuts. We are financial companies and we are making $40 million; this is not a healthy situation.

E  And the insurance sector is still extremely small when compared to the banking industry in Lebanon…
It is small also due to the situation; the Lebanese people, one can say, are poor. They are paying health [insurance] because it is something very important for their families but on the other [insurance needs] they are not doing anything.

E  Life insurance policies tied to loans have helped insurers increase business in the past. Could there not be potential in other areas related to banking such as developing credit insurance?
Let’s talk about the housing loans. The housing side was very important for us to develop our business due to the bank loans. But this year, banks have reduced their issuance of housing loans because of the economic situation and this has reduced our production.

E  Does the insurance sector have an official position regarding the government’s decisions on minimum wage?
Yes, we are with the [business community] and are not accepting [the government’s position to increase wages]; we cannot accept the increase in salaries. From the last salary increase in 2008 until today, the increase in the [inflation] index was 16 percent. We can increase [salaries] on a 16 percent [basis] but we cannot increase 40 percent. They said it is LL200,000 for the minimum salary, which is 40 percent.

E  Would the increase in minimum salary levels mean insurance companies will have to hike premiums?
Of course, and not only because of the salary increase.  Firstly, the hospitals, which have laborers working there, will increase their rates and then we will have to increase our rates. Secondly, there will be wide price increases. The situation on the minimum wage increases [is] already clear; supermarkets have started to raise prices, saying we have to see if salaries will go higher. We will have to increase our premiums.

E  You are trying to make insurance companies more efficient and to spread awareness on the value of insurance. How are these efforts proceeding, and what are the latest developments?
We are trying to change the image of the sector. We have to be much more open and we have to be, if you want, more solid. It is [important] to show the people that we are beside them and that we are not reluctant [to service policies]. This is very important. We are also trying to raise awareness through campaigns to save lives on the road in collaborating with NGOs such as Kunhadi. We see the need to support these types of NGOs because they create [traffic safety] awareness for all the Lebanese people, not only for the insured people. This is something new we are doing.

E  The sector today still includes more than 50 companies but there has not been much growth for all to share in. Do you think the Lebanese insurance industry will consolidate moving forward?
With the new law, I think there is something that can be done in the matter of consolidating companies. The new minister [of economy], Nicolas Nahas, is doing his best to implement this new law with our collaboration. This is what we heard from him.

E  Do you have an idea of the timeline for getting the new law approved and implemented?
Last month, [Minister Nahas] said [the new insurance law] was a priority for him but it may be delayed for six months or 12 months. I think it will happen in 2012.

E  In the past, ACAL has voiced criticism over some points in the draft for the new insurance law… 
There were 10 points and we sent this list to the new minister with our criticism on these points and he said he will take them into consideration.

E  And you feel that the relationship between ACAL and the ministry has been improving?
It is excellent and there is very good collaboration, even on a weekly basis.

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Finance

Q&A – Walid Genadry

by Executive Staff
written by Executive Staff

Insurance customers rely on impartial authority to ensure that their insurance policy will be honored when they have to file a claim. For insurance companies, the supervision by a trusted public entity provides a shield of corporate credibility and a safeguard of companies’ financial solidity. Supervision, however, needs to be tailored expertly to meet both ethics and reality and even then dialog on regulations and requirements between insurance industry and insurance supervisor is often  tough and thorny. To better understand the local state of insurance, Executive sat down with Walid Genadry, head of the Insurance Control Commission at the Lebanese Ministry of Trade and Economy.  

E  When you outlined the concept behind proposed legislation for Lebanese insurance in 2004 you were not only convinced of the urgency of this matter but also enthusiastic about the law’s spirit and optimistic about a rapid adoption of what is still a draft law today. What happened?
I had less experience then [laughs]. Actually, there was reason to be optimistic, if things had gone like they would normally go in a normal country.

E  Under Lebanese circumstances, your optimism was a little bit…
…too high. But it was a reasonably good period at that time, before things took another turn. It is a shame because I see all the other countries in the region putting regulations in place.

E  But how important is regulation vis-à-vis having best practices? Lebanon, for example, has no actuarial association but we have more local actuarial competency in Lebanon than in most countries in the region. Is new regulation necessary where good practices already exist?   
Without regulation, it is not easy to have good practice. It becomes dependent entirely on who decides to have good practice. We would like everyone to implement good practices on their own and then we wouldn’t need a supervisor. This is not, unfortunately, how things usually go. On some issues, regulation is necessary. The issue is to determine which regulation you want through a law, which can be passed as a decree and which is best done through decision-making of the supervisory authority. That applies to most subjects, such as solvency and also actuarial issues. 

In terms of actuaries, yes we have more actuaries than others but we definitely don’t have enough, particularly since I am increasingly convinced of the necessity that some actuarial work needs to be done on non-life insurance.

E  Why do you see this actuarial work on non-life insurance lines as a growing need?
When I look at medical insurance, it is more risky in Lebanon than in France, or in Europe overall, because the government over there is the insurer of last resort. Under the French system, for example, it is quota-share by default and excess of loss without limit for anything serious, which means that the insurers have a very limited risk. We don’t [have this limited risk for medical insurers] and I would imagine that we need some actuarial work on this.

E  Has motor risk also been calculated with actuarial input?
Motor risk also, [but] I tend to be a bit less worried about motor. It is really high frequency and the nature of the accidents are almost always the same. Medical remains less controllable and you don’t know what types of diseases are being built in society. Today they are talking about cancer being not a genetic or a viral disease necessarily but a lifestyle one and we still don’t know what is hidden there. We are only realizing that cases of cancer are increasing significantly and we could not have forecasted this easily. That is why medical in my opinion is of concern.

E  Insurance balance sheets and risk calculations are widely seen as very difficult to understand even by accounting experts. From a regulator’s perspective, do the legislators sufficiently understand the needs for insurance regulations and how to legislate those terms?
This is not an easy business. People of course understand what insurance is and why it is needed, such as to avoid going bankrupt from being hit by a catastrophe. But when it comes to the mechanics of the insurance business and what a regulator ought to do, I would say that almost all of our legislators don’t understand that. This is a challenge because when you don’t understand you can be an easy target for inappropriate lobbying. You can get scared or influenced easily and with arguments that are seemingly logical. Unless you know how it really works and hear another point of view, it is very difficult not to be convinced that such arguments are right when they are not.  But we cannot change these things easily. We have to maximize whatever we can to introduce the proper legislation.

E  You have been criticized quite harshly at some points during the past seven years when the insurance law was being questioned repeatedly by the industry, and you have alluded in your speech to the fact that the supervisor, while never perfect, is regularly blamed when he does not deserve it. How do you view that criticism of your role?
I realized one thing at a point during these years: This was a change management process. In the beginning I never saw it that way. It took a discussion with a friend who had nothing to do with insurance but who happened to know a lot of insurers to clarify this to me, because he heard what insurers were saying. That woke me up and I realized that in fact I was organizing change management. Here was a sector that was active for decades without any supervision. There was some disposition in the law but it amounted to virtually nothing.

Then someone comes in and says we are starting to reorganize this issue. It is very difficult. Some people may feel threatened… There can be several processes within normality and we ended up in one process that, while not the most desirable was still a normal path: Confrontation. It could have been tough dialog but nonetheless dialog trying to convince [me], by showing data, where things failed or telling me where I am not seeing it clearly. But I think somewhere we were all growing; on both sides the visibility at times was not 100 percent.

A simple question: Do we want to bring in [the regulatory framework called] Solvency II in our region? This is for big sophisticated companies and complex insurance sectors whereas in the Middle East so far to a very high degree we have simple insurance. I think Solvency II as a framework is a beautiful thing but then we have to adapt and simplify it.

E  Solvency II has been criticized in Europe as being extremely complicated…
We cannot afford that. We need something that is understandable for the insurers and is feasible.

E  Would you say that there was a negative impact on Lebanese insurance companies from the fact that the law didn’t come into existence in 2004/2005?
Of course. The difference is between real loss and opportunities lost. Our human nature gives a very high weight to real loss, which could be $10. If you lose $1 million as opportunity cost, you may say ‘I am not sure if that would have ever come’. What we have here is a huge missed opportunity to grow the sector properly, to consolidate it properly and to show the region that we have serious companies that are well regulated.

The supervisor’s reputation of strength — and some companies realize that — is great publicity for the sector. This reputation is essential to the business of insurance companies. I wouldn’t say it’s free publicity because there is a cost to supervision, but it is publicity that you [as a company] don’t need to promote yourself. If you have a supervisor that has a reputation of being professional and capable of doing what he has to do, one who cannot be fought off easily, then you as an insurance company are seen as a very serious insurer.

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Finance

Treachery and trickery await online

by Executive Staff
written by Executive Staff

The lure of an easy buck is tempting for many, and as online trading becomes ever more accessible in Lebanon there are many who are ready to put their savings on the table. As with everything that seems too good to be true, however, the pitfalls are plentiful and inexperienced traders will quickly find themselves prey to the sharks of the market.

The number of online brokerages in Lebanon has been steadily swelling in recent years, with four launched in 2011 alone. Banque du Liban (BDL), Lebanon’s central bank, has 13 registered financial brokers, of which nine have online services. Also offering online trading platforms are many of  Lebanon’s other financial institutions, including the major banks.

What online brokers offer investors is easy access to the financial markets and the opportunity to trade a wide variety of securities from anywhere in the world, through a desktop, laptop or smartphone.

“Everyone can have access to the markets and trade all types of financial instruments for as low as $500,” says Walid Abousleiman, chairman of Aksys Capital, referring to the standard minimum deposit required to open an online account. 

Mohammed al-Hamidi, managing director at AM Financials, says that for average Lebanese people without a large capital base to invest from, online trading can be a tempting way to make money.

Aiding the surge in online brokerage is the rapidly expanding access to Internet across the region. “When you look at the percentage of Internet penetration in various countries in the Middle East, all are on the rise and Lebanon is no exception,” says Karim Farra, chairman of Amana Capital. “The concept was proven elsewhere, with online brokers in the United States and in Europe flourishing, so there was less risk for online brokers in Lebanon as we are not reinventing the wheel.”

Size of the market

The foreign exchange market is the world’s largest, with an average daily turnover of $4 trillion as of April 2010, 20 percent higher than in 2007, according to a report by the Bank for International Settlements. The report reveals that the growth of foreign exchange trading is partly attributed to increased trading by retail investors, who account for $150 billion of the average daily trade total, or 4 percent of the forex market.

Taking into account the population of the Middle East and North Africa (MENA), its trading history and Internet penetration, as well as the lopsided market share of the US, United Kingdom and Japan, Farra estimates that just 1.25 percent of total global foreign exchange trades are carried out in the MENA, equating to $1.8 billion per day, or $470 billion per year.

“The potential for the MENA region is clearly there as we have to play catch up in market share to claim our rightful 5 percent share,” says Farra.

An interesting perspective put forth by Henri Chaoul, general manager of Master Capital Group, is that the significant amount of liquidity sitting idle in Lebanese banks has contributed to the increase in the number of online brokers. According to Chaoul, Lebanese banks hold between $20 billion and $25 billion of ‘risk capital’ — money investors are willing to play the markets with.

“Banks have been very slow to react and provide products for [the excess liquidity]; as a result, finance companies have mushroomed because they want to take that opportunity,” he says. However, Chaoul is concerned about the lack of development concerning the financial products offered: “You don’t get any degree of sophistication. For instance, there is hardly any asset management.”

Jamil Barrage, head of asset management at financial institution Levantum, agrees on the lack of sophistication in the market. He says he tries to offer clients long-term investment advice, but encounters many who prefer much shorter horizons.

“‘Should I buy gold? I want to make a quick buck’,” says Barrage, mimicking these clients. “Their mentality is geared towards instant gratification and trading and they want to win now.”

Every online broker Executive spoke to for this article said the vast majority of traders in Lebanon, and the wider MENA region, are speculators, looking to make a quick buck rather than invest for the long-term.

“They gamble and they like it,” says Chaoul. “The more you gamble, the bigger your bet is and the higher the risk that you lose. Think about the casino. When was the last time you went to the casino and made money?”

Online brokers note that the average retail investor lacks market experience and so tends to lose money, while experienced traders generate better returns as they perform in-depth analysis of the securities traded and have superior market awareness.

A leverage-powered casino

In Lebanon, clients are typically offered 1:100 leverage on forex, meaning that for every $1 deposited the client can trade up to $100. This significantly raises the risk of being wiped out quickly.

Say a trader wants to buy euros and sell dollars. He opens an account with $5,000 and his broker gives him 1:100 leverage, so he can trade up to $500,000. If the euro/dollar exchange rate stands at 1.36, he can buy €368,000; if it falls to 1.345, his €368,000 is now worth $495,000, meaning he has lost $5,000 — or his entire investment — for just a 1 percent change in the euro/dollar.

“If you take on too much leverage with a small account, you cannot hold positions, you are obliged to [exit],” says Marwan Riachi, senior financial consultant at Berytus Capital.

The US imposed rules last year to reduce leverage at US Forex brokers to 1:50 on major currency pairs and 1:20 on minor currency pairs. No such regulation exists in Lebanon and some online brokers offer leverage up to 1:400. According to Rayan el-Annan, chief executive officer of Royal Forex Trading, “stricter leverage rules, like in the US, would be very good in general to protect people from assuming more risk than they can handle.”

Given that clients are frequently wiped out, online brokers have to constantly be on the lookout for new ones. “Online brokerage is a very inefficient business model as you have to constantly get new customers,” says Chaoul. “If you are living in the US or Western Europe, there are plentiful amounts of clients. The problem here is that the number is limited.”

The darker side

Among the reasons for the rapid rise in online brokerage is that it has proven lucrative, but revenues do not stem from commissions alone.

It is a popularly cited statistic in the brokerage industry that 90 percent of retail investors lose their money; many online brokers in fact count on this to fatten their pockets.

The role of an online broker is to execute trades for clients in exchange for a commission. A widely understood practice in Lebanon, however, is for brokers to place their clients’ orders on their books and not send them to the exchange. These brokers are betting that the majority of their clients will lose their deposited capital, which is a form of market making prohibited by the BDL.

“What is happening in Lebanon is mind-boggling,” says Barrage, who describes an encounter he says he had with a salesman. “He asked us how many of our customers make money. When we said, ‘just a few’, he replied, ‘You see how much money you could have made if you had taken all these positions onto your books.’”

“It is the Wild Wild West,” he adds.

According to Chaoul, some online brokers will say “X is a stupid trader so we won’t send their trades to the market as we expect him to lose; so we will trade against him and hold the trade on our books.” In this case, when the trader loses money, the broker does not just take the commission on the trade, he takes the entire amount initially deposited by the client for the trade. The risk is that the trader makes money, in which case the broker will have to pay him from his own account. If they face a smart trader, then they will send the order to the market.

Rawad Halawi, head of Halawi Investment Trust — which focuses mainly on South Lebanon — says his firm faces competition from several unregulated online brokers, which offer very low commission fees.

“They must be winning something. They are relying on the loss of the client — that’s the source of their income so that’s why they can lower their commissions. They are killing the market,” he says.

Holding traders’ positions on their books is not the only shady business online brokers are up to. When a trader buys a contract of gold from his broker, that broker is meant to place that order with the appropriate exchange, which will require a margin from the broker as a buffer. For instance, the current margin required by the Chicago Mercantile Exchange for a contract of gold is $11,475, and that is a fixed amount required from any investor who wants to buy a contract of gold.

In Lebanon, some brokers are ignoring the margin requirements of the exchanges and asking for lower margins to induce the clients to buy. “If the exchange requires a margin of $6,000, they will give it to you for a margin of $1,000 and they will not send it to the market,” says Chaoul. “At best it is deceptive marketing, and at worst it is fraud, and it is happening all the time.”

What is not generally realized is that when a client buys a future contract on the popular platform MetaTrader4, which is used by the vast majority of brokers in Lebanon, the order goes to the broker and not directly to the exchange, meaning the broker is doing the execution.

According to Nusseima Taleb from BDL’s legal department, the central bank is aware of these issues and is trying to curb them: “We require reports from brokers and we monitor them onsite. If they are not abiding by the law, we take the necessary measures. If their breach is serious, we can close them down.”

When asked about plans for issuing a license for market making, she replied that “it is just talks for now,” and that there are no concrete plans to issue such licenses as yet.

Looking ahead

“Online brokerage in the Middle East is still in its infancy and it is going to grow tremendously,” says Hamidi.

The number of online brokers setting up shop is a reflection of the expectation of growth in this industry, and while the ease of access to the financial markets is a step in the right direction — allowing investors in Lebanon and the MENA to have the same investment opportunities available in other parts of the world — traders should tread with care to avoid pitfalls in the perilous world of online trading.

 

Sidebar: Picking an online broker

With the rise in the Middle East of brokerage firms dedicated to online trading, Executive helps you ask the right questions when choosing your online broker.

What service do you need?
Online brokers differ in the amount of services they provide. So to decide which type of service you need, think about how experienced you are as a trader. If you have significant experience, you can go for an execution only brokerage. If you are not experienced enough, you will need a full service broker who will offer investment recommendations. Keep in mind that these services are usually not offered to small accounts and when offered, they come at a fee, sometimes embedded in the commissions. It is highly recommended to take courses related to financial securities before starting to trade. 

What securities do you want to trade?
Online brokers also differ in the amount of securities offered. Some brokers are specialized in particular securities while others offer several types. Deciding which ones to trade should be based on your understanding of the security and also on your risk appetite. For instance, trading future contracts is much riskier than trading equities. A typical future contract would provide you with a 1:100 leverage, meaning that if you open an account with $1,000, you can trade with up to $100,000. Equities, on the other hand, typically offer a 2:1 leverage.

What trading platform is offered?
Some brokers offer their own proprietary trading platform but most commonly they offer a third party platform such as MetaTrader4, JT Trader and CQG Trader. It is essential to become familiar with the platform before starting to trade. Most online brokers provide demo accounts so that you can practice before going live. Some also offer platforms for your smartphones and tablets — a feature worth taking into account if you expect to trade on the go.

What are the rates on different securities?
Online brokers charge different commissions for the various securities they offer. In most cases, these rates vary depending on the volume traded. You will need to ask what rate you will be charged based on the volume you expect to trade. Also make sure you ask about the “hidden” fees as some brokers might charge fees for closure of an account, an inactive account or the transfer of funds out of the account.

What is the minimum deposit required to trade?
When deciding to open an account, you need to ask what is the minimum deposit required. For trading of futures, in most cases there will be a margin requirement set by the exchange that online brokers abide by. For trading foreign exchange and equities, online brokers will usually require a minimum deposit to open an account; nowadays, this can be as low as $500.

Who are the correspondents?
Online brokers use correspondents, financial institutions that have access to markets and place trades on behalf of the brokers. Make sure to ask who the correspondents used are. The higher the rating of the correspondent, the more you can be assured that your money will not evaporate.

How good is their reputation?
Before deciding on an online broker, ask around. As there are still no professional reviews of online brokerages in the Middle East, you need to rely on word of mouth. Also try calling the customer service of the brokerage to check how quickly they respond, check if they have live chat and if their response is efficient and helpful. Visit the broker personally before you open an online account to make sure it feels right.

With the rise of Internet penetration throughout the Middle East and the ease of accessibility to trading financial instruments, online brokers have been mushrooming. Gaining an understanding of the various securities and making an informed decision on which online broker to choose is fundamental in order to reduce the risk of losing your investment.

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Lost in translation

by Gareth Smith
written by Gareth Smith

Admiral Michael G. Mullen, outgoing chairman of the United States Joint Chiefs of Staff, in September warned of a lack of communication with Tehran. “We are not talking… so we don’t understand each other,” he said. “If something happens… it’s virtually assured we won’t get it right.”

Admiral Mullen’s idea of a “hotline” to avoid an accidental flare-up was played down in Washington and rejected by senior Iranian commanders, despite its common sense assertion: In the absence of understanding, messages are invariably misinterpreted.  One theory over the alleged plot to blow up Adel al-Jubeir, Saudi Arabia’s Washington ambassador, came from American journalist Gareth Porter: That Tehran was “sending a message” as to how it might respond if attacked. Quite how complex this message sending becomes is illustrated when Porter notes that undercover American agents’ sting operation against Mansour Arbabsiar — the Iranian-American facing criminal charges in the case — may also have constituted entrapment. The truth lies hidden somewhere in the smoke, fog and noise of US-Iranian relations.

US Secretary of State Hillary Clinton warned Iran in a CNN interview it would be “badly miscalculating” if it believed the US military withdrawal from Iraq, announced last month by President Obama, was evidence of diminishing US military commitment in the region.  She had a point. While Washington is to withdraw almost all its troops from Iraq by the end of the year — the current level of 45,000 is already well down from a peak of 166,000 during the “surge” of 2007 — it still has 100,000 in Afghanistan and a considerable presence in the Persian Gulf, especially with the Fifth Fleet based in Bahrain.

Yet Washington wants more sanctions. The mantra is familiar. They will, said Clinton, “send a strong message to Iran and further isolate it from the international community.”

Hence David Cohen, undersecretary at the US Treasury, has been lobbying in Europe. As well as the alleged assassination plot, he cited two reports: One due this month from the International Atomic Energy Agency, which is expected to criticize Iran for inadequate explanations over its nuclear program, and another published last month by the United Nations special rapporteur on human rights in Iran.

Cohen raised the option of sanctioning Iran’s central bank. This is probably too radical a step for Europeans worried that freezing Tehran out of the global financial system could jeopardize its oil sales and send energy prices up, but they might follow the US in imposing sanctions against Iran Air and the port company, Tidewater Middle East. Washington has accused the two of carrying “illicit shipments” and defense supplies. While the US has long argued that both sanctions and its military build-up in the Persian Gulf “send a message” to Iran to end its nuclear program, Tehran believes Washington’s real aim is the overthrow of the Islamic Republic. Iranian politicians see sanctions as an alternative to talking, as coercion designed to force Iranian compliance.

The US message, linked to implicit or explicit threats, has been sent around the world. Washington has made it clear that countries and businesses trading with Iran may face severe penalties, especially through banking, and has targeted Tehran’s gasoline imports and crude oil sales, encouraging Tehran to curb gasoline consumption and increase refining.

With oil, Iran remains confident of finding buyers. But sanctions have had a deeper effect in keeping Iran’s gas underground. Despite reserves of 30 trillion cubic meters (m3) — surpassed only by Russia — Iran is a net gas importer, with an output of just 138.5 billion m3 last year.

Extracting and exporting gas requires advanced technology, especially in the most versatile means of transportation, liquefaction, and Iran’s joint projects with international majors floundered as companies like Total and Shell eventually decided they could no longer ignore Washington’s strong messages of disapproval.

Naturally, Iranian officials are loath to admit sanctions have hampered the country’s economy in case they communicate any weakening of the country’s resilience. They have no desire to send out the wrong signals.

Ayatollah Ali Khamenei, the supreme leader, seems to have opted to label Western pressures as conspiracies and to wait for problems to pass. In reaction to the US furor over the alleged bomb plot he said: “The way to success is not to retreat from the enemy, not even one step.”

 

GARETH SMYTH has reported from around the Middle East for almost two decades and was formerly the Financial Times correspondent in Tehran

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Jasmine in bloom

by Amna Guellali
written by Amna Guellali

Judging by the long queues at the polling stations, the elections for Tunisia’s Constituent Assembly on October 23 were an enormous success. People of all ages and walks of life, most voting for the first time in free, transparent and competitive elections, came en masse, steeped in emotion and with a new sense of dignity. Many patiently endured hours of waiting to experience democracy.

Two days after this historic moment, Tunisian streets are animated by debates over how to interpret the results.

The Constituent Assembly is tasked with writing a new constitution, drafting laws necessary for the transitional period and appointing a new interim government. A daunting challenge will be to reach agreement on how to incorporate into the state’s fundamental legal document the uprising’s ethos, with its aspirations for justice, dignity and freedom.

In elaborating the new constitution, the assembly should uphold international norms of human rights and create strong safeguards against backsliding into repressive rule. The first of these safeguards should be to remove the qualifying language and exceptions to exercising the rights to freedom of opinion, expression, press, assembly, association and movement that in the previous constitution eviscerated these rights of their content.

A second responsibility of the assembly is to revise the laws that the former president, Zine el-Abidine Ben Ali, and his government used to crush any genuine opposition, undermine judicial independence and limit political participation. While the interim government revised some of these laws during the past year ­—- such as the political parties law, the press code, and the law on associations —- more needs to be done to purge the country’s laws of all the repressive provisions that can be used to violate the rights of citizens.

The ability of the Constituent Assembly to incorporate human rights protections into the constitution and laws will depend on the dynamics among the various political forces that Tunisians elected to serve in that body.

While the good results of Al Nahdha came as no surprise, other outcomes were unexpected. The first of these was the failure of the Progressive Democratic Party and the coalition known as the Modernist Democratic Pole to gain traction — likely due to their inability to unite in a strong coalition, and a backlash against their secularist discourse. By contrast, the Congress for the Republic and Ettakattol, two modernist parties that did not rule out allying with Al Nahdha, did better than expected. Another surprise came from the almost unknown Popular Petition party, led by Hashmi Hamdi, which gained numerous seats in inland cities such as Sidi Bouzid and in the coastal cities of Sousse and Sfax.

The elections made clear the strength of the Islamist movement on the Tunisian political scene. We will soon see if it remains true to its campaign pledges to respect public freedoms and human rights.

Since Ben Ali was ousted, Al Nahdha has made significant efforts to dispel the suspicion that behind a veneer of moderation it has extremist and intolerant tendencies. Al Nahdha’s political platform, published September 13, abounds in references to democracy, human rights, respect for dignity and tolerance, and the party does not officially advocate applying or using Sharia as a source of law. In public speeches, its leaders have repeatedly stated that they will not seek to roll back Tunisia’s personal status code, perhaps the most progressive in the Muslim Arab world.

But even today, there are contradictions in the discourse of Al Nahdha leaders that make some skeptical about its professed attachment to human rights. While the party includes “freedom of expression” in its general program, it has qualified that right in some of its public positions. When protests erupted on October 9 against Nessma TV after it aired Persepolis, an animated feature film that includes a scene in which God is personified, Al Nahdha issued a communiqué that condemned attacks on the sanctity of Islamic principles and contended that a distinction should be made between freedom of expression and attacks on sacred beliefs.

Across the political spectrum, Tunisians hailed their election as fair. Nonetheless, more than a few are concerned by the configuration of the Constituent Assembly, with a plurality held by Al Nahdha and the strong showing of Popular Petition. Whether they serve in the ruling majority or not, the political parties should not forget, in the gambit of alliances and coalitions, that the struggle for dignity that set off the revolution nine months earlier was no fluke. The Constituent Assembly will exist only for a short interim phase and is expected to adopt a new Constitution one year after convening.

Tunisia is about to have real politics for the first time. Its parties should not squander this opportunity to profoundly remodel the legal and political system to embody the aspirations of Tunisians.

 

AMNA GUELLALI is the Tunisia researcher for Human Rights Watch

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Rein in the ratings agencies

by Paul Cochrane
written by Paul Cochrane

Why should we take credit ratings agencies seriously anymore? It is a question that has growing currency globally, and one that would not have been asked several years ago, certainly not by those in the financial sector. Yet in these turbulent economic times I have heard corporate bankers, private traders, insurance brokers and compliance officers rant about how the credit ratings agencies (CRAs) have gotten out of control.

People are starting to question why the CRAs’ “opinions” — for that is what their ratings are — should wield such power in the global markets given their prominent role in instigating the financial collapse. Subsequent moves over the past year have further escalated the crisis, such as downgrading Greece, Portugal and Italy in the midst of the European sovereign debt debacle.

The CRAs raising ire are the three majors in the United States, Moody’s, Standard & Poor’s (S&P) and Fitch, not the 70-plus other CRAs that operate on a much smaller scale worldwide. Indeed when China’s Dagong, the only non-Western sovereign CRA, downgraded the US in 2010 to “AA” status it hardly registered, especially compared to when S&P did the same (to “AA+”) a year later.

In particular, the problem is the way the three CRAs work to assess the risk of debt-based securities and other structured financial products: CRAs are paid by clients to “objectively” rate these same clients. But there is a clear conflict of interest here. As US Senator Charles Schumer remarked to the Senate Committee on Banking, Housing and Urban Affairs in 2008, this is comparable to “allowing students to pay for their grades,” for naturally, everyone wants to receive a higher rating. CRAs bestowed “AAA” ratings — the highest possible — on the bulk of the $3.2 trillion in mortgage-backed securities issued by banks during the build up of the housing bubble, despite the risky nature of bundling together what is known as ‘collateralized debt obligations’, while watching their profits double to $6 billion between 2002 and 2007. When the bubble burst the following year and the big three CRAs were asked during US government investigations why they kept these securities rated so highly, all three stated: “it’s an opinion.”

Among the core issues here is that these opinions — the downgrade on the debt of sovereign debt or unrealistically high appraisals of toxic assets — are a type of self-fulfilling mantra: a poor asset wrapped in the gloss of a high rating will attract people to invest in it, making it worth more. This warps a market and can cause havoc, as we continue to see. Credit ratings are also used to anticipate future credit worthiness, but CRAs cannot predict the future no matter how good the data at their fingertips, and especially not if they are inherently in a conflict of interest.

So what is the solution to curb the powers of the CRAs? The US Dodd-Frank Act, the financial overhaul law enacted in 2010, and the Securities and Exchange Commission (SEC) have proposed policies to crack down on the CRAs, but they do not go far enough, with pressure from the well-lined pockets of the CRAs and Wall Street lobbying for significant concessions.

A more radical — and simple — solution was proposed by economist David Raboy at a Congressional Oversight Panel in 2009. Raboy suggested creating an independent clearinghouse that would receive rating applications from securities issuers and allocate each assignment to a ratings agency in a random fashion, with payment dependent on the complexity of the securities involved. Accurate ratings would ensure assignment of further cases. This model could be applied nationally or even at an international level, such as for sovereign ratings. Another solution is to scrap the CRAs all together. After all, the stock markets are devoid of ratings, with investors getting by on research from firms and banks to make decisions. If neither of these solutions is adopted — which seems likely unless the ongoing protests of the Occupy Wall Street movement pick up momentum for greater change in economic policy — then one must hope that the SEC can effectively rein in the CRAs through tougher regulation.

In a world with properly functioning markets, however, it is likely CRAs would have already rated themselves out of business, with their lost credibility leaving the services they offer akin to stirring gossip and spreading rumor.

 

PAUL COCHRANE is the Middle East correspondent for International News Services

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