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Coronavirus AnalysisOpinionSpecial Report

The need to develop an integrated approach on COVID-19

by Thomas Schellen April 28, 2020
written by Thomas Schellen

The real-life specter of SARS-CoV 2 comes across as existentially frightening. With the virus being as familiar as a seasonal respiratory disease and yet totally untamed by possibilities of existing immunity, it reminds many of a scary scenario in popular fiction (remember that Stephen King one about the bad dude living in Texas and the flu survivors in Colorado?). One must admit, SARS-CoV2 sounds high tech and ominous, much more so than any threat in a tale of hidden monsters under your blanket (I am not a toddler, you know), and much more threatening than a flu (yawn, got that last year), a velociraptor (cute), or an alien (unreal). 

But after more than four months of living with the virus and reading a new story about it every two minutes, it seems inevitable that one develops a certain familiarity with this new monster in our life—but, dangerously, without actually having real knowledge about it. And acting on half-knowledge, in itself, is a serious threat—because, as the Alexander Pope couplet says about a mythological fount of scientific and artistic inspirations, “a little learning is a dangerous thing, drink deep, or taste not the Pierian Spring.” 

Accurately determining all possible trajectories of the coronavirus threat in different national and cultural environments sounds like an impossible challenge. Its dangers lie in the absence of information on what variables actually play how much of a role in influencing the virus’ spread, what its real lethality is, and how the immunity created by a first-wave exposure might or might not nullify the risk of mortality when being exposed to the virus in a future coronavirus wave. 

Correlating a full risk assessment of the virus with a full assessment of the economic risks that could emerge because of measures against the virus, sounds like mission mega-impossible. This modeling of these two unprecedented risk complexes would involve extrapolation of medical factors on yet to be obtained epidemiological knowledge in conjunction with assessments of never before measured social and economic risks pertaining to the death of social lives and slaughter of economic activities in course of implementing lockdowns and isolations of millions. 

How to quantify the risks of increased morbidity and mortality associated with a chain of job loss—impoverishment—long-term unemployment—deterioration of general health—depression and a sense of uselessness that can be triggered as downward spiral through an economic hyper-recession not seen in almost a century? How to compute the thoroughly unexplored risks of social repercussions and lasting life impairments from an experiment putting the human “zoon politicon” (in the Aristotelian sense of humanity as a herd animal) indiscriminately into isolation not seen since the bomb runs and sequestering of masses in air raid shelters in London, Moscow, and Berlin during World War II? Modeling all those intertwined risks on a large numerical scale of affected individuals and over an extended period of time, appears to the non-scientist to be impossibility squared, or total delusion. 

In the small factual base of knowledge about the pandemic and its direct human impact—not accounting for the indirect and induced impacts over time—the confirmed infected percentage of populations such as China, France, Italy, and the United States is at time of writing is assumed to be in the two to three per mille range, meaning that 0.2 or 0.3 percent are infected in countries with, by global comparison, high absolute infection counts. 

The total number of global COVID-19 deaths is horribly high, yes, but this is because the global population is unimaginably large. We humans are numerous—more numerous than ever before in the existence of planet Earth, whose accretion is estimated to have commenced an also unimaginable 4.6 billion years ago. 

Zooming back into the present age of the coronavirus threat, the disease’s mortality rate is moreover so different from country to country that some associated factors jump out—such as the variance in average population ages between a country such as Italy and a population-wise younger country such as Lebanon. As Lebanon’s acting head of the Insurance Control Commission Nadine Habbal pointed out on the sidelines of an interview with Executive, when researching the extent of Lebanese insurers’ likely exposure to the coronavirus she found to her surprise that the average age in Italy is 47 years, while the average age in Lebanon is merely 31. 

Taking this case as example, it is correct that in a Wikipedia list of countries by median age, Lebanon is ranked in position 118 while just north of the Mediterranean, Monaco is noted as the country with the world’s highest median age and Italy as the fifth-oldest. As a matter of fact, Lebanon is in spitting distance of the world average as far as median age of its population. Also with regard to the specific higher vulnerability of older men to the pandemic, Lebanese men would by conventional wisdom have better cards than their Italian peers, given that the median age of men in Italy is almost 15 years higher than that of Lebanese men. 

However, assuming a direct correlation between median ages as single determinant in a national coronavirus propensity profile would be indefensible—Brazil (ranked 103), Turkey (110), and Iran (123), ranked among the world’s 12 worst-infected countries as of April 20, are very similar to Lebanon in terms of median population age. The age factor, when taken alone, thus seems more than questionable for being suited as predictor of anything.

Besides the country’s small size, the young age of the population, and the government’s immediate decision to close schools, further advantageous factors cited by Habbal regarding Lebanon’s response to the COVID-19 pandemic include the country’s heavy reliance on individual modes of transport—“every family has two or three cars; we don’t have a metro or tube we can use,” she noted—and the absence of large social gatherings in the revolutionary and restless months before the coronavirus crisis. 

From the perspective of fighting the coronavirus, it was almost an advantage to have been in subdued spirits due to our Lebanese economic crisis, meaning, for example, to not have had events in February that would have been comparable in their effect to spectator sports events with ten thousands of visitors at football matches in northern Italy in mid-February or a major religious assembly in France’s Alsace region. 

But when taking a complex national specificity into account—even if this diagnosis includes factors that at first seem so thoroughly counterintuitive to national wellbeing as Lebanon’s historical overcrowding with private cars or the new extreme detriment of the economic meltdown—and combining this with currently accumulating data on the spread of coronavirus infections and COVID-19 fatalities as percentages of populations that have been collated in countries with much more thorough testing than Lebanon, it does sound no longer like totally fake news or ignorant deception that official Lebanon reports comparatively benign coronavirus numbers. 

What’s in a number?

It deserves to be repeated, however, that the data uncertainty on the pandemic is immense. With regard to known data, and without even venturing into questions of the distinction and relationship between crude global death rate (total number of deaths during a given time interval) and the cause-specific death rate (number of deaths assigned to a specific cause during a given time interval) related to the coronavirus, it is undeniable that the infection fatality rate (the proportion of deaths among all the infected individuals) of COVID-19—which appears to be more narrow that the cause-specific death rate but wider when taken as the mortality indicator for an epidemic as opposed to the case fatality rate (the proportion of deaths from a certain disease compared to the total number of people diagnosed with the disease for a certain period of time) will support a different sort of bias when the information is processed emotionally, given that infection fatalities are in ranges that will not ever conceivably threaten the survival of the human race. 

The confusing ways of defining and accounting for fatalities makes you wonder if any of the data from any of these definitions would have been helpful to Homeric hero Achilles for answering his fateful question over eternal glory after a short life versus a long life of eternal boredom. Moreover, when compared with, let’s say, statistics on minority rights or gender equality, death rates appear to be a topic that psychologically and philosophically has not been prominent on the agenda of most people in the postmodern age, including media professionals—with the consequence that imbalances in discussions of the pandemic in media sometimes seem to be magnified either out of ignorance or because of editorial or political biases.

Given that huge differences in confirmed infection rates and death rates have so far been recorded in countries around the world—and that among those very divergent accounts are adjacent territories with similar development levels and cultures such as Belgium and Germany where the population-adjusted COVID-19 fatality rates in mid-April were reported in the former as nine times those of the latter (452 versus 52 per million inhabitants) one can safely assume that people with predilection for rational arguments—meaning excluding those who consider metaphysical explanations as well as those who overenthusiastically jump on passing conspiracy wagons—will for much, if not all of this year, hypothesize, guess, and speculate about contributing and exacerbating factors in the pandemic. 

This range of rational assumptions, judging from a scan of statements by governments and reports in media with fact-checking cultures, begins with explanations about statistical methodologies and governmental reporting standards in different countries, as well as testing capacities and health system factors such as available hospital staff and medical equipment. The laundry list of presumed influence factors continues with demographic, environmental, climate, and geographic items, such as age structure and general health of a population, the degree of air pollution, a country’s role in international transit travel, its seasonal climate pattern, and factors of urbanization such as population density, residential clustering, and dominant modes of urban transportation. 

The list balloons further to a line of economic and social factors, the most influential of which is nominal GDP per capita “as proxy for several socioeconomic dimensions” according to Lebanese actuarial consultants i.e. Muhanna & co (see box and Q&A). The firm applied its actuarial exactitude this March and April to developing a tool for calculating and visualizing four factors of import in analyzing COVID-19 mortality—infection rates, GDP per capita, number of hospital beds, and average age of population in a country. 

But the list of economic and social factors appears to stretch much farther still, from the count of accessible water faucets and people’s informedness in underprivileged areas in the developing world to smoking and lifestyle habits everywhere and eventually the atomization of families with segregation of the elderly into group accommodations in economically overdeveloped G7 countries. 

All such assumptions and rational theories about factors that influence the pandemic have yet to be tested and verified or falsified but some already appear likely to become widely accepted as people’s heuristics for estimating the coronavirus risk for years to come. However, the perhaps only thing that during the disease’s first global wave can safely be said about this haystack of rational assumptions is that a multi-faceted look at a country’s circumstances is preferable to a single-focus approach, even when based on factors as fundamental as the case-specific death rate or the number of testing kits that are available in a jurisdiction. 

We are not living a dystopian horror tale where 99 percent of the world population die of a weaponized flu; we all are now actors in a, no less dystopian, play where the 99 percent do not die of a virus but are threatened by convergence of medical and economic risks and need to find their way to a sustainable future. A multi-factor analysis almost certainly will offer a better chance for untangling the complex yarn ball of economic, social, and medical risks that impend on us in the wake of the 2020 COVID-19 pandemic. 

April 28, 2020 0 comments
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BusinessCoronavirus AnalysisInsuranceSpecial Report

Q&A with actuary Ibrahim Muhanna on insurance liabilities amid economic crisis

by Thomas Schellen April 28, 2020
written by Thomas Schellen

Practically every private household in Lebanon relies on one or other insurance service, beginning with the mandatory protection of motorists under third-party liability insurance or savings schemes offered by life insurers. Services such as health and pension insurance are becoming focuses of attention as the country’s healthcare and employment systems are increasingly challenged. Commercial lines from property to credit insurance feature in prudent business planning of an increasing number of enterprises. To understand better what risks and threats the Lebanese insurers are facing in the coming months, Executive inquired with Beirut-based international actuary Ibrahim Muhanna about his expert perspectives.

What is your assessment of the financial situation of the Lebanese insurance sector?

Looking at the balance sheets of the insurance industry as of 31/12/2018 and their exposure to the banking sector in Lebanon [reveals] that the total assets of insurance companies in Lebanon are in the neighborhood of LL7,500 billion, which translated into about $5 billion (see table below). From that amount, roughly $2.7 billion is exposed to the financial sector. Simply stated, local insurance companies have a huge exposure to the banking sector.

As an example, if the industry loses 50 percent of its assets that are currently at the banks, because of some form of a haircut, that means that there could be $1.35 billion in losses across the industry. Which would be roughly $29 million per company on average. Obviously, not all companies have the same level of exposure or the same assets. I have calculated that the estimated average exposure of insurance companies to the financial sector is around 55 percent of total assets, with the company with the least exposure having 11 percent and a maximum of 96 percent for the company with the highest exposure.

If we use this representative number to get a first concept, such as $29 million per company, what does this exposure imply in context of the Lebanese banking scenario today?

If the banking industry takes a hit of 50 percent on deposits above $100,000, which is what is being discussed, this means that the insurance industry may take a hit of $1.35 billion on their assets in the banks. Calculating these $1.35 billion, which companies may lose from their assets in banks, against shareholders’ equity in Lebanon’s insurance sector of $1.34 billion means they may be short by about $145 million and their capital may be completely wiped out.

Would that mean the companies with shortfalls in shareholders’ equity will be bankrupted by a potential haircut of 50 percent of large deposits?

In a pessimistic scenario, up to 17 insurance companies would have their equity completely depleted if a 50 percent haircut is implemented in some form. In that scenario, the other 31 companies would maintain a positive shareholders’ equity. However, they may need to inject further capital, in particular insurance companies that write long-term business. What I said so far about the assets, however, is not really the full story. We know that if there is a devaluation of the assets, the associated liabilities of these companies will also have to be revalued. Technically speaking, it cannot be said that the insurance industry is bankrupt because their liabilities in some cases may decrease as well. What is very interesting here is that out of the $2.7 billion in total assets there are about $1.4 billion in assets for the life portfolio, which does not include unit-linked policies (NB: savings-cum-life insurance contracts that are linked to specified assets and are exposed to upside and downside risks. Returns of such plans are linked to market performance and the investment risk in investment portfolio is borne entirely by the policyholder). Insurers total earmarked assets for unit-linked life policies amount to around $700 million, which match the insurers’ associated liabilities. Therefore, the tens of thousands unit-linked policyholders are the ones exposed to any haircut and will be the ones affected. 

Then holders of unit-linked combined life-and-savings insurance contracts will be hit heavily?  

That is right. But it can be mitigated, even when there is a financial crisis. To give an example from the time when the financial crisis hit Cyprus in 2011, our firm was managing pension funds of different syndicates. When capital controls were introduced in Cyprus, we said [to the authorities] that we have seven such accounts with about €500,000 each but these are not really seven accounts. They represent 1,000 individual sub-accounts because each deposit account/fund account is for hundreds of individual members of the total pension fund. Each member’s contributions to the pension fund and rights to the fund are for example in one case €17,000 or in another €56,000. We identified all these contributors, submitted their cases to the central bank, and were able to renegotiate the capital control of certain funds.

Would that be a route that insurers in Lebanon should take in your opinion?

I think that it can be one of the possible options to study to mitigate the risk. You and I know very well that most of the life policies in Lebanon are sold in dollars. If someone has a cash value of his policy of $17,000 or of $26,000, whether in unit-linked or in endowment form, these people should not be hit under the capital controls. They can be safeguarded. We in the insurance industry have an opportunity right now to proactively say that these total amounts are really for our thousands of individual policyholders. They can earmark these amounts and protect and ring-fence these values.

As a consulting firm, we have consulted in different jurisdictions on such situations and ways that insurance companies can protect their assets and their policyholders’ funds. Had the levels of exposure to the banking sector been reduced by other admissible assets, the solvency margins might have been sufficient to safeguard both the policyholders’ and the shareholders’ funds. I am very surprised that few insurance companies were exposed to the banks above 50 percent of their total assets without holding reserves against this risk.

What is the average exposure of insurance companies to banks in other jurisdictions by your experience?

Twenty percent to the banking sector.

How do you think the economic crisis will impact the insurance companies in Lebanon on the demand side? Will market demand for general insurance lines, health insurance, and life insurance hold up or do you expect destruction of demand?  

On the medical side, the demand will be maintained, because people buy insurance out of fear. Whether they can afford to buy it or not is a different ballgame. But the appetite to buy [health] insurance will be there. In other products, whether motor or fire, household or marine, demand will be affected tremendously because of the economic crisis.

Going forward a bit into the future, there will be the IFRS 17 regulation as the new global accounting standard for insurance. A first seminar on the new standard was conducted in Lebanon last fall by the Insurance Control Commission. Even if IFRS 17 will now come into force in January 2023 as per the latest delay announced only weeks ago will the new accounting standards also have an impact on the Lebanese insurance companies?

It is right that regarding IFRS 17 everything is being postponed internationally. I would think, however, that before talking about IFRS in general, this time is an opportunity for the insurance industry to reflect and figure out how they can survive this crisis—the financial crisis in Lebanon, compounded with the corona crisis. Those who will emerge from this crisis will be very few companies in my opinion.

So you expect that if there is the long overdue merger wave of Lebanese insurance companies, it will be bound to happen before IFRS 17 kicks in, rather than after?

Definitely. Now that all the cards are on the table, people will have to view the situation. I think within the next month or so, things will be clarified. In short, I expect a massive impact on the insurance sector in Lebanon and a large role for risk professionals and actuaries to play as they help navigate the upcoming systemic shocks.

You are an actuary and also have long been very active in consulting on pensions. Is it possible in your opinion to create a sustainable pension system for the people of Lebanon?

I was very happy to hear that they are talking about seriously reforming the pensions of the civil service and the military because that is costing the government quite a bit. Certainly if there is more [done about] the electricity authority, they can in my opinion easily balance the budget but they have so much to worry about right now that I don’t know what priority they are addressing.

April 28, 2020 0 comments
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BusinessCoronavirus AnalysisInsuranceSpecial Report

The Lebanese insurance scenario amid threats of global collapse

by Thomas Schellen April 28, 2020
written by Thomas Schellen

Judging from the numbers at the tail end of the third phase in the Lebanese lockdown and the start of the transition to a winding-down phase, the picture is flawless from the medical and from the insurance supervisory angle: Lebanon’s case count of severe COVID-19 illnesses up to the second half of April 2020 has been medically and administratively manageable. There was no need for dreaded selections by attending physicians—of who would get respiratory support on a ventilator and who would not—and, in a proxy indicator, there was no undue stress on the hotline of the Insurance Control Commission because of hospitalized persons’ complaints over exclusion clauses in their existing medical insurance policies.    

And although trust in politicians is as rare as a $100 dollar bill in an ATM these days, one had absolutely no need to rely on assurances by government ministers or community leaders to believe the unfathomable: that something in this country was moving the right way. The numbers confirmed that the country has so far been responding with uncommon effectiveness to the medical dangers of the COVID-19 pandemic. 

Firstly, the around 700 confirmed cases up to the last days of the third lockdown period have been reassuringly low, with a slow rate of increase. This impression is compelling, notwithstanding the under-powered testing for coronavirus infections in the population. Even if one hypothesizes a gap between actual infections and confirmed infections to be in the thousands of cases, or upward of 1000 percent, it seems simply implausible that a high cresting of severe COVID-19 infections would have gone unnoticed across the entire (very small) country—particularly when one takes into account the country’s intensity of social communications, the high connectivity of family networks, and the recent protest movement’s shattering of previous social barriers to free expression.

More significantly, no alarming developments have been observed in the crucial count of deaths from the pandemic. There may be—and this must be assumed with high degrees of certainty—individuals who are not included in the official fatality number of 24 as of April 25 because they passed away in their homes in villages or perhaps behind the veils of emergency tents in the southern suburbs. There may thus be deaths related to the pandemic that did not get reported as COVID-19 fatalities. But fatalities show in national statistics even if they are not attributed to the pandemic. And the overall seasonal fatality numbers in Lebanon have not been reported anywhere to be in vast excess over those of previous years, contrary to what the statistics show for countries such as Italy, France, Spain, and the UK, and also are beginning to show for New York City in the United States. 

Slide three with Lebanon selected (see box below for more details on the tool)

For the months of March and April, available data from these most-affected countries show that total fatality counts—attributed to COVID-19 or not—have increased undeniably, thereby strengthening the case for vigilant coronavirus containment measures in those countries and countering conspiracy tales that suggested normal death rates to have been present. 

In Lebanon, a conceivable theory of hidden death counts would go in the opposite direction, not alleging that overall fatality numbers were the same as every spring as conspirationalists say in Europe, but alleging that the number of COVID-19 fatalities in this country from the last six weeks is seriously underreported. Of course, the statistics of weekly deaths in Lebanon this April might very well not be available for many weeks and then only as reliable as any other tally in a statistically impaired country. But the question remains if a statistically significant and communally unnoticed aggregation of March/April fatalities in the hundreds or thousands could really occur here.

Deaths per 1 million inhabitants in the pandemic’s worst-hit countries were reported to be multiples of what was this spring observed in Lebanon in terms of deaths per capita. Could a proportional increase of such magnitude have been kept hidden from attention in Lebanon’s small and family-centric society? In a country with this newly hyper-sensitive and protest-eager civil society?  

Upon accepting that the Lebanese response to the COVID-19 pandemic to date has shown good results and saved lives—but without drawing the false conclusion that the country will continue to be spared from worse developments—quite a few questions remain. And these are questions that urgently wait to be answered as the global moods shift from containment of the virus to alleviating the repercussions of lockdowns on economies. 

As the pandemic’s current wave might be slowing in some countries and yet must be expected to surge in others, and as a following wave is expected by many epidemiologists to strike later this year, the question for policy-makers and governments is how to balance the need for a restart or reinvigoration of economic activity on the one hand with the need for containment of the virus on the other. For corporate strategists and investors, the challenge is to limit sunk costs, identify sustainable opportunities that emerge in the wake of the pandemic, reorient teams from old economic nags to new stallions, and also assess risks of the coronavirus recession that might manifest with a delayed fuse. 

Both of these uncertainty complexes—the need of policy-leaders to reduce economic risks while staying on top of the containment and treatment needs, and the need of economic agents to assess risks and potential new rewards in the business landscape—have the common denominator of risk evaluation and risk management. This bears the question, if pertinent evaluation on the balance of medical and economic coronavirus risks or hints for economic opportunities could be procured from the industry that has prided itself over all others as harboring top expertise in the assessment and management of risks in the global economy. This is the insurance industry with its more than $5 trillion in premiums, or more than 6 percent of global GDP in 2018. 

Not all bad news

Curiously, while wave after wave of bad news have been hitting the world economy during the coronavirus crisis, the globe’s insurance giants and reinsurance behemoths have not constantly been in the front row of bad news during the pandemic—as opposed to banks, manufacturing, construction, real estate, hospitality, event, entertainment, tourism, and travel companies as well as all sorts of micro, small, and medium businesses. But insurance interacts with all these economic agents as well as with the, so far, significantly fewer sectors that are named as the best winning bets in the pandemic, such as pharma and biotech companies or online networking, communication, and entertainment companies. 

Where then is insurance itself positioned in context of the global recession, and what can insurance mathematicians, or actuarial consultants, tell us about the changing risk landscape that nations have to navigate with painfully dwindling resources?

As a preamble to looking at those questions, two facts deserve to be noted: Insurance leaders and risk analysts have for years considered the increasing risk of a human pandemic. The threat level assessment of a pandemic, however, had been ridiculously low when viewed against the real unfolding costs of the current pandemic. 

Illustrating the limits of risk surveys and models are, for example, the annual risk maps compiled by the World Economic Forum, which in January of this year named climate risks, economic confrontations, and “domestic political polarizations” as the risks that were top on the minds of economic elites. 

But underestimation of pandemic risk by several dimensions of magnitude was found also in more specialized academic exercises such as the annual global risk assessment published by the Cambridge Center for Risk Studies (CCRS) in the UK. In the 2019 global risk index by CCRS, a human pandemic is the fourth-largest threat in a list of 22 modeled risks that threaten the economies of urban centers around the world. These urban productivity hubs collectively account for over 40 percent of the global economy by CCRS’ reckoning. 

Reiterating a warning from previous editions of the index publication, “Whether it is due to the global nature of supply chains, urbanization or climate change, we see that the potential for epidemics to extend their reach is increasing,” CCRS noted, and stated further, “There is little doubt that a pandemic is due to occur again … but how it will unfold will remain highly variable and dependent upon emergency planners and the insurance community.” 

Given that the study’s projected pandemic threat was quantified at $49.9 billion, accounting for 9 percent of the index’s total global GDP at risk of $577 billion, the conclusion imposes itself that the risk of a pandemic was known but thoroughly misunderstood and insufficiently modeled by leading risk experts.  

Acknowledging the caveat that the unprecedented experience of the coronavirus crisis complex trashes existing conventional wisdoms of economic leaders and nullifies the risk modeling capacities that are based on historic data inputs, the question becomes what economic burdens insurance and reinsurance companies will be faced with during and after the pandemic? The current perspectives of analysts are mixed with some bright spots being projected but the longer term outlook is highly uncertain with swathes of darkness.

For the immediate physical threat perspective of the coronavirus risks, insurance companies and insurance professionals are generally not in the vision line when compared with audience-facing economic activities during the pandemic. In an assessment of physically risk-prone professions during the coronavirus crisis in the United States, data visualization site and online publisher Visual Capitalist listed occupations with high risk exposure. The 40 most risky jobs in that list are top heavy in healthcare (with dentistry-related occupations taking up half of the lead group in riskiness), but also include flight attendants, bus drivers, kindergarten teachers, supermarket cashiers, municipal firefighters, food preparation supervisors, hairdressers, and supervisors of correctional officers.

In this context of coronavirus risk which does not include economic exposure, financial services providers, including bank tellers, would expectedly not be showing near the top of risky occupations, and teleworking insurance professionals are decidedly not considered to be in a high-risk occupation. But even when the attention turns to economic exposure, remoteness from the immediate risk landscape is generally perceived to apply to the insurance industry. Specialized agency Fitch Ratings said in April that it revised its general outlook to negative for all insurance companies/regions globally and specifically mentioned negative outlooks for the life insurance sectors of developed markets and the health insurance sector in the US. However, the agency kept its ratings outlook stable for global non-life, general reinsurance, and title insurance sectors.

Also notably, the world’s two largest reinsurers by premiums, Munich Re and Swiss Re, announced that their dividend payouts this spring would be as projected (and generous looking) as earlier in the year. The companies presented themselves optimistic but nonetheless acted cautiously, by postponing a share buyback program in case of Swiss Re, while Munich Re said in a press release it would not retain a projection of annual profit of €2.8 billion.

In the outlooks of insurance analysts, the issue of burdens on insurance and reinsurance companies actually has become a global concern. Health insurance is the obvious insurance line that comes to mind when thinking about immediate insurance implications of the coronavirus. In this regard, however, the cost of the pandemic to health insurers is from a global perspective not yet assessable. This is because of the large differences in healthcare systems and insurance components between countries and also because of uncertainty about treatment requirements, mortality and morbidity rates of the diseases, and their associated costs, writes Laura Hay, the global head of insurance at KPMG International.

The possibility of billions of dollars in short and medium-term costs for health insurers and reinsurance companies notwithstanding, Hay notes that the outlook for health insurance does not entirely exclude positive scenarios, pointing out that the shock of the pandemic will translate into a significant leap in health insurance awareness and demand, especially in developing countries with underinsured populations. A temporary spike in demand for critical illness policies occurred in Asia after the SARS epidemic, and a parallel phenomenon would be possible post-corona, “with rising sales of health insurance, critical illness, and even life cover around the world,” Hay speculates. 

Similarly, consultants Bain & Co wrote in early April that health insurance payers of COVID-19 covers face risks of long-term respiratory care costs, medical loss ratios, and weakening of returns on financial markets and assets. However, the expectations by Bain also entail upside risks. “In an overstrained clinical environment, most non-Covid patients will have challenges gaining access to care,” write Bain partners Joshua Weisbrod and Vikram Kapur. “From a financial standpoint, payers will face significant pressure on their medical loss ratios. That shift will be offset by a severe decline in high-cost elective surgeries.” 

Moreover, increased health awareness can also, according to Bain, be anticipated under the pandemic’s trigger effect. “In emerging markets such as China, we already see a significant rise in insurance penetration above and beyond the levels that followed previous pandemics such as SARS,” the consultants observed. 

Precedents for the catalytic effect of major disasters and man-made catastrophes on insurance demand reach from historic examples such as the Great Fire of London in the 17th century and the San Francisco earthquake at the threshold of the 20th century to contemporary examples. The latter, while not unilaterally positive from a business point of view, triggered a rethink of correlated catastrophe losses and terrorism insurance as issue of national concern after 9/11 or narrow/transitory demand increases for property and business interruption protection after flood events and changes in demand, risk, and claims of political violence insurance after occurrences of civil disturbance or popular unrest.

In contrast to a mixed outlook of highly probable near-term costs and possible long-term opportunities in health insurance lines, insurance experts from various organizations have rattled off warnings about the pandemic’s impact on insurers and reinsurers, which could reach far beyond the cost of health insurance and life insurance claims. Thomas Wade, the head of financial services policy at the American Action Forum, a conservative advocacy organization in the United States, warned in mid-April against governmental attempts to make insurers pay claims for business interruption insurance that comes with exclusions for incidents related to pandemics. The expert argued that forcing such steps in legislation would be damaging to contract law, run counter to the fundamental business model of insurance as an instrument of risk mitigation by risk sharing, and altogether could kill insurance. “Were insurers to have to pay business interruption claims, it is likely that this would bankrupt the industry,” Wade darkly augurs.  

Citing risk modeling studies from the last few years, Joy Langford, a partner at international law firm Norton Rose Fulbright, warns that the pandemic could unleash a casualty catastrophe for reinsurers, meaning a scenario that extends across different geographies and involves claims from multiple policyholders across different insurance categories. In anticipation of years of needed clarifications and legal disputes over insurance covers on the global mega-event of the pandemic, Langford says that impacts of claims related to the coronavirus recessions could hit reinsurers not only in business lines of health, life, and pension insurance but also have significant general insurance impacts on liability, travel, credit, business interruption, workmen’s compensation, and a number of lesser business lines. She refers to a hypothetical scenario paper produced for the CCRS (not part of the official threat assessment), which projected possible insurance losses of hundreds of billions of dollars in a pandemic. “What can be confirmed by the events of recent months is the accuracy of CCRS’ hypothesis that a global pandemic could present the insurance industry with the type of casualty accumulation capable of rising to the level of casualty catastrophe,” the lawyer points out.  

i.e. Muhanna & co COVID-19 data analysis tool

Part of a growing scene of coronavirus visualizations and tracking tools created in intellectual hubs around the world, a research tool developed by Lebanon-based actuarial firm i.e. Muhanna & co looks at the coronavirus impact through the lens of social policy-making.

Analyzing 66 days of data in the January to March 2020 period, the actuarial firm first released a policy note in early April to show that four research variables—confirmed infections, nominal GDP per capita, total number of hospital beds per 1,000 inhabitants, and age structure of the population—all had significant impacts on the development of country-specific trajectories of mortality rates connected to the COVID-19 disease.   

Upon encountering follow-up inquiries from clients, the firm subsequently made the tool accessible on its website to interested researchers and the general public, to enable analysis by region, age group, health sector capacity, and the economic condition of individual countries or country groupings.  

According to Ibrahim Muhanna, the founder and CEO of i.e. Muhanna & co, the firm’s actuaries and data experts invested more than 100 hours of pro-bono work in development of the tool and initially published the policy note on their findings to open the eyes of policy-makers to the correlations of different factors that can help in decision-making during the coronavirus crisis. 

Reliance on numbers is very dangerous when driven by only one pertinent angle among several, Muhanna pointed out, such as lockdown or social distancing policy decisions made irrespective of national specificities in countries with very young populations and large informal sectors where up to 80 percent of working people survive on daily incomes. “Are policy-makers trying to save lives at the expense of killing the economy?” he asks. “What is the right balance? We found interesting correlations looking at the health sector, the economy, and the age [structures] of countries and observed moving trends.”

As the early April policy note observed: “Simple cross-country regressions show that, all other things being equal, death rates decline with the level of GDP per capita and the number of [hospital] beds per capita and increase as a function of the average age of the population.” It confirmed the strong correlation between new infections and mortality rates, which makes the number of infections per capita the main predictor for the observed number of deaths and controlling the number of cases the main instrument by which countries can reduce the future number of deaths, but followed this observation by warning that, “Because policies that control the number of cases – social distancing – also have impact on jobs and labor productivity, the optimal [strategy] might not be to suppress the virus but to mitigate the contagion.”

According to the policy note, 4.6 billion people, or 62 percent of the world population live in countries where the median/average age is in two age brackets between 30 and 39 years but lockdown decisions are heavily influenced by countries with a high share of people above 60. Countries where the average age is higher by five years see additional 3.5 deaths per one million inhabitants, Muhanna tells Executive. This group of 37 countries with average age above 40, which has an aggregate population of 821 million (11 percent of world population), is driving policy decisions on coronavirus together with China (a country in the 35-39 bracket for average age), whereas global coronavirus policy trends appear to not at all be driven by countries with average populations aged 20 to 29 years or even less, which are 50 plus countries in Africa and South America. 

The tool that facilitates analysis of coronavirus trends with actuarial techniques is updated continually and has been made freely accessible here (but is best accessed in desktop environments). 

Under pressure

In a picture that is getting increasingly complicated, insurers in recent weeks have been facing mounting pressures—up to the level of American presidential pressures—that they should honor claims irrespective of their validity under existing policy stipulations. At the same time insurers were operating in environments that led several providers to support emergency workers by giving them privileged protections and also issue rebates on motor insurance premiums in lockdown periods. On the other hand, windfalls were pocketed by health insurers due to reduced numbers of elective surgeries, not to mention that the expectations regarding reinsurance are of protracted legal disputes over the coverage of non-life claims that are part of recession events.    

In business concepts of insurance, the downside question is how badly the industry will be impacted and driven down by weakened financial markets and elevated losses in multiple lines from life, health, and pension insurance to general lines including business interruption, workmen’s compensation, credit, liability, and specialized lines. As far as the upside, the question is if and how profitably insurance companies will be performing as high-power players in the rescue and resuscitation of the global economy. 

In considering these polar questions, one can disagree if the insurance industry is systemically important for the function of the long-term financial system of a capitalist society. Or, when taking account of insurance stereotypes and thinking in terms of urban dictionary-type utility, one can wonder if insurance is just boring and thus superfluous for society, or if it is boring on the surface and sexy beneath—like the proverbial accountant or librarian whose hunky or voluptuous qualities are very well concealed. 

For more serious aficionados of the purpose of insurance, a reasonable assumption globally might be that the coronavirus crisis and deep worldwide recession will add to already existing pressures. These business-revolutionary pressures have been building throughout the last ten to 15 years toward reinventing the way in which this industry addresses digitally enabled economies, how it responds to changing behaviors of millennial generations in terms of things such as personal mobility and the sharing economy, and to new cyber risks. Insurance companies’ recent behaviors during the crisis in this sense have been hinting at changes in the sector’s culture and need for further changes. 

The prospects of changes in international insurance culture notwithstanding, it is an unanswered and unanswerable question if such a hoped-for global insurance revolution and adoption of socially more harmonious modes of operations would infuse new life into the Lebanese insurance sector. In the past 20 years, the local culture in insurance was more neighborly than if it was solely determined by paradigms from international markets but the sector was also marked by less innovativeness than one would expect, given the quality of insurance talents in the country. However, ignition of digitally innovative thinking and alignment with a reborn global insurance culture is, in any case, not an immediate concern that Lebanese insurers can afford to ponder. The challenges of demand destruction and the immediate to mid-term financial future are much more pertinent concerns on the tables in the approximately 50 corner offices and boardrooms of Lebanon-based insurers.  

To give an example, the country’s sole specialized insurance provider for trade credit insurance, LCI, is by default on the daily pulse beats of trade and also an operator of an insurance line that is highly sensitive to local and international fluctuations in the real economy. As CEO Karim Nasrallah confides, LCI took drastic measures already in October and November of 2019 because of the erupting economic crisis. These measures proved efficient for the situation but will not provide indefinite relief. “We took very drastic measures in terms of lowering exposures, cutting down on risks, and not taking on new business,” Nasrallah tells Executive. “Our business is also sharply down because it is based on sales by our customers. Thus in our Lebanese operations, we are working on a very, very slow pace. As you can imagine, this will trigger many payment defaults and issues, which are still manageable but we will have a big problem in the market here if the situation gets stuck for a long time.” 

Like every business leader that Executive communicated with in the past six weeks, Nasrallah sees the dual economic and coronavirus crisis as a very heavy burden on Lebanon. The crisis massively includes the insurance sector and is in urgent need of a sustainable solution. “As a country, we are very much exposed; we have to hope for the best,” he says. 

In the description of acting insurance commissioner Nadine Habbal, some immediate problems of the Lebanese insurance sector are being addressed, specifically the challenges which sector companies face with regard to executing international transactions for payments of their quarterly reinsurance dues. However, longer term issues such as the implementation of the upcoming IFRS 17 regulation, will require large investments in the sector and mandate massive consolidation of the overpopulated provider field, she tells Executive.   

Due to the implications of the much debated haircut in the Lebanese banking sector, the highly banking-exposed insurance companies already face near-term prospects of asset write downs, says Lebanese actuary Ibrahim Muhanna (see Q&A). He explains that in a pessimistic scenario, the shareholders’ equity of up to 17 insurance companies would be completely depleted if insurers’ assets in the banking sector would be subjected to a 50 percent haircut on large deposits. Another 31 companies would maintain positive shareholders’ equity but would need to inject further capital, especially if they write long-term business. 

Moreover, associated liabilities of insurance companies will have to be revalued in light of the new economic circumstances in Lebanon, which could leave some companies with increased liabilities and others with decreases, in addition to spelling bad news for small life insurance policyholders. “Insurers’ total earmarked assets for unit-linked life policies amount to around $700 million which match the companies’ associated liabilities,” Muhanna says. “Therefore the tens of thousands holders of these policies will be taking all the hit that comes as a consequence of any implemented haircut … In short, I expect a massive impact on the insurance sector in Lebanon and a large role for risk professionals and actuaries to play as they help navigate the upcoming systemic shocks.”

There is, in sum total of the accounting of the coronavirus crisis impact on insurance from a Lebanese vantage point, absolutely no certainty about the future incarnations of global insurance culture and still less certainty on the local market question how many insurance companies will still be active one year onward from what one might call the great Lebanese crisis of coronavirus, everything economic, and politics. Also the question how the local provider landscape will be composed and oriented in terms of companies that are independent local, bank-affiliate, or units of international firms, will only be answered with time. 

However, a very pertinent question remains with view to the culmination of the coronavirus and economic crisis in Lebanon and elsewhere: Can insurance wisdom and actuarial risk assessment provide value to countries that are deciding on their path out of their respective medical and economic crisis scenarios? (See box above). As the ICC’s Habbal noted in a conversation with Executive, each country has a specificity that must be properly understood and addressed if the aim is to reach an optimum path of sustainability. 

It emerged, as a generally agreed upon perspective during the coronavirus crisis, that lives count more than money. While, as IMF head economist Gita Gopinath noted in April, “there is no trade-off between saving lives and saving livelihoods” in the sense that countries need to enable health systems to cope with the disease as condition upon which resumption of economic activity can occur, however, countries also can ill afford to have their economies die and kill scores of people in the process while enterprises are waiting for the virus to be controlled. 

This means that careful, balanced, and constructive navigation of the coronavirus crisis’ medical and economic cliffs is essential. As economic cliffs may loom very large in countries with overwhelmingly young populations and large informality in the economy, there may be urgent needs for immediate income as well as productivity gains. Such economically needy societies are not found in old Europe or among the two largest economies on planet earth, but they exist in places like Africa and South America—and, with a unique other specificity, in Lebanon. Adequately addressing these nations’ specificities and needs for recovery and new growth will need a lot of investment money, probably debt forgiveness too, but much more than that: smart policies, accountable politicians, and custom-tailored coronavirus solutions.       

April 28, 2020 0 comments
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AgricultureCoronavirus AnalysisFood securitySpecial Report

Growing trend of individual or community planting in Lebanon

by Nabila Rahhal April 27, 2020
written by Nabila Rahhal

As prices of both imported and locally produced food items continue to increase and Lebanon’s food security is potentially threatened (see articles on agro-industry and food security), the old Lebanese proverb “fellah mekfi, sultan mikhfi”—which roughly translates to “a satisfied farmer is really a sultan”—rings true. Knowing how and being able to grow one’s own consumption needs of fruits and vegetables, is a wealth in these economically challenging times we are passing through.

This awareness of the significance of a productive sector like agriculture was close to zero prior to 2019. Ramy Boujawdeh, deputy general manager at Berytech—an ecosystem that fosters innovation technology and entrepreneurship, initiated in 2002 by Université Saint-Joseph, recalls (in an earlier interview with Executive) that when they launched the first edition of accelerator program Agrytech in 2017, they struggled to attract participants. After a lot of efforts to drum up interest in agriculture, targeted mainly toward universities, this was slowly beginning to change and their third accelerator round—launched on October 16, 2019—attracted 110 participants (up from 65 in the first batch). 

As indicators of bleak days to come over Lebanon showed their first buds toward the end of 2019, this emerging interest in agriculture was heightened as more Lebanese felt the need to be food independent (being able to provide food for one’s self and community). This interest was manifested at individual and community levels, with more people showing interest in growing their own food. Kon, a neighborhood growing initiative in Furn el-Chebbak that was developed in early 2020, is one example of community efforts revolving around agriculture.

Also born out of this awareness of the value of producing one’s food were volunteer-based movements or initiatives aimed at supporting those interested in becoming more food independent. The popularity of these movements can be viewed as an indicator of the growing interest in agriculture. A Facebook group called Izraa, developed by agricultural engineers to answer all agriculture-related questions (whether urban or rural, high or low tech) and to share expertise through tutorials, exceeded its admin’s expectations by reaching 1,000 members barely two days after it was launched in mid-January 2020, according to Salim Zwein, one of Izraa’s founders. The group has 14,500 members at time of writing, an increase of 2,200 from the same time last week, and receives an average of 15 questions per day, per this writer’s observation.

Similarly, a talk on food sovereignty that was held in Tripoli’s Nour Square early in December 2019 took three hours instead of the planned hour and a half due to the high level of engagement, with a larger than expected 150 attendees. The talk was organized by Haraket Habaq, a movement which was also founded in December by a group of youth who live in Tripoli and which promotes sustainable development through agriculture and local production. Mourad Ayyash, one of its founders, tells Executive, “We saw the need for us to organize this momentum that had developed around the importance of agriculture and food sovereignty so, we went across Lebanon (Hemmanah, Majdal Anjar, Saida, Sour, Akkar, Tripoli, Beirut, and the Bekaa) engaging with whoever was interested in this subject. From these talks, other initiatives were born.”  

There is also increased interest in agriculture from private sector individuals, according to Shady Hamadeh, director of the Environment and Sustainable Development Unit (ESDU) at the American University of Beirut’s Faculty of Agricultural and Food Sciences. “Many are expressing interest in investments in agriculture,” Hamadeh says. “So we would like to take this opportunity, through Ardi Ardak [NB: a national food security initiative launched in December 2019 as a collaboration between ESDU, the Lebanese League for Women in Business (LLWB), the Food Heritage Foundation and Zico House] to link these investors and big land owners with small farmers and rural women. Rural women are at the center of Ardi Ardak.”

The face of the modern day farmer

Those interested in individual and community planting nowadays span a wide range of people in Lebanon. “We have professional farmers who ask us a question related to crop disease and also individuals asking us how to best care for their gardenia or what vegetables to plant next to their olive trees, so we cater to everyone,” says Izraa’s Zwein.

Although the interest in agriculture and being food independent was born out of Lebanon’s economic crisis—proof being that a big percentage of the initiatives promoting agriculture were developed by the end of 2019—the COVID-19 crisis gave people enough time on their hands to do something about it. Izraa receives daily comments from members who had no prior background in agriculture but say they have developed a passion for planting after having first tried their hand at it during the lockdown, according to Zwein. Although he cannot yet quantify it, he also says that based on interaction within the group since the start of the lockdown there has been an increase in both high-quality rooftop garden installations, complete with raised beds, and in youth returning to rural areas and planting in the neglected land of their grandparents.  

Asmahan Zein, president of LLWB, also believes that the coronavirus crisis has made people with no background in agriculture realize its value as a productive sector. “People are looking toward alternative productive industries that would help them survive and they no longer assume that everything will arrive to them while they are at their office in Beirut,” Zein says, explaining that this thinking has allowed her to gather several organizations they work with around Ardi Ardak.

Because the quarantine measures limit gatherings, growing efforts are more at the individual level rather than the community level nowadays. Souad Abdallah, founder of Kon, says that some neighbors have expressed their interest in the initiative but have shied away from actively participating because of the restrictions; she expects this to change once the lockdown is lifted. For now, there are four active participants in the rooftop garden of her building and they communicate online with representatives of another rooftop garden two minutes away from her and three balcony planting projects, also in the area.   

The ABCs of planting  

The beauty of planting is that anyone interested can find a surface to grow something in. When it comes to food, herbs are ideal for those planting on small balconies, says Zwein, while potatoes and tomatoes are more suitable for rooftop gardens and those with access to land can plant wheat alongside a variety of fruits and vegetables, depending on the land’s specifications.

Abdallah says they have assigned different produce for the participating neighbors depending on the specifications of their planting area: One neighbor grows lettuce for the community because his garden gets a lot of shade and that is favorable for lettuce, for example.

The initiatives Executive spoke to all promote sustainable agriculture, which Hamadeh explains as environmentally friendly agriculture that is resources efficient, or permaculture, defined as “an agricultural system or method that seeks to integrate human activity with natural surroundings so as to create highly efficient self-sustaining ecosystems.”

This type of agriculture does not use chemical fertilizers or pesticides, which has the benefit of driving down gardening costs. The latter two, according to Zwein, are the highest costs for farmers, especially nowadays when the price of chemical fertilizer has gone up because of the foreign exchange rate. Instead, permaculture uses organic fertilizer or compost instead. This can either be homegrown—Abdallah says Kon makes its own compost out of egg shells, coffee grinds, and organic material such as fruit peels—or bought from local producers. In this case, the cost of compost for a 200-square meter rooftop garden would be an average of LL50,000, Zwein says, speaking out of personal experience.

Abdallah says permaculture uses less soil than conventional planting, explaining that in Kon they use layers of dead matter (dead leaves), green matter (grass), horse manure, and soil to plant the seeds in. “This decreases the weight on the roof and the usage of soil and creates a healthy environment for plants,” she explains. Other ways Kon is decreasing costs is by using donated recyclable items for planters and pots, and relying on exchange of services to get some gardening tasks done (neighbors help her plant in exchange for seeds or seedlings, for example).  

Zwein estimates that a 6 meter by 3 meter raised bed (for rooftop gardening), with a depth of 60 centimeters, would need a maximum investment of LL1 million when using the best soil (a mix of 80 percent peat moss and 20 percent compost). Those who already have arable land would have an understandably smaller investment, since the soil is already there.

Why plant?

There are many reasons why Lebanese are more inclined to spend more time with a shovel and soil these days. A main driver for promoting agriculture among the movements and initiatives Executive interviewed is to promote food independence. “Food sovereignty among urban dwellers is a main goal for Kon because we are passing through an economic crisis when it is very easy to produce our own food and also very healthy since we know we are putting into the soils,” Abdallah says. 

Ayyash also speaks of the importance of food sovereignty and people’s right to nutritious food. He adds that providing refugees with employment opportunities is another goal for Harkat Habaq, since Lebanese labor law restricts the fields which they can work in. He gives an example of a project in Tripoli that Haraket Habaq is collaborating on with another organization called Hajjar w Bashar (Stones and People) where the municipality donated a 13,000 meter square garden to be planted by the two organizations—produce from the land will be distributed by them to vulnerable communities.

Aside from being able to feed one’s self and community, planting in rooftop gardens and small plots of land, if done at a very large scale, could conceivably free up Lebanon’s already limited agricultural land. “When people can feed themselves from these ways, it will decrease the pressure on the land used for vegetables nowadays and so it can be used for more interesting projects such as growing wheat or animal feed, for example,” Zwein says.

One of the main goals of Ardi Ardak, according to its concept document, is to “promote food security at the rural producers’ level by promoting small scale producers’ access to markets; and urban consumers level by providing them access to healthy local produce.”

For Abdallah, community growing in urban areas has the added benefit of improving air quality, an element which she feels is very important in Beirut, where air pollution exceeds World Health Organization recommendations over threefold. Abdallah also says that neighborhood planting initiatives such as Kon nurture a sense of community among neighbors and she hopes to see this initiative eventually replicated across many of Beirut’s communities. “It shows that people can work together on a common interest without having a political umbrella or identity,” she says.

Whether this individual and community growing trend is a temporary fix to lockdown and economic hardships or whether it will remain in the long term remains to be seen.  What is clear, for now, is that people have realized that they can no longer take for granted their access to food, and that the effects of the economic and coronavirus crises has had and will continue to have impacts.   

CORRECTION: This article was updated on 08/05/2020 to reflect that the talk held in Tripoli’s Nour Square was organized by Haraket Habaq, not the Socio Economic Action Collective (SEAC). During our initial interview, Executive was informed that the talk was organized by SEAC, and that Haraket Habaq was a media offshoot of the organization. We have since been contacted by Haraket and asked to remove this reference, as their organization is independent.

April 27, 2020 0 comments
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Coronavirus AnalysisEconomics & PolicyOpinionRefugeesSpecial Report

Lebanon’s refugee restrictions could harm everyone’s health

by Nadia Hardman & Aya Majzoub April 22, 2020
written by Nadia Hardman & Aya Majzoub

Government responses to the spread of the COVID-19 virus have exposed the extra barriers to healthcare for refugees and migrants worldwide. But discriminating against already marginalized noncitizens not only erodes their capacity to avoid or survive infection, but inevitably has a negative impact on the wider society’s health.

This is undeniably the case in Lebanon, home to nearly 1.5 million refugees—almost a quarter of its population. Both Palestinian and Syrian refugees have suffered from long-standing discrimination and marginalization as a result of Lebanese policies that deny them access to basic rights, including housing, work, education, and healthcare. The COVID-19 outbreak in Lebanon has only heightened the marginalization of both groups. Many municipalities have introduced unjustifiable, discriminatory movement restrictions and curfews on Syrian refugees that do not apply to Lebanese residents as part of their effort to combat COVID-19. And leading Lebanese politicians have fueled anti-refugee sentiment by implying that Syrian and Palestinian refugees will be responsible for spreading the virus. 

Yet, the Lebanese government’s national response plan for COVID-19 depends on self-reporting. People are advised to call a national health ministry hotline for advice about testing and treatment. The United Nations Refugee Agency (UNHCR), which is responsible for Syrian refugees, and the United Nations Relief and Works Agency (UNRWA), which is responsible for Palestinian refugees, have both said that they will only cover the cost of testing and treatment of refugees if the refugee has first contacted the hotline and followed its instructions. 

While it is widely acknowledged that testing and contact tracing are key to tackling this virus, Lebanon’s response plan rests on an assumption that an individual experiencing coronavirus-like symptoms will feel comfortable enough to call a government-run service, travel to get tested and treated, and potentially share information about where they live, whom they live with, where they have traveled, and where they work. However, Syrian refugees have told Human Rights Watch (HRW) and aid agencies of their fear of further discrimination and stigmatization if they contract COVID-19. Some Syrian refugees have even expressed fears of deportation if they exhibit COVID-19 symptoms. They cite these fears as a deterrent from seeking medical care, even if they experience symptoms.

Our interviews with Syrian refugees lay bare the government’s failure to provide them with up-to-date and accurate information about the virus and the healthcare services available to them—a human rights obligation of the Lebanese government. More than a month into the COVID-19 outbreak in Lebanon, the majority of Syrian refugees that HRW interviewed said that they did not know what they should do in case they experienced symptoms, nor did they know of the existence of the health ministry hotline. Humanitarian organizations have cited similar findings. 

At a time when that trust is most needed, the Lebanese authorities are conducting business as usual and adopting policies that fail to alleviate the refugee populations’ mistrust of the authorities. This lack of trust could easily undermine efforts to prevent control and spread of the disease. Lebanese policies should guarantee access to healthcare for refugees, including testing and treatment for COVID-19. The government should simultaneously push an information campaign to provide refugees with all the facts that they need to protect themselves against infection and to seek healthcare in a timely manner. The authorities should also proactively reassure refugees that they will not face retribution or stigmatization if they seek testing or treatment for COVID-19. 

The international community must also step up. Lebanon has the highest number of refugees per capita in the world. While not an acceptable excuse for the discriminatory and abusive measures that marginalize refugees or endanger their health, the burden is something the international community should help carry. 

UNRWA has suffered several funding cuts, including when its erstwhile biggest donor, the United States, cut its funding entirely, and is now running a deficit of over $120 million. In 2019, only 55 percent of the Lebanon Crisis Response Plan for refugees was funded. Other states may have been able to stem the flow of refugees across some borders, sometimes in unconscionable ways, but it cannot do the same with this virus. 

Lebanon and the international donor community should do better in assisting refugees to build their resilience by ending discriminatory practices and by ensuring that they are able to get healthcare and adequate housing. It should not take a global pandemic to force this position, but as the first case of COVID-19 was recorded in a refugee camp in the Bekaa on April 21, the authorities may soon realize that they have no other choice.

April 22, 2020 0 comments
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BusinessCoronavirus AnalysisInsuranceSpecial Report

Confused outlook on insurance coverage for Lebanese COVID-19 patients

by Thomas Schellen April 22, 2020
written by Thomas Schellen

In the immediacy of the coronavirus crisis, the most pertinent insurance question for the holder of a medical policy is simple: Who will pay if I need to be hospitalized?  The answer, as with many things in Lebanon, depends. According to Nadine Habbal, acting head of Lebanon’s Insurance Control Commission, slightly more than half of Lebanon’s health insurance policyholders have coverage for coronavirus-related hospitalization costs. Their providers either have written no exclusions of pandemics into their contracts or have waved such exclusions as a service to their clients, she tells Executive. Another category consists, she says, of “companies health insurance portfolio is divided into two parts: some policies that don’t exclude pandemics and the remaining policies that exclude pandemics. (For additional information, see Q&A).   

Notwithstanding that commercial insurers listed on the ICC website, by Habbal’s assurance, honor their health insurance obligations in COVID-19 cases, the picture is not automatically clear as to how large a percentage of health insurance policyholders will be admitted without any questions and how many would be faced with incongruences in admittance procedures when in need of hospitalization for the disease. According to Elie Torbey, the president of the Association des Compagnies d’Assurances au Liban (ACAL), coverage of COVID-19 cases is to date clear and secured for one client category only: all those who are medically insured as foreign workers in Lebanon under coverage (up to a ceiling of $20,000) that is mandated under labor regulations. “In our opinion, most of the Lebanese are not covered by insurance in corona cases,” Torbey tells Executive. “Just two or three companies in Lebanon cover the corona cases for Lebanese [policyholders], but only because they are linked to head offices abroad. They are [units of] international companies and since their head offices says they will cover COVID-19 cases, they will have to follow coverage.”  

According to him, the total population with private sector insurance is composed of 845,000 policyholders, of whom almost 200,000 are holders of expatriate medical insurance policies designed for foreigners who are employed in Lebanon. After accounting for the expats, 670,000 Lebanese policyholders with existing health insurance contracts remain, and many of their policies explicitly exclude coverage of pandemics. “A limited number of the insured are covered for COVID-19,” Torbey reiterates. 

The problem about actuarial calculation of premiums for coverage of the pandemic is the lack of data. Given that a global pandemic on the magnitude of the coronavirus infection might happen once every 200 or more years, no data exists upon which a rational calculation could be based, Torbey explains. “That is what we are afraid of,” he says. “We are afraid of the frequency and the severity of cases. If we have data, we can calculate how much we should require from the clients if we want to impose an extra premium for the future, and then we will cover it. We don’t want to shift from problems of covering coronavirus cases to a situation where we have a problem that might go as far as bankruptcy of a few insurance companies if they are highly affected by the cost of treating coronavirus cases inside Lebanese hospitals.” Ten to 12 Lebanese insurance providers have large medical portfolios and could be highly exposed to COVID-19 risk, he says, but to his view, exposure of insurance companies to the pandemic would in any case require placing caps, meaning a maximum limit, on risk exposure per company.

In addition to the fundamental difficulty of assessing the pandemic’s coverage risk, the situation of insurance payments for in-hospital treatments of COVID-19 appears to have not yet been sorted in two further respects. According to Torbey and other sources in the insurance industry, private sector companies are, at time of this writing, still engaged in pricing disputes with hospitals and discussions with ministries. In their negotiations, which Torbey says are progressing now on the level of the office of Prime Minister Hassan Diab and his staff, insurers are asking to be invoiced for treatment dues for coronavirus infection at or near the discounted rates that hospitals receive from the National Social Security Fund (NSSF) for patients with NSSF coverage. 

On their parts, hospitals demand insurance companies to pay rates that appear to exceed the NSSF rates by as much as 150 percent, based on information that ACAL gleaned from a number of invoices that had already been sent to insurance companies after they assumed responsibility for coverage of COVID-19 treatments. 

However, it seems that the NSSF rates are not suitable as benchmarks for determining full treatment cost in the coronavirus scenario, given that hospitals, according to Torbey, argue that they are incurring extreme costs for protective gear needed in care for pandemic patients and that such gear, which is purchased on basis of dollar prices and reportedly accounts for 30 percent of total patient care cost, is not included in the NSSF’s coverage.    

What is furthermore missing and yet to be developed is a rule for tariffication of treatments under a medical code for the novel coronavirus infections. Medical codes are standardized and detailed scientific catalogues that come into force when approved by health authorities. They entail information on diagnosis, procedures, drugs, and prices of treatment for a classified disease and note correlations with other ailments if such are applicable. Guidance on such codes for coronavirus infections is internationally evolving with the pandemic; interim or emergency codes have been issued by the World Health Organization and some developed countries over the past two months while research into clinical and epidemiological features of COVID-19 is still far from complete. 

In Lebanon, medical codes are developed and regularly reviewed by a committee of high-powered medical professionals and officials for the Ministry of Public Health (MoPH). While Habbal confirms that the medical code for the novel coronavirus is needed and that discussions on this issue are progressing with support from the minister of health and MoPH teams, there is no indication of the code having been completed. 

However, seeking to give a signal of hope for the people with private sector insurance, Habbal points out that a recent ministerial decision by the economy minister through Ministry of Economy and Trade (MoET), the administrative superior of the ICC, has been issued to remove any ambiguity on the inclusion of pandemic coverage from future health insurance policies in Lebanon. “As part of our efforts to improve the medical insurance offering in Lebanon, a ministerial decision was issued on April 15 requiring insurance companies to introduce a compulsory pandemic cover in every new or renewed policy,” she tells Executive in a Q&A. “This will enhance the insurance protection for existing and new insured members, and would present a better value proposition that is uniform for all.” 

Insurers confirm the receipt of the MoET’s ministerial decision but did not enthuse about it. On one hand, their first worry is about dealing with existing policyholders (an issue not addressed in the new ministerial decision) and finding a solution for the tangled situation of insured clients whose needs are neither provided for by their contracts with Lebanese insurers nor included in treaty coverage of local insurers with international reinsurance companies. “Our priority is to cover existing policies,” Torbey says. “We are working now with the prime minister’s office to find a solution for the existing, non-covered clients. We should find a solution for those clients, because it is clearly mentioned in our policies that pandemic is excluded; so if we have to pay, we will be paying from our own pocket.” 

He also is not exactly cheery about the long-term risk implications of the new decision. “We are not overly in favor of this because if they cover pandemic it is not mentioning corona [specifically],” Torbey says. He emphasizes that another pandemic might just be too much for Lebanese insurers to cover and alludes to principles of risk mitigation under which large aggregate risks such as pandemics and earthquakes are tasks for governments rather than commercial insurance markets. 

This general principle of governments’ responsibility for handling national-scale disasters, however, does not answer the question if either the Lebanese insurance sector or the country as a whole would emerge intact if another, equally severe pandemic to COVID-19 were to hit Lebanon next year. Even the thought of such a possibility reminds that in insurance and governmental preparations for eventualities of catastrophes alike, fortuitous timing and utmost actuarial diligence in planning may both be needed—and certainly appear to be so in this Lebanese spring of 2020. 

April 22, 2020 0 comments
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BusinessCoronavirus CloseupInsuranceSpecial Report

Q&A with Nadine Habbal, acting head of the Insurance Control Commission

by Thomas Schellen April 22, 2020
written by Thomas Schellen

Lebanon’s insurance sector is highly fragmented, featuring extreme competition between small local players, bank-affiliate insurers, providers that are parts of multinational insurance giants, and—outside of the regulated sphere of commercial insurance companies—even quasi-insurers with competitive privileges that are categorized as mutual funds. The diverse and overpopulated sector, mired in opacity of companies, has not been able to achieve significant consolidation and has, for the last 30 years, rarely been able to find a unified voice that would have enabled to address public concerns and deliver insurance as a public good. Throughout the last few decades, the need for an adequate insurance law has moreover loomed large over the disjointed industry. Frequently faced with greatly diverging opinions from within the insurance sector and having to tear down attitudinal walls of vested interest as part of challenges it encountered, the Insurance Control Commission (ICC) has, since the early 2000s, incrementally implemented increasingly effective financial oversight over the sector and also gradually expanded its advocacy in support of insurance clients. Executive inquired with Nadine Habbal, the—by now long-term—acting head of the ICC about the oversight institution’s perspective on the dilemmas of the COVID-19 pandemic for the insurance sector.     

The ICC has published a list on its website of insurance companies that provide coverage for treatment of COVID-19 for all or part of their insured members. Is the list accurate and comprehensive as far as including all details, and what is the meaning of the phrase “all or part of their insured members”?

As listed on the ICC website, a number of insurance companies provide cover for pandemic diseases to their entire portfolio. Some companies decided to waive exclusions on pandemic diseases and cover their policyholders. There are also companies whose health insurance portfolio is divided into two parts: some policies that don’t exclude pandemics and the remaining policies that exclude pandemics. This is the reason why we put a note on our website that they cover part of their members. Finally, some insurers exclude pandemic risks entirely.

When looking at Lebanese insurance companies in terms of their coverage response to COVID-19, what is proportionally the largest group among the categories you mentioned? 

The ICC numbers indicate that up to 55 percent of insured members have no exclusions, and are consequently covered for pandemic diseases—I am telling you our estimation. The remaining 45 percent have policies with pandemic exclusions; they do not have coverage.

Is the coverage that you are discussing related specifically to in-hospital treatment of COVID-19 or is testing for the coronavirus also covered by the insurance companies under their health policies? 

The coverage may change depending on your policy. Our efforts focus on policyholders that require in-hospital treatment. Testing is covered for policyholders with outpatient coverage and no pandemic exclusion. Our aim primarily is to cover the cases that require treatment, and these are divided into three categories: mild, moderate, and severe (requiring intensive care units).

Did the ICC receive many requests over its hotline for insurance-related inquiries and complaints?

ICC-Care is recording situations related to insured persons requiring in-hospital treatment as a result of COVID-19 and we are resolving such cases based on the stipulations of the respective insurance contracts. Our interventions differ on a case-by-case basis.

Are the phones ringing off the hook, meaning are many cases that need supervisory investigation being brought to your attention simultaneously, or is the situation moderate in terms of number of complaints and inquiries about how the coverage of COVID-19 cases is handled, either from the side of hospitals or the side of insurers? 

The situation so far is manageable and we are able to accommodate and resolve all requests. The number of policyholders who require in-hospital treatment is limited; an estimated 80 percent of the cases are either asymptomatic or very mild, and do not require hospitalization. Altogether, and in as far as the insurance sector is concerned, the projected population of insured members who are infected and require in-hospital treatment is not large.

Are you playing a role as mediator in discussions between insurance companies and hospitals? 

ICC Care recorded cases where hospitals are not automatically admitting an insured member. We investigated such cases as part of our supervisory role and found out that such insured members were [being] required to make an advance deposit before being admitted. In our opinion, such practices are not fair, because they infringe the policy conditions. Therefore, we entered into discussions with hospitals to understand the reasons for the implementation of such procedures, and to defend the rights of policyholders. When COVID-19 is covered, patients should be treated as if they are admitted for any other disease. We requested that usual admission and treatment procedures should be uniformly applied for COVID-19 patients, as the case is for other services such as for heart surgeries for example. In case hospitals decide, for whatever valid reason, to apply alternative procedures, then the ICC, the insurance companies, and the public in general should be made aware of such alterations.

Our role is to protect the rights of policyholders and the sustainability of the insurance sector, and we acted with this perspective in mind. We engaged in discussions with the private hospitals in order to reach an agreement on fair tariffs that hospitals can charge for COVID-19 treatment, taking into consideration that some of the hospitals undertook investments in order to enhance their capacity to admit and treat COVID-19 patients. 

One further note is that hospitals are minimizing admissions of [patients for] non-emergency procedures, and people are tending to postpone non-essential medical treatments. There is a major change in the dynamics of supply and demand of healthcare services.

What is the ICC’s aim in the current time where people are so deeply impacted and concerned with the issue of COVID-19? Do you have updated plans or targets in light of the fact that you previously talked of provision of universal healthcare as a major need and long-term target for Lebanon?  

If we had universal healthcare with a primary or basic cover funded by the public sector and a top-up from the private sector, the situation would definitely have been better. The alarming situation that we reached provides strong supporting arguments for the urgency of the reforms needed to establish universal healthcare with a public-private partnership. We cannot postpone tackling this issue any further. Even now, with the recession and all the economic challenges that we are facing, this is the right time, especially as we consider the post COVID-19 period.

During a conference call that I attended with other insurance regulators in the region, there was a consensus that the main concern presently is not about how to fund the cost of healthcare services for COVID-19. The estimated costs are well established and documented, and the estimated incidence in the Middle East is so far largely manageable. The statistics indicate that the direct impact, especially in Lebanon, is much lower than Europe and North America. Nonetheless, we need to worry about what we are going to do post-corona, after the medical emergencies have been dealt with. This is an alarming issue that needs particular attention in Lebanon. What will happen to the people who became unemployed, and the businesses that had to stop or shift to survival mode?

Going back to your question, and as part of our efforts to improve the medical insurance offering in Lebanon, a ministerial decision was issued on April 15 requiring insurance companies to introduce a compulsory pandemic cover in every new or renewed policy. This will enhance the insurance protection for existing and new insured members, and would present a better value proposition that is uniform for all.

April 22, 2020 0 comments
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Executive talks and podcast

by RabihIbrahim April 20, 2020
written by RabihIbrahim
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April 20, 2020 0 comments
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AnalysisEconomics & PolicyFiscal policyLira peg

Leaked Lebanese government reform plan addresses lira peg head on

by Thomas Schellen April 13, 2020
written by Thomas Schellen

“The existing dual exchange rate is not suited for the long-term recovery of the Lebanese economy, because of its distortionary nature and the limited availability of FX-resources in the parallel market.”  

The Lebanese Government’s reform program, April 6 draft

Chained to the dollar for the longest time under a policy favoring partisan interests—but not Lebanon’s socio-economic best interests—the Lebanese lira has broken loose from its peg. The rate of LL1,500 to the dollar, an automatic beacon in the Lebanese economy for over 20 years, has been partially replaced by a parallel market rate that has been dancing and twirling all over the place, from LL1,800 to LL2,200 and back, and up again to within spitting distance of LL3,000 to the dollar. But it is not a happy sort of freedom. According to a new assessment that was produced as part of a nameless rescue plan for Lebanon—and leaked in draft form soon after its internal release on April 6—the emergence of a parallel market has done no good and this market has no future beyond the middle of next year. 

In principle, the paper argues, the widening gap between Lebanon’s official and parallel rates of exchange is prone to be the source of “social inequalities.” The gap could have a rentier effect of leading to economic rents for accessing dollars at official rate, which would be “prolonging an already inefficient system.” And adding to this economic burden of the parallel market that has existed for the most turbulent six months in the past 28 years is the scarcity of foreign hard currency. This scarcity is due to unofficial but increasingly stringent bank-imposed capital controls that have been in place from last October and are continuing to this date. These distortions of capital flows are preventing the emergence of a functioning parallel market and drive parallel rates to excessive highs, the paper argues. But what is the story with the dollar peg, and why is this peg officially still in existence? 

One can think of a peg as a form of partnership, a marriage of currencies in which one currency follows the other for better or worse. However, since the business of following is 100 percent one sided—it is always the pegged currency that follows slavishly, and never the currency that it is pegged to, usually the US dollar—these partnerships, at least for larger economies, rarely last more than a few years or even a few months accompanying a promise of fundamental economic reforms. And when the promises are not kept the consequences are often spectacular, as seen in examples from Mexico and Turkey in the 1990s to Argentina and Egypt. In the better cases where a peg has been engineered, it was often done for a limited time and was designed as support tool to overcome a financial crisis, allowing a pegged country to stabilize its currency. 

Pegs have been perceived by economists as limited because they come with a conceptual downside known as the trilemma or the impossible trinity—the practical impossibility to simultaneously have a fixed foreign exchange rate (peg), free flow of capital (no controls), and an independent monetary policy. Since amounts of capital behave like profit-seeking missiles, recent financial history shows that whenever the interest rate environment in a pegged country with no capital controls opens wide doors for capital to profit from carry trade, the central bank of a pegged country cannot make its own interest rate decisions to stabilize the domestic economy. It has to copy the other country’s prevailing interest rate, the hypothesis goes and practical experience of the past 40 years has corroborated.      

To get away from economic deserts full of narrow triangles, one can compare a currency pairing perhaps to generic partnership. Productive partnerships have consequences. Short-term exclusionary partnerships involving individuals, enterprises, and even currencies that begin with common interests tend to yield shared outcomes but can also produce divergences. These divergences can be curtailed by dissolving the partnership—or they end in a disingenuous breakup. 

Open-ended productive partnerships with solid foundations and processes, such as mutual/shared ownership of equal-value assets, agreed principles, and dynamically developing joint interests under adherence to proactive and transparent internal information policies, can generate continually improving superior outcomes as well as intensely align the stakeholders in the partnership—like a couple in a marriage that finishes each other’s sentence or is so in tune with each other’s intentions that they appear to read each other’s minds. 

Such intense and mutually beneficial alignments can emerge not only in social and economic partnerships of equal individuals, but also in asymmetric partnerships of senior and junior business partners, in and between enterprises and stakeholders in long-distance enterprises. But the downside risk of such uneven partnerships is immense. Total dependency can develop into hell for the weaker partner. The one-sided, open-ended, and overlong currency partnership of Lebanese lira and US dollar lasted for over two decades, in which it seemed to defy the impossible trilemma and survived many external stresses, episodes of capital outflows, and pressures of divergence.

The partnership might have continued as it had, with the knowledge that the freedom to set its own interest rate policy is something of an illusionary freedom for a small country embedded in webs of international trade. After all, no theorem in economics is unshakable, many very small countries have a fixed exchange rate policy without drawing undue attention, and there is a polar counter-perspective to every presumed truth. But the end result of the long dollar partnership—first adopted to accompany nation building, reforms, and private sector’s recovery after the Lebanese Civil War—was disaster for the Lebanese, largely due to the establishment’s perpetual failure to enact lasting reforms. 

According to the above cited draft rescue plan, the lira was increasingly overvalued during the last few years. Notable ratios of overvaluation included estimates of 6 percent in 2008, 15 percent in 2012, 18 percent in 2014, 12 percent in 2016, 19 percent in 2019, and 33 percent in 2020. Other signals of alarm have exacerbated the problem. As confidence in financial markets evaporated and the long accumulating economic imbalances came to erupt, the relationship of currency dependence turned into hell for central bank, Banque du Liban (BDL), the suddenly incapacitated banking sector, and all Lebanese. The peg of the lira to the dollar is broken in principle and for most practical purposes with it the hopes for reforms toward an efficient and functional Lebanon.  

Now, with economies and financial interests that could be not more dissimilar, and finding themselves in a totally untenable currency relation on top of a totally untenable economic hole, the question of the Lebanese is how to survive after the divorce and how to save any monetary integrity. For more than five months, this problem of the factually broken peg has become increasingly exacerbated although the nominal parity was supposedly maintained. What to do in this quagmire, one of the many life-threatening and chronic conditions of which the almost comatose Lebanese economy has for months been in need of intensive care?

Plans long overdue

This problem has been no secret. At the Executive roundtable series just before Lebanon’s Independence Day last November, the lira peg and its future was one topic on the agenda, with a plurality of discussants expressing views that the peg in the long run would not be defensible. Some participants at the table argued for a crawling peg, others saw a need to stabilize the exchange rate at the official level before carefully revising it. 

While this type of discussion has been repeated many times since—for example, in the public squares during the thawra (revolution) and via online meetings under coronavirus conditions—efforts on part of official Lebanon to disambiguate the picture of the two diverging rates until very recently were foggy. Unequivocal statements on the peg’s need for replacement were scarce both before the appointment of a new government in January this year and since that theoretically pivotal moment. 

In the early days of the mother of all crises in Lebanon, assurances that the peg would not be touched were made from the side of the monetary authorities and its highest representative, BDL Governor Riad Salameh. Even in late March, the issue of having to change the exchange rate policy was not clearly stated and the unfortunate bipolarity of the lira was only alluded to by Minister of Finance Ghazi Wazni.  

When Wazni went before a video conferencing setup on Friday, March 27, he had something to say to bond holders. Those were the people who have financial claims on Lebanon and who have hardly been happy campers since the country’s announcement in early March that they would not settle what was due in regard to the then-outstanding eurobond on March 9 (an announcement from the Ministry of Finance [MoF] later in that month had confirmed that Lebanon would not be making its payments for any of this year’s maturing eurobonds in foreign currencies). 

But what the minister told these finance professionals with regard to the schizophrenic reality of the Lebanese foreign exchange (FX) rate in his opening speech (as published on the MoF website) was only a fleeting mention of the “critical level of available foreign currency” at the central bank, after which Wazni went on to acknowledge, equally vaguely, that one of the problems facing Lebanon was the “FX liquidity crisis, including the depreciation of the parallel exchange rate.”

As several stakeholders in the challenge of realizing a national economic recovery plan for Lebanon—which includes everyone in the country—noted in the days following the MoF investor presentation, the provided content was on the light side. “Big on words and small on deliverables or plans,” as one entrepreneur put it to Executive.

Indeed, the minister’s observation was not followed in his opening speech by a rectification formula or outline of practical steps for dealing with the Lebanese exchange rate. Nor, according to content displayed on 27 presentation slides presented subsequently during the event, was such a formula made concrete there. One slide (see below) mentioned an exchange rate framework, but did not provide hints to any intended FX rate path or plan for an exchange rate framework.     

To crawl, to float, to leave well alone?

Seeking for deeper understandings of the overlong ongoing currency conundrum, Executive asked economists for their opinions on the lira peg’s sustainability and their perspectives on a devaluation—meaning a decision to revise the currency exchange rate downward from the decades old existing rate and of ca. LL1,500 to the dollar to a specific net level—or a depreciation—meaning a relinquishment of the official peg in favor of letting market forces determine the overvalued lira’s trajectory.

For economist Marwan Mikhael, it makes no practical sense for the government to embark on a redesign of the exchange rate regime at the moment. “The issue is that there are no advantages from devaluing the official exchange rate right now. As long as you have capital controls, the parallel market will depreciate more if you devalue the official exchange rate,” he tells Executive at the end of March. “There is thus no point of devaluing the official rate at this time. [Only] if you are lifting capital controls, can you devalue. This is my opinion.” 

According to Mikhael, the theoretical increase of competitiveness of Lebanese goods in international markets after a devaluation is hampered by the highly dollarized cost structure of Lebanese companies that can even include their payment of salaries in US dollars. A market with a single exchange regime could be realized on fresh money (money transferred into the country after November 17 last year), he adds: “For everything in fresh money, there should be a unified rate.” 

In his perception, Lebanon should move toward a crawling exchange rate peg—one that allows for gradual adjustments and envisions minor down and up moves of the exchange rate, even as some overshoot of the rate is to be expected in the early stage of a transition to a crawling peg via an intermediate free float decision. Describing the IMF program that has been implemented with a similar process in Egypt as successful, he advises that it would likely be beneficial to allow the market in this way to provide an indication on the rate at which to position a crawling peg. “This is why you perhaps will first float it and then get the right price that you can defend,” he explains. 

Seasoned economists Elie Yachoui and Roy Badaro (speaking separately to Executive prior to the March 27 investor presentation), both point out that the opposition to a fixed exchange rate peg in Lebanon has almost as long a tradition as the peg itself. “I am totally against pegging and have been so since the beginning [of the policy in the 1990s],” Yachoui says. “Market forces have finally overcome Banque du Liban’s policy of pegging. We are a free market economy and have to operate according to market dynamics in a monetary market and all other markets.” 

Yachoui tells Executive that he favors depreciation as the more market-compliant path over a governmental decision to devaluate, and also that he prefers a free float of the currency as opposed to a crawling peg or managed exchange rate regime in any form. “It is high time to see free float of exchange in Lebanon after 27 years of fixed rate,” he says. “I am against a devaluation to a new and lower peg or a managed exchange rate regime because I am against the central bank committing the same error again.” 

In Badaro’s perspective, the decision for a fixed exchange rate regime in the 1990s was linked to international policy preferences at the World Bank level, in line with what was then called the Washington Consensus (as defined by economist John Williamson, not to be confused with the later usage of the term). The peg might have succeeded as monetary Lebanese policy of the early 1990s if peace in the Mashreq would have been achieved then, but as peace was but a dream by the late 1990s, the policy should have been changed back then. “They stuck to it and we are paying the consequences of the decision,” he says. 

Differing in this from Yachoui, Badaro is in favor of a gradual freeing of the exchange rate and recommends a crawling peg. “I think that before October, [2019], the equilibrium rate was around LL2,300 [to the dollar],” he says. “[Adopting it] could have brought trade balance, but nobody would listen [to such advocacy].” He points out that neither the MoF nor BDL have a policy addressing the way in which the parallel market’s existence impairs lives of vulnerable population groups. 

“Many take advantage of [the black market] at the expense of the poor population,” Badaro says. “I would be in favor of freeing [the exchange rate] but at the same time of revising the minimum salary twice yearly, [so as to] catch up with inflation. There is a cost-push inflation [created by] the pass-through of the exchange rate but this inflation would decrease if we take measures of promoting a pro-competition environment, which means to abolish all the anti-competition regulations, exclusive agencies, and any monopolies.”

For Tamim Akiki, an entrepreneur and data sleuth with training in heterodox economics, the devaluation issue has to be dealt with as part of a larger context. Maintaining an exchange regime that is close to the status quo of a fixed peg would first require deep research and investigation of what benefits this could provide to a very small economy like Lebanon, and for how long and for what reason a fixed regime should be maintained. A new exchange rate policy that even considers a fixed peg should therefore first address questions such as: Do you want to maintain a fixed exchange rate for a year so that you can overcome a certain crisis? 

Saying that rather than adherence to any fixed rate, a different regime should be pursued, Akiki tells Executive: “I think there is a general consensus that having a more flexible monetary policy can be very advantageous for Lebanon. So I don’t see why we would stick to the status quo. My view is that Lebanon should move to something like a managed float, which is what exists in most of the world. Everybody manages their exchange rates—it has never been a total free floating environment. I think we have to move to something similar so that we don’t have this buildup of instability over time.”   

The top priority in his view, however, should be that a new exchange rate regime is integrated into a national strategy for the economy. “I think the devaluation has to be part of the rescue package,” he says. “My concern is much more related to seeing if this will be an opportunity to move to a modern sovereign monetary policy or will this remain a policy that has proven to be a mistake. What we need to do is start developing a master plan for the next financial system in Lebanon. This should include a floating exchange rate, which can always be influenced by the central bank [BDL].”  

With devising a promising exchange rate policy being a major challenge in itself—let alone seeking to do so in combination with measures aimed at increasing the purchasing power in the population and fostering improvements in competitiveness that is based not on price competition but on increased reliance on skilled labor—it becomes clearer why the issue of adjusting the lira exchange rate appears to be viewed by many in government and even some in industry as a hot potato. This impression is heightened even further when one considers that economists generally agree that a traditional tradeoff between pricier imports and cheaper exports will not give a significant advantage to local producers, most of whom are a long distance away from being ready to tackle international markets with efficiency. 

Economic rescue proposal

A positive flash on the thought horizon of proposing an economic rescue that incorporates a clear view on the lira reached Executive on April 1. Consultants Gerard Charvet and Ziad Hayek (who, like Mikhael, was one of the highly knowledgeable experts participating in Executive’s roundtable in November) published a plan that explicitly addresses the FX issue and lira devaluation under inclusion of inflation aspects. Stipulating that four core concerns need to be dealt with in the people’s interest, the plan lists the national debt, banking sector health, depositor protection, and the exchange rate of the Lebanese lira indispensable targets for attention. 

The consultants propose as a second thematic focus of their plan—right after advocating for the establishment of a defeasance company that holds state assets by a new law—to reset the price of the lira at LL3,000 to the dollar. As the next step in a viable currency policy, they recommend letting this devalued lira “float at least for an interim period before installing a crawling peg policy,” and soon thereafter eliminate the lira’s tail of three zeros, which would mean targeting parity at three (new and rationalized) lira to the dollar. 

In a financial projection, the Charvet-Hayek plan calculates the budgetary impact of their devaluation/float/crawling peg scenario on basis of their proposed ratio of LL3,000 per dollar rate. They say it would modify the central bank balance sheet from LL216,541 billion in assets and liabilities to LL302,981 billion. Charvet and Hayek advocate that their proposed economic measures ought to be brought on simultaneously in one comprehensive package, under inclusion of flanking measures to soften the plan’s social blows to average earners and argue: “The devaluation (free float) will restore competitiveness to the Lebanese economy, stabilize the exchange rate at a real level, and encourage depositors to return to LBP deposits.”

Reasons to be wary

As the economic crisis is showing no intent to vanish—it is behaving to the contrary—it is welcome news that the government as of now has some numbers to discuss on the exchange rate. There is much to be said about the April 6 draft. Much of it can be shocking in good ways, for example when it states early in the text—which is all marked as “strictly confidential”—that the government is committed “to change its harmful practices.” But the plan also reminds of exercises where lip service to social care is juxtaposed with actions that dissolve social stability. Terminology such as “rationalizing public sector employment” and advocacy of efforts to “rein in” salaries and benefits in public institutions (e.g. universities) is not the kind of terminology that departs from neoliberal recipes which, when implemented, regularly fell short of humane successes. As Akiki notes, the plan seems neither ambitious enough nor creative enough and offers prescriptions that “are pretty much the same as in other countries and tend to perpetuate financial and debt crises.”  

Justified criticisms on its general drift notwithstanding—and also despite some overconfident assertions on global realities in governmental treatment of systemic banks that sounded off even before the coronavirus pandemic changed every outlook on governmental support for vital economic entities—the draft plan has enticing aspect from the perspective of the need for a clear FX policy. Naming its program objectives and strategies, it declares one of eight pillars to be: “Moving to a more flexible exchange rate policy beyond the near term to lessen strains on BOP [Balance of Payments] and improve competitiveness.” 

And it puts some exchange rate policy numbers on the table. As projections, these are debatable but at least they are numbers to debate, starting from an effective exchange rate of LL2,302 to the dollar in 2020—calculated by assuming that 80 percent of economic transactions are conducted at the parallel market rate and 20 percent at the old and still existing official rate. According to the table of numerical projections in the plan, the lira rate would move further from LL2,771 to the dollar in 2022 to just below LL3,000 per dollar in 2024. A parallel market would be tolerated by the central bank as long as absolutely necessary but the bipolar market of today is expected to be replaced with a unified official exchange rate by 2022, the draft plan says. 

“The unification of the two rates and the formal depreciation of the official exchange rate require the prior stabilization of the economy and the restructuring of the banking sector,” the authors note, giving their rationale why the discussion over the devaluations and deprecation issue might not be incessantly sizzling on the front burner of governmental elaborations. 

Authors of the plan are unequivocal when they declare in relation to the dollar peg that, in their view: “For years, the lack of competitiveness of Lebanese companies has prevented the emergence of a productive and diversified economic base in Lebanon and encouraged the consumption of imported goods through artificially inflated purchasing power.” They are also unmistakably clear in making a statement a few lines earlier that: “The peg to the US dollar that has been maintained over decades is now impossible to restore and must be abandoned as part of the Government reform program.” 

For the foreseeable—and by their wording practically indefinite—outlook on the exchange rate, they say that a free float of the exchange rate is in their opinion not advisable as long as the economy has not reached a stable equilibrium but foresee, in the same vein as most economists that Executive inquired with, a managed float or a crawling peg as the best policy after a recalibration of the rate through an initial devaluation and successive depreciation driven by inflation differential.   

In theory, a currency devaluation or depreciation is a trade-off affair that makes imports more expensive but exports more competitive. But as increasing competitiveness in export markets appears to be a long struggle in conjunction with an even greater struggle for economic sanity, the deterioration of the lira exchange rate—that is all over the short, medium, and long horizons—could very well be a lesser booster of the competitiveness of Lebanese goods and services than increased reliance on skilled labor and high value-added. For the moment, the question of devaluation and the future of the exchange rate is the monster in the large herd of our economic problems that has come out of the closet and is now waiting to be tamed. 

For the credibility of the Lebanese government, the honest discussion of this monster can only be beneficial. Honest discussions and interactions with the Lebanese public, as the example of the devaluation shows, are still in need of improvement. In this sense, an open and transparent presentation of the draft plan to the public for discussion would have been vastly preferable over the emergence of a leaked copy—even if one can hardly imagine a more surefire way than the leaking of a document to whet the appetites of analysts and self-appointed finance watchdogs on social networks, or to honey-trap by definition lazy business journalists who might otherwise not bother with poring over an intellectually advanced document. But the plan did not have to be hidden. When truth comes, falsehood vanishes. Ignorance, as a saying goes, is the shadow of death where knowledge is the light of life.     

April 13, 2020 0 comments
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Coronavirus AnalysisEditorialOpinion

Dystopian nightmare

by Yasser Akkaoui April 11, 2020
written by Yasser Akkaoui

These are worrying times for all of us. In April the lockdown in Lebanon was extended for a second time. It is possible it will be extended again. On a global scale, our lives have been disrupted en masse in a way in which many people have not experienced in their lifetimes. People are anxious, anxious over their health and that of their loved ones, but not just that, over their jobs, over the bills still piling up while savings dwindle. The brutal reality is that for many, missing one paycheck was enough to push them below the poverty line. People are scared.

Here in Lebanon, it is as if we are living in a nightmare. Already suffering under an economic crisis that had cost many their jobs at a time when access to money was curtailed and prices were rising, many Lebanese had already been pushed past breaking point and others were teetering at the brink—all while our politicians continued playing the game as if people’s lives were not dependent on them getting their acts together. It seemed as though things could not get worse: Enter the coronavirus.

It would be easy to give over to despair in times such as these, where challenges seem insurmountable, and the human solidarity needed to overcome them is fractured by our imposed distance from one another. But this too will pass. And now, more than ever, is the time to be thinking of the future. Because the world will change. That is a given. Whatever path we were on before the coronavirus swept over the globe has been altered. A new future lies ahead, and it is the decisions we make now that will shape it.

What does that mean for Lebanon? On the most basic level, this crisis has shown us that our overreliance on the outside world is a vulnerability that can and must be addressed. Increasing numbers of Lebanese are struggling to afford the food they need for themselves and their families. In the short term, we need to band together and look after each other, fill in the gaps left by the state—as we always have.

But looking to the future, now is also the opportunity for us to focus our attention on developing our agriculture and agro-industry sectors and to ensure those working in them have the support they need to succeed. To date, these vital sectors have been neglected and overlooked, with no steps taken toward their improvement other than those of social entrepreneurs utilizing design thinking to solve individual problems. But these are not national programs, nor at the scale at which we need.

Agriculture works on a cycle of 21 weeks, investments in it will pay off fast. We need to start strategizing now, not just because of the coronavirus crisis but because our own home-grown economic crisis was already putting tremendous pressure on imports—imports that we rely on to a dangerous degree. What do we need to produce locally to secure a higher level of food security in this country? These are fundamental questions that we need to address. Now more than ever, there is a public need for affordable local produce, and we have to develop an agriculture industry capable of addressing this need.

Our eroding purchasing power is gnawing away at us as these crises drag on, and there is little sign that our local currency will regain its previous value. The day-to-day supplies that each Lebanese needs to feed themselves and their families are only going to be available and affordable in the coming years if they are locally produced and sold in the local currency.

Now is the time to look inward for change, to work together in these most difficult of times to secure the best future for our country.

April 11, 2020 0 comments
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