At the end of April, the imposition of rules on guaranteed renewability (GR) in health insurance was introduced to the public under ministerial decree 186, issued by the Ministry of Economy and Trade (MoET). Executive sat down with Nadine Habbal, who heads the MoET’s Insurance Control Commission (ICC), to explore the implications of GR for the insured and insurers of Lebanon.
E What is your perception of the health insurance sector in Lebanon from a regulatory perspective and what is the rationale behind the decree that mandates insurance companies to adhere to guaranteed renewability, or GR, in underwriting health insurance contracts?
The decision behind the GR was to influence the appetite of the economic agents to take a decision on how to manage personal risk and be in a win-win situation. As long as there is an absence of compulsory universal health coverage, Lebanese individuals will always have to choose between medical insurance contracts underwritten by an authorized insurance company or expose themselves to financial losses from out-of-pocket expenditures in case their health deteriorates. Thus, it is up to the individual to take the decision whether to put money into a savings account in a bank to finance medical expenditure or to opt for risk management and buy an insurance contract.
E What does GR mean for the Lebanese citizen?
As an insured person, you will be insured for your lifetime if you don’t make fraudulent claims or [provide] false information during the underwriting stage [of your health insurance contract]. It also means that the insurance company cannot amend the conditions of the policy after the policy agreement is in place following the underwriting stage, even if the health condition of the individual deteriorates.
E Is it correct that the underwriting stage, or period during which the insurance company can monitor the agreement, is fixed at six months?
In the underwriting stage it is the right of the insurance company to do the appropriate [medical] examinations and undertake procedures to make sure that the applicant provides true information. The insurance company has the right to set the conditions under which the client is accepted and provided with a policy. We also allowed the company to take six months as [an] observation period, because [insurers] told me that it is so expensive to do a whole battery of tests and that there is a possibility of facing fraudulent information. We wanted to provide the six-month observation period to make sure that the agreement would not be abused by either side, insurers or insured. We are controlling this process.
E When was the decision made? Did it come suddenly?
The GR decision is not a new decision. It is something that we have been telling the sector for a long time: apply basic insurance core principles. We had also been telling the sector that the current practice in the [health insurance] market is not in line with insurance core principles. This is the first rationale behind the GR decree. The second rationale is to motivate people to practice better risk management. If we want to speak economics, we are talking [mathematician] John Nash versus [economic philosopher] Adam Smith. Adam Smith, in the absence of GR, [stands for] individual optimization. What you want to achieve from a regulatory and an economic perspective, is social optimization, which means that—in applying the theory of John Nash—everybody would be in a win-win situation.
E Is there a maximum age by which people must enroll?
Why would there be a maximum enrollment age? If at time of enrollment you are in a clean bill of health and do not have chronic diseases, you are fine. If you are in a group policy, which is the case of many Lebanese and foreigners living in Lebanon, and reach the retirement age, the insurance company is obliged to offer you an individual contract with the prevailing conditions for the segment that you belong to. It is not fair to lose your medical insurance when you retire or if you lose your employment for one reason or another. The insurer is in this case obliged to offer an individual contract with the conditions that apply to your age segment, but taking into consideration that there is no new underwriting stage because you are a policyholder. This is fair to the consumer and in line with insurance core principles. After all, we want to apply fair rules and the insurance core principles, not impose something that is harmful [to either side], taking into account our economic situation.
E How is the state of the implementation process for companies in the sector to comply with the GR degree and present contract wordings to the ICC?
We gave the companies 20 days to send their policy wordings to us and we have received most of the policies. Some companies have pre-approval and can sell these policies that they have submitted. Others are still in the submission process. Companies who fail to comply with the [GR decree] will be prohibited from selling health insurance.
E Is there an expectation that some companies will be prohibited from selling medical insurance in future?
We are not just checking if the companies comply with GR in one paragraph of their policy contract because we know that it is possible to have another sentence somewhere in a policy that will change the whole meaning of the contract. We want the companies to send us their policies and we do a comprehensive review. Some companies had to change their policies and did so, and some are still in the process. Those who fail to comply will not be allowed to sell.
E Will the ICC at some point publish a list or white book of companies that are in compliance?
We can achieve transparency, [but] not through a public note because our current laws and regulations do not allow us to issue a public note of this type. However, in our annual report, which is accessible on our ICC website, you can see how the medical portfolios of insurance companies are developing and how the portfolio of one company or another changes.
E If we cannot have a white book saying which companyies are good and performing according to core insurance principles, how can we evaluate companies in a sector where migrations of large medical portfolios are occurring for reasons such as corporate takeover or intense price competition to attract large group portfolios?
This is an interesting question that posits the challenge of how we can inform the public. This question is answered through our unit called ICC Care. Upon the launch of Circular 186, a new infographic has been created. It is “Amin min al-ta’mi”—which means security of the insured, or trustworthy insurance.
E You are telling us that there will be a stronger public interface and public awareness campaign. How is this campaign designed and how long will it be running?
It will resume shortly and focus on a number of awareness pieces to introduce ICC Care and its role as consumer interlocutor. ICC Care receives the calls from the policy holders, their concerns and complaints, and exists to address issues that arise between policyholders and insurers. The main idea [of the awareness campaign] will be to convey what the policy holder will have to look for in dealing with insurance companies, and how people should read the sales brochures and policy contracts [of the insurers]. As to your question of the length of the media campaign, the campaign will be long term. We will be very aggressive in [conventional and social] media in presenting our infographics and conveying the message to the people that there is a regulator who will not take sides with any party, but is there in case of any concerns and to apply the conditions of the policy.
E Insurance is all about management of risk, but risk transfers can be a thorny issue re-allocating risk from one party to another party. Under the stipulation of GR, is there risk transfer from the Ministry of Public Health (MoPH) to the insurance sector?
From a technical perspective, the ICC and the MoPH complement each other in medical insurance. The MoPH’s role is to establish protocols for diagnosis and treatment, and to manage chronic diseases. If we want to have a national insurance card, like in advanced economies, the MoPH should as soon as possible establish a protocol to determine for every disease whether I should have an x-ray, have an MRI, take a drug, or undergo surgery. If surgery is performed without a medical need for this procedure, this is abuse on both sides: the medical side and the insurance sector side. In Lebanon, one might undergo surgery where a simple medicine could be effective for treatment. The MoPH should establish protocols, and we should follow [them]. For each sickness there should be a protocol and there should be a network between insurers and the MoPH and the people.
E This sounds like you are advocating for more collaboration between public and private actors in the field of health. Does this mean that you advocate also moving toward more centralization, in the sense of national compulsory health insurance for all Lebanese?
It is very important that we think of universal health coverage. Then we will all be in a win-win situation through a cooperation between public and private. A national insurance card cannot be implemented without cooperation between the public and the private sector. There should be many layers. There should be a layer [in universal coverage] that is financed by the public sector but as you know, the public sector cannot finance $1 billion [spent out of pocket annually by the people]. We need to have more people in the system and we need to have economies of scale and manage the risk of a big number [of policy holders]; this is insurance. I need to get everybody into the system, and in this way I can secure good medical benefits for [older] people [via contributions from] young people and where I have collaboration of public and private sector. This is my vision for the health insurance, [following what exists in many advanced countries]. We did a lot of research and meetings [with international experts] and concluded that this is very important for our people and our economy. Better health, better economy.
E In your perception, how could our economy benefit from a universal healthcare system?
In medical insurance, we had a total premiums portfolio in 2017 of $470 million. If we compare that to out of pocket, there was almost $700 or $750 million. People are telling us that they are financing their medical expenditure on an out-of-pocket basis. [For me, the answer is to] attract these people and have them [integrated] into the system. The entire insurance sector represents 3 percent of GDP [as insurance penetration] and this compares to 6-7 percent in OECD countries. How can we get there? Very simple. We need to create compulsory insurance and pension insurance; if we take the pension product under consideration, we can accumulate $10 billion in savings, with $1 billion per year with accumulated assets over 20 years. We can all [benefit] if we design the right products, and what we need are all basic insurance products, medical and pension.
But despite numerous proposals for the implementation of pensions, we are still operating the NSSF with a scheme of end-of-service indemnities, not pensions.
It is one of our projects [to introduce pensions instead of indemnities as well as compulsory health insurance] and we already have the analyses. We are waiting for the right time. These projects will be very good for the insurance sector, for the economy, and for the people. Everybody should be in a win-win situation. Social optimization for everybody is the spirit of our work.
E In this context of social optimization, how do you plan to balance risk between the two existing subsectors of insurance, the mutual schemes and the commercial insurance schemes? How to supervise the compliance of mutual schemes with core insurance principles? There has been fear that mutual schemes, which offer lower benefits, have an unfair competitive advantage over commercial insurers and that this advantage might increase since mutual schemes are not supervised by the ICC and therefore are not obliged to apply the new GR.
Honestly, I do not see a correlation. It was a statement of many insurers that there would be an unfair competitive advantage for mutual schemes. From a regulatory perspective and from a policy holder perspective, I see no correlation. The activity of the cooperative funds is strictly regulated by Decree 35 from 1977: The cooperative fund can offer benefits of insurance only to its own members and cannot approach the public. Also, they need to offer the same benefits [to all members]; they cannot offer class A, B, or C benefits. This is not insurance. Because they don’t offer products and don’t approach the public, they are not under our supervision. If there is non-compliant behavior [by a mutual scheme], it should be monitored through the appropriate legal channels. My advice to insurers is that mutual schemes are not competitors.
E As a last question relating to potential risk transfer problems, could an insurance contract provided with GR from an authorized insurer pose such problems, given that it establishes a certain range of premiums for certain ages and risk groups and so forth? Would this not reward risky behavior in insurance customers, under a form of moral hazard where people that conform to high standards in healthy behavior will get the same coverage for the same price as people who engage in high-risk behaviors? How do you want to counteract this moral hazard?
With this question, we move into the area of advanced analytics and predictive modeling. This is part of our agenda for the coming years. Let me share our general perspective on this agenda with you. Our aim is to enhance the insurance sector and for it to be a platform for regional and foreign investments. In order to do that, we need to create the right infrastructure. How can we establish this infrastructure? The first chapter we are starting with is risk-based capital, [which is the appropriate method] to measure and quantify the risk. Then, the second chapter is [imposition of better] governance. The third chapter is digitization and the fourth [in building this infrastructure] is what? It is your predictive modeling and advanced analytics.
From the behavior of consumers [we can learn with these tools of advanced analysis and reach] predictive analytics. For example, in the area of car insurance, what will be the pricing for insurance of a Toyota or a Kia? This is now our new way to monitor pricing which is fair to the consumer and the insurance company at the same time. And to understand the motor and the medical books: analyze detailed consumer behavior through big data.
E Does this mean that you want to reimagine or restructure the whole soft infrastructure of insurance conduct in Lebanon?
E Will actuaries and managers of the existing insurance system be able to cope with this type of revolution in insurance?
I can already sense that there is now more involvement by actuaries in insurance planning and I also felt that there has been more creativity and major changes in the thought processes of some major insurers. Some insurers have started to use technology and adhere to the right practices [to deregulate the markets] and have insurers achieve reasonable profits. But some other insurance companies need to work hard on this so that they can get the right experts on board. We will share with the companies in the insurance sector our initial analyses and how we see their business moving forward and what they need to change to achieve first to protect the interests of their policyholders and, [second], to achieve reasonable profits.
E You have been quoted as giving optimistic estimates on the growth of the insurance sector in the coming years. Medical insurance is at the top of insurance lines in terms of market share today, at about 34 percent, and has been increasing its market share in recent years. In this context of an overall expectation for expansion of insurance in Lebanon, do you see the medical insurance as stable, regressive, or as slated to go up as a share of the total insurance premiums?
In 2019, this share should grow, because we are building more confidence in the sector. We are telling the people who are financing their medical expenditure from their out-of-pocket money: ‘Come to the insurance sector for better management of your risk.’ We are expecting better growth [in medical insurance] and are expecting more products to come to the market, perhaps a compulsory product for medical insurance and pension plans. This is the way we can grow the sector, through creative products and as well through digitization. Companies [will have a greater] ability to invest in their IT as they [will] have the infrastructure prepared by the ICC, and thus more power and consolidation will be taking place in the coming period.