Home Special Section Not A Fire Sale

Not A Fire Sale

by Thomas Schellen

It takes but a few steps to walk from the site of the first bomb explosion that shook Lebanon in March in the aftermath of the Hariri assassination and anti-Syrian protests to the offices of one of the country’s largest insurance brokerage firms, Beirut Broker. The offices of the brokerage in fact suffered some slight damage from the blast in March and in a perfunctory nod to the heightened awareness for security, the doors of the no-frills office building in New Jdeideh now remain closed and have to be buzzed open during business hours.   

Inside, the mood is cautiously upbeat, despite a very slow period in the last three months. “The entire retail business saw basically no growth in the last couple of months; that was not at all our expectation for 2005. In 2004 we grew and started feeling that clients are more and more accepting bancassurance,” says the firm’s manager, Pierre Talhami. Bancassurance is the distribution channel of standardized insurance products through bank branches, which the brokerage handles for its parent company, Bank of Beirut.  

Predictably, the first quarter of 2005 was not extremely kind to Lebanon’s insurance providers. They apparently did not have to pay out huge claims for damages incurred by businesses from the bomb that killed former Prime Minister Rafik Hariri, former minister for economy and trade, Bassil Fuleihan, and 19 others, nor were they called upon to cover damages from four subsequent bombs that cost several lives and millions in destruction of property. But being spared spectacular claims costs did not mean that insurers would have benefited from increased demand. To the contrary, consumers kept their purse strings tight in face of the uncertain times they were confronted with and sales of retail insurance products suffered in consequence.

In the corporate segment, things looked somewhat better, though. While businesses did not respond to the security crisis by investing in more insurance protection, they on the other hand also did not turn their back to the need for insurance in the knowledge that covers for damages incurred because of acts of terrorism would be prohibitively expensive if at all available.

“Lebanese people are used to the fact that terrorism is not a cover you can buy in Lebanon,” said Talhami. Beirut Broker has a substantial business on the corporate side, as it assists Bank of Beirut and its corporate clients in assessing insurance needs when discussing loan financing. In the corporate segment, the firm found that by and large, companies carried on buying general insurance products as they encountered the necessity. This left the insurance industry during the aftermath of 2/14 exactly there where it has been perennially: following economic trends set in other sectors. And these, as we all know, were pretty dismal over the past three months.  

This is not to say that the insurance industry’s progress, which had been accelerating over the past two years, is in danger of stalling. The process of consolidation and natural selection of viable companies in the overpopulated, sector is also continuing. Many of the sector’s reputable companies could improve their results in 2004. Some, like life insurance specialist Sogecap, moderated their growth purposely while others achieved tremendous portfolio increases. Arope, the insurance daughter of BLOM bank, reported a 71% increase in total premiums to $24.7 million, which included a more than fivefold boost of its previously smallish life insurance portfolio. According to unofficial company figures, a number of insurers achieved some growth in the first quarter of 2005 even as players across the industry conceded that they had expected much more and could only hope to catch up in the second half of the year. “It is a slowdown in our progression. Our plan was to grow more than we did but we are still 5 to 10 % above production of last year,” said Rene Klat, general manager of Adir Insurance.

Prospects also remain interesting for the development of Islamic insurance where the Arab Finance House (AFH) plans to market TAKAFUL products in cooperation with Bahrain-based firm Solidarity, one of the world’s foremost providers of financial protection that is Sharia-compliant. According to Mounir Sinno, marketing manager and spokesman for AFH, the two institutions already signed an agreement and are preparing to offer TAKAFUL products in Lebanon probably before the end of this year.

Yet although being large by regional standards and despite impressive growth of life insurance business and respectable improvements in general insurance premiums by leading companies – often those providers whose shareholders include local banks and/or international insurance firms – the total insurance premium volume in Lebanon still measures about 1 against 100 when compared to the country’s banking deposits.

Market mechanics and private sector initiative have worked in the past five years to gradually increase the degree of insuredness in the business community. While in the mid to late 90s only about a quarter of enterprises in Lebanon could be counted upon to be fortified with well-rounded insurance protection, industry experts generally agree that coverage today extends to an estimated 40 to 50% of enterprises. This is in a major part due to the fact that more and more businesses rely on bank finance for their development and banks in turn oblige them to obtain the appropriate insurance covers, and as such the trend can be expected to continue.

To make the logic of insurance more compelling in Lebanon, administrative action and legislative initiative remain major needs. Industry insiders say the Insurance Control Commission at the ministry of economy and trade could do more in advancing the professionalism of insurance companies than monitor their financial soundness, in which the ICC achieved clear progress with field audits and improved supervision.     

The main item to advance the insurance industry in this respect is the further enhancement of the insurance law. A new draft law stipulation a clearer industry structure, higher capital requirements and stronger teeth for supervisory entities was presented in April 2004 by then minister of economy, Marwan Hamadeh, but expectations for the law’s quick implementation by its admirers did not get fulfilled.  

Insurance legislation is a clear need not only as far as better legislation on the sector’s activities but also in relation to legislation to make insurance products more attractive under tax perspectives, such as allowing tax deferrals on both employee and employer contributions to individual or group retirement plans. While consumers bought life insurance in recent years at a faster rate than before, life products with a savings element still have to become more attractive when compared to the simpler and in the short run cheaper term life products, which offer protection of one’s family in case of sudden death or accident but do not serve the insured as tool for wealth creation and financial security later in life.

Law givers in developed nations widely provide incentives to personal provisioning for old age by deferring the tax burden on contributions into retirement plans. As long as this is not the case in Lebanon, the concept of individual retirement provisioning is deprived of a psychologically and financially important support factor.  

Another obstacle to growth in the life insurance sector is the ceiling on investing funds abroad. This has become even more of an issue as the interest rate environment in Lebanon has dropped from the unsustainably high levels of the 1990s and the turn of the century. In light of the deficiencies of the local financial market – the anemic bourse and the absence of alternatives to bank deposits – the regulation that 50% of the amounts managed by life insurance companies have to be kept in the domestic market means that insurers cannot unfold their full potential to develop attractive products. This applies especially to unit-linked life insurance products, where returns from the savings component of the policy depend on the performance of sophisticated investment strategies. “The Sogecap unit-linked knowledge is worldwide. If we have to keep 50% in country, we cannot do the products we are best in,” said Jean_Francois Jaboulay, general manager of Sogecap Liban.

With expectations for quick adoption of new insurance-related legislation appearing over-optimistic in light of the sector’s relatively low priority in the economy and more pressing needs consuming the political realm for at least several more months, the hottest issue and best opportunity for the insurance industry right now is institutional self-improvement. The insurance industry association ACAL has for the past few years been involved in lobbying for insurance but its role has been impeded by fragmentation of interests and somewhat incomplete structures.

As demonstrated by a near total absence of studies and publications and a gap of several years even in providing figures available from insurance firms on its website, ACAL has not been able to formulate the positions of the industry as convincingly as it could have. Some insurance professionals have criticized the association as a body where the large number of small firms with restricted ambitions for sector improvement has held developments back. Others said it is high time for ACAL, which is holding elections for its president and part of its board early this month, to establish a position of director general or secretary general, in the aspiration to make ACAL function more like the role model in finance sector associations, the Association of Banks in Lebanon (ABL). “I hope that the profile for the position of secretary general will be devised. The president of ACAL, who has to take care of his own company, does not have the time to do everything,” said Klat. 

In 2004, ACAL shone in organizing the 25th General Arab Insurance Federation conference, whose list of registered participants included more than 900 insurance professionals from around the Arab world and beyond. With this record attendance, the event highlighted the growing regional awareness of insurance development and raised new hopes for faster development of activities in key Arab markets.

While some countries, notably Bahrain and Saudi Arabia, are making good on their programs for competently regulation and opening up their insurance markets and partly Beirut-based Medgulf Insurance was included on the top of the Saudi Arabian Monetary Agency’s list of companies that have completed the application process required for operating in the kingdom’s insurance and reinsurance market, the development of the insurance sector in the region is overall anything but a fast affair. Syria, another market where many Lebanese companies are keen to build insurance capacities, is still awaiting its insurance laws. Lebanese insurance companies that already have a presence in the neighboring country deny the existence of problems in pure economic interaction and are upbeat about their business relations and acceptance of Lebanese firms there, but nonetheless operate in an environment not comprehensively covered by insurance legislation.

Given the slow evolution of the domestic and regional insurance markets, no radical changes appear to be in the cards for Lebanese insurance firms in the near to mid term future. Internationally, the outlook for insurance continues to focus on prudent underwriting in order to maintain profitability in changeable investment environments. Natural catastrophes, as demonstrated painfully by the Tsunami that devastated so many parts of Indonesia, Sri Lanka and other countries bordering the Indian Ocean, continues to be the leading concern for insurance providers worldwide. However, as terrorism risk has been increasing around the world and especially in developed countries, the provision of protection against the damages from a terrorist attack is becoming an issue of increasing importance for the world’s insurance leaders.

Support our fight for economic liberty &
the freedom of the entrepreneurial mind
DONATE NOW

You may also like