Vital and seeking vibrancy
Lebanese insurers’ long march into a mysterious future
The numbers for overall premiums growth, penetration and density in the Lebanese insurance market in 2017 may not bring huge surprises. In 2016 the sector delivered 3 percent nominal growth in gross premiums, from $1.52 billion in 2015 to $1.56 billion, according to the latest quarterly report of the Association of Insurance Companies of Lebanon (ACAL). The compounded annual growth rate (CAGR) of written gross premiums for the period 2009 – 2015 was 7.6 percent, according to the latest figures published by the Insurance Control Commission in its annual report for 2015.
The 7.6 percent CAGR of written gross premiums was eclipsed by the CAGR of claims at 15.6 percent, but in line with the 7.1 percent CAGR of the sector’s net income after tax. It also is notable that year-on-year growth for gross written premiums in 2015 was better than in 2014, at 7.8 percent versus 4.3 percent, but that the last three years have witnessed significantly lower annual growth rates than the years 2007-2011. Total premiums were $727.52 million in 2007, roughly half their level in 2015. Total net profit for the sector according to the ICC stood at $93,150 in 2015.
The overall underwriting activity of Lebanese insurers is segmented into three main business lines – life insurance, medical insurance and motor insurance. The percentage split has been grosso modo stable for years, with about 30 percent in life, 30 percent in medical, and 22 - 25 percent in motor insurance. The next business line by volume is fire insurance, which according to ACAL accounted for 6.9 percent of the total market in 2016.
All other non-life specialties contribute less than 3.5, and often less than 1 percent, to the total premiums pie – incluing coverage for workers’ compensation, engineering, contractors’ all risk, cargo, travel and transportation, public liability, and credit insurance, as well as policies against perils such as political risk, hostage and ransom, terrorism, riot and civil unrest, loss of a company’s key person, directors and officers liability, and so forth.
Policies and awareness of coverage for incidents that will define the corporate risk landscape and insurance contracts of future decades, like cyber insurance, seem to still linger beyond the horizon of most companies. It seems one can insure (almost) everything in Lebanon (ironically, the ICC lists no local companies as licensed for the agriculture branch, one of six licensing categories under the regulatory portfolio), but the demand here is focused on mandatory coverage, not on the risks that might have the greatest impact on an economic entity or the whole country.
UNTAPPED POTENTIAL
The challenges in this situation, where insurance is understood as being vital for the Lebanese economy and society, while awareness of its importance is still focused on basic coverage, were highlighted in the International Monetary Fund’s (IMF) latest evaluation of insurance in context of the national financial sector. The evaluation was published earlier this year under the IMF’s Financial Stability Assessment Program (FSAP) and notes that the Lebanese insurance sector is confronted with “structural challenges” to its development.
The FSAP, research for which was completed last autumn, points to the obvious fact that the total assets in the insurance sector at $4.3 billion, or 8.6 percent of GDP, are “small compared to the banking sector,” (with $150 billion in deposits equaling 280 percent of GDP). It continues, “There might be scope for market expansion and deepening [of insurance], which would help corporates and households better manage risk exposures, support investment, contribute to financial inclusion, and expand contractual savings that could contribute to capital market development.”
The FSAP document describes Lebanon’s Insurance Control Commission positively (for interview with the acting head of the ICC, see page 52) but notes critically of the insurance sector, “There is a large number of unspecialized companies, including many small, family owned and managed companies, resulting in intense price competition. Many of these firms have made limited investments in risk management and pricing techniques, and the ICC considers some do not have adequate
professional capacity, resulting in operational risks and mispricing.”
With regards to the overall financial system of Lebanon, the FSAP sees sovereign and credit concentration risks as potential vulnerabilities in the nation’s banking sector, based on solvency stress tests and sensitivity analysis. It further asserts that neither the capital markets nor the secondary debt markets are well developed. “Capital markets are small and contribute little to the financing of the economy, and expansion prospects for the insurance sector are hindered by a relatively weak regulatory and institutional framework,” concludes the document’s executive summary.
Given the overall state of the financial environment, insurers in Lebanon are facing an economic path that looks mildly challenging, but at the same time slightly promising – more promising the more the economy and regional stability recovers, and the more the Lebanese state overcomes its inefficiencies and inequities. That notwithstanding, to borrow from George Orwell, some insurers appear a bit more equal than others when it comes to thinking about the future and initiating promising new trajectories.
HOPEFUL SIGNS
While it is true that some insurers have outperformed the overall sector in 2016, this is not a narrative that will advance the Lebanese insurance industry on a path to new life. The real story is that some of these outperformers are the very companies that have declared themselves adherents to practices and principles which in the past were not common practice in the sector.
The first of these is a commitment to transparency and governance. Nothing currently obliges insurance companies in this country to practice either. And no Lebanese insurance company is listed in the stock market, so even if the Beirut Stock Exchange had much stronger governance requirements, this would not matter for insurers.
In this desert of transparency, void of culture and incentives for governance, it is encouraging to encounter a full and proper board structure in a sizeable Beirut-based group like Chedid Capital Holding, whose bread and butter is insurance, and find that it is indeed possible for such a group to perform well in the current economic environment. According to group chairman Farid Chedid, organic top line growth in the past year was over 30 percent (including the acquisition of Sharjah-based brokerage Al Manara, “we reached growth of over 40 percent in the top line,” he says).
Even more impressive is that the boards of units in the group are not opaque or stuffed with names of only one family, but entail credible Lebanese and foreign names among their independent, non-executive directors. There are other examples of liberated financial thinking in the management strata of local insurance companies, such as an orientation toward competition over quality, solvency and sustainable long-term profitability.
This contrasts with the lack of a regional or national culture in Middle Eastern insurance sectors, with very poor habits when it comes to annual report writing, communication and general transparency toward analysts and the public. Sector practices have for many years given an uninspiring impression of a field characterized by politicking, narrow interests, undemocratic debate, and horsetrading or influence peddling.
The second uncommon valor is modern positioning vis-a-vis the customer and an emphasis on employee welfare. In December of last year, Lebanon’s largest insurance company by consolidated premiums undertook its inaugural customer loyalty survey, conducted by a multinational market research company. The survey was focused on customer experiences in life insurance, but there are plans to conduct a second survey on non-life insurance, Allianz SNA’s chief market management officer Raed Labaki tells Executive.
“It was an external survey to compare the satisfaction of our customers in life insurance with our main peers and with the rest of the life insurance market. We were happy to find that we were the loyalty leaders compared with the average of the market but, most importantly for us, [the survey] helped us to identify our strengths and our weaknesses, both [our customers’] delights and pain points,” he says. According to him, the company will now consult with experts in the global group and develop a customer experience action plan to improve on the pain points that were identified. “Our aim now is to maintain this loyalty leader position,” he enthuses, adding that the group’s lead over the market in terms of loyalty was in doubledigit percentages for each measured touch point.
Some insurers appear a bit more equal than others when it comes to thinking about the future