An industry-wide upgrade

A massive overhaul in governance and legislation is required

Times of change and upgrades of operating systems are confusing events, or, in today’s economic lingo, disruptive. Few things can be more disruptive than the abrupt upgrade of a whole industry to a higher level, forcing it into new ways of doing business and, inevitably, altering its whole identity in the process. That’s what’s currently happening to insurance.

The upgrade of this industry encompasses on one hand the transition into the digital age, with a host of new challenges in distribution, security, consumer behavior, and, perhaps most importantly, new risks, accumulations and synergies of risks. On the other hand, insurance has been deeply affected by the global transformation of the financial economy and the rise of uncertainty and change triggered a decade ago in the Great Recession, which remains far from over.

Since Lebanon’s economic rebirth after the internal warfare of the 1970s and 80s, the insurance industry has made some remarkable strides. Premiums grew almost exponentially and rates of insurance penetration, or percentage of GDP spent on protection, remained at the top among Arab countries.

But one cannot overlook the fact that the Middle East is a global laggard when it comes to insurance penetration, something that is not expected to change radically in the next 10 years. Global insurance group Allianz predicts that the average per capita contribution in the Middle East and Africa will only grow from $139 to $180 from 2016 to 2026, and that the MENA region will account for just 1.8 percent of global premium income in 2026.

Current insurance penetration in Lebanon – estimated by Swiss Re Sigma at 3.42 percent for 2015 – shows the country to be at the forefront of Arab markets, and respectable in comparison with middle income countries from Argentina and Russia to Bulgaria and Iran. But this is not much to write home about when compared to the average global insurance penetration rate of 6.23 percent. In purely domestic terms, the Lebanese insurance sector’s assets, premiums and profits in 2016 (while not yet officially announced) are dwarfed by the assets, deposits and profits in our banking industry.

WITH CHANGE, OPPORTUNITY

Within the financial landscape, Lebanese insurance stands timidly in a swamp of undeveloped capital markets and foggy legislation. Moreover, when compared with the friendly but boisterous banking ogre and its substantial marketing power, the sector is practically invisible. In Executive’s view, this situation warrants remedy.

By conventional wisdom, great change is a time of great opportunity. Agility and openness to new ways are a requirement for benefiting from these opportunities. But effective exploitation of change requires legal empowerment. Executive believes that it is not enough to pursue piecemeal improvements in the legal framework for insurance and calls for the adoption of a new insurance law in Parliament.

With a view to insurance, we reiterate our demand for a supportive framework for growth in the financial markets, and our call for the Capital Markets Authority of Leba- non to focus equally on the regulation and development of our capital markets. The CMA has to step up its efforts and effectiveness to invigorate the markets under its supervision, and the Beirut Stock Exchange has yet to deliver vibrancy to the bourse. We would like to see all local insurance companies listed, and adhere to the corporate governance structures and systems that befit a modern corporation.

One often encounters the perception that insurance is boring. In truth, it is a complex cog in the financial industry and one with much hidden – or difficult to understand – potential and attraction.

Reporting on these issues in our current issue, Executive endorses the view, expressed by the chairman of the country’s largest insurance provider, Allianz SNA (see interview page 56 and consolidation story page 36), that an indispensable precondition for successful adoption of corporate governance and transparency in our private industries is public sector leadership by example. We need full and speedy implementation of the new law on access to information (see leader page 10), and transparency and accountability in our government institutions before we can realistically hope to see tax compliance, proper reporting, and real transparency in our private sector.

As for insurance stakeholders, we affirm our view that it is time to free industry minds from the last remaining burdens of egoism that symptomized the industry in the past; they must cast off the cloak of invisibility and put on the armor of transparency and good corporate governance.

Insurance is a complex cog in the finance industry