In the fog

Lebanese in­sur­ers ever re­silient against the same chal­lenges

Executive Magazine - - FRONT PAGE - By Thomas Schellen

As­sess­ing the in­sur­ance in­dus­try of Le­banon at the cur­rent junc­tion of global in­sur­ance chal­lenges, re­gional va­garies, do­mes­tic eco­nomic hur­dles, and the coun­try’s on­go­ing po­lit­i­cal is­sues is not with­out dif­fi­culty. Just as with the na­tional econ­omy, there are hopes and in­ter­est­ing prospects, but they are mainly just over the hori­zon—whether in the re­con­struc­tion of war-torn Syria and Iraq, in the de­vel­op­ment of an oil in­dus­try, or in the in­fra­struc­ture and in­vest­ment pro­grams that are be­ing am­bi­tiously pur­sued by the Lebanese state (see story page 20).

In the best of all pos­si­ble worlds, where “tout est pour le mieux,” as Voltaire’s Pan­gloss never tires of as­sur­ing us, Lebanese in­sur­ance would of course be de­vel­op­ing re­lent­lessly, and man­agers would not ask for their com­pa­nies to be men­tioned ed­i­to­ri­ally in mag­a­zines they ad­ver­tise in. Alas, the world be­ing as it is, and the Lebanese in­sur­ance sec­tor not hav­ing re­leased new per­for­mance num­bers for about six months, it is dif­fi­cult to per­ceive in­sur­ance as a growth in­dus­try in Le­banon for the cur­rent pe­riod.

Much of the fog that ob­scures the in­sur­ance in­dus­try’s state and fu­ture prospects is not gen­er­ated lo­cally. Chal­lenges from abroad are enough to send the whole in­dus­try, in­clud­ing its big­gest multi­na­tion­als, into deep soul-search­ing. “In­sur­ance com­pany lead­ers have a lot on their plates,” the ac­count­ing firm Deloitte mused at the end of last year in its out­look for the global in­sur­ance in­dus­try in 2018, point­ing to in­tense in­sur­ance tech­nol­ogy de­velop-

ment, po­lit­i­cal and reg­u­la­tory up­heavals around the world, an “ac­cel­er­at­ing evo­lu­tion” driven by in­no­va­tion and higher cus­tomer ex­pec­ta­tions, and “dis­rup­tive new­com­ers” who are look­ing to take mar­ket share from in­cum­bent in­sur­ers.


Ex­is­ten­tial chal­lenges for the global in­dus­try are not rooted in the usual va­garies of manag­ing the im­pacts of nat­u­ral or man-made catas­tro­phes. Ac­cord­ing to re­search es­ti­mates by Swiss Re Sigma, 2017 moved, in a 10-year com­par­i­son, from hav­ing be­low-av­er­age in­sured losses in the first six months to above-av­er­age losses of $136 bil­lion for the whole year (out of $306 bil­lion to­tal fi­nan­cial cost caused by nat­u­ral catas­tro­phes). Be­sides be­ing a tes­ti­mony to the con­stant ba­sic re­al­ity that the world has its an­nual share of nat­u­ral per­ils, with eco­nomic costs that are largely un­mit­i­gated by in­sur­ance, the catas­tro­phe count of 2017 only re­in­forces the un­der­stand­ing that the global in­sur­ance in­dus­try is well-pre­pared and fully ca­pa­ble of manag­ing its in­sured risks.

In­stead, what has the po­ten­tial to rock the in­ter­na­tional in­sur­ance in­dus­try in its boots dur­ing the com­ing decade are not nat­u­ral catas­tro­phes, but hu­man be­hav­iors and fun­da­men­tal changes in at­ti­tudes and habits when it comes to ev­ery­day ac­tiv­i­ties, such as driv­ing to work. Pro­jec­tions from in­dus­try gi­ants such as Al­lianz Group an­tic­i­pate that the 20th cen­tury norm of peo­ple own­ing cars and buy­ing mo­tor in­sur­ance will be re­placed by mod­els of non-own­er­ship of cars and ab­sti­nence from con­ven­tional mo­tor in­sur­ance cov­er­age, where dig­i­tal na­tives in­creas­ingly come to con­sti­tute the main eco­nom­i­cally ac­tive strata in the United States and else­where, from some point in the next decade on­ward. Thought lead­ers in the in­sur­ance field of­ten dis­cuss how dig­i­ti­za­tion, cy­ber risk, and all the un­knowns of dig­i­tal cap­i­tal­ism are ap­proach­ing their in­dus­try with the speed and mass of a bul­let train.

The lo­cal in­sur­ance in­dus­try has for the past few years been lis­ten­ing to the mes­sages and pre­dic­tions re­lated to dig­i­ti­za­tion and cy­ber risks and is aware of the changes that will be im­posed on their busi­nesses. As Lu­cien Le­tayf Jr., gen­eral man­ager of Le­banon­based in­de­pen­dent re­gional in­surer Libano-Suisse notes to Ex­ec­u­tive, the spread of dig­i­ti­za­tion and new in­sur­ance busi­ness mod­els are among the main chal­lenges for his com­pany in Le­banon and re­gion­ally. That’s in ad­di­tion to lo­cal chal­lenges like the ab­sence of an ad­vanced in­sur­ance law in Le­banon, the weak growth of in­sur­ance in the county un­der the pre­vail­ing eco­nomic con­di­tions, and a lack of so­cial aware­ness on the im­por­tance and value of in­sur­ance.

On top of these im­pend­ing changes un­der the dig­i­tal rein­car­na­tion of cap­i­tal­ism, in­ter­na­tional moods in the fi­nan­cial in­dus­try—and one must not for­get that in­sur­ers are es­sen­tial cogs in the ma­chine of global fi­nan­cial mar­kets—are this year be­set by po­lit­i­cal con­cerns over trade wars and over­drawn self-in­ter­ests by im­por­tant play­ers on na­tion-state lev­els. Global trade wars are not here yet, and it is dif­fi­cult to pre­dict, as with all hu­man fol­lies, what cour­ses they might run. But re­gion­ally ac­tive in­sur­ers have al­ready been im­pacted by lo­cal­ized dis­tur­bances and trade con­flicts such as the al­ter­ca­tion be­tween Qatar and its Gulf neigh­bors. One does not need to high­light that economies, and with them in­sur­ance mar­kets, in the Mashriq re­gion have been im­pacted very sig­nif­i­cantly by the var­i­ous con­flicts that have shaken the re­gion since 2011. If all that were not enough, mar­kets are show­ing in­creas­ing im­pacts this year from the slow­down in eco­nomic growth in the Gulf re­gion that has been caused by weak­en­ing global oil prices.

As a new mar­ket re­port on money and bank­ing in the United Arab Emi­rates by the Na­tional Bank of Kuwait notes, the ef­fects of the 2014 plunge in oil prices and the re­sul­tant slow­ing of growth in key sec­tors to the be­gin­ning of 2018 has trans­lated into fac­tors such as “dis­ap­point­ingly weak” credit con­di­tions. “Since peak­ing at 11 per­cent year-on-year in mid-2015, credit growth has been in more or less con­sis­tent de­cline, stand­ing close to multi-year lows at just 0.5 per­cent [year-on-year] in Jan­uary 2018,” the re­port reads, il­lus­trat­ing some of the rea­sons why the Beirut-based re­gional spe­cial­ized in­sur­ance com­pany the Lebanese Credit In­surer (LCI) says it was com­pelled to shift fo­cus away from some Gulf mar­kets. “We have scaled down our ac­tiv­i­ties in the Gulf re­gion a bit, mainly in Saudi [Ara­bia] and UAE, be­cause of the prob­lems re­lated to drop­ping oil prices that led to the stop of in­fra­struc­ture projects and to crises of fi­nance and bank­ing in Dubai,” Karim Nas­ral­lah, chair­man and gen­eral man­ager of LCI, tells Ex­ec­u­tive.

Sev­eral re­puted Lebanese in­sur­ance-sec­tor com­pa­nies with re­gional busi­ness in in­sur­ance and bro­ker­age, like LCI, tell Ex­ec­u­tive that 2017 was a dif­fi­cult year for them. Lebanese in­sur­ance com­pa­nies of­ten do not re­port on their per­for­mance abroad, how­ever, re­gional mar­kets are very im­por­tant for many Le­banon-based in­sur­ers. As Libano-Suisse’s Le­tayf points out, the small, crowded na­tional in­sur­ance mar­ket in Le­banon con­fronts providers with

Re­gion­ally ac­tive in­sur­ers have al­ready been im­pacted by lo­cal­ized dis­tur­bances and trade con­flicts.

The al­i­ments of the Lebanese in­sur­ance in­dus­try ap­pear per­fectly cur­able, but none­the­less do not re­cieve proper treat­ment

high costs and low prices, plus Lebanese in­sur­ers have long-stand­ing skills which give them an ad­van­tage in re­gional mar­kets.

When tak­ing the re­gional and in­ter­na­tional chal­lenges of in­sur­ers into ac­count, the do­mes­tic mar­ket chal­lenges in Le­banon—which are un­de­ni­able—ap­pear very man­age­able and mi­nor, al­beit with one main neg­a­tive char­ac­ter­is­tic: They are thor­oughly en­trenched. One might com­pare the prob­lems of Le­banon’s in­sur­ance in­dus­try to an an­noy­ing al­lergy against pollen that resur­faces ev­ery spring with vi­o­lent sneezes, or to some fun­gus that itches un­der the soles of your feet and reap­pears year af­ter year. Worst all, the ail­ments of the Lebanese in­sur­ance in­dus­try ap­pear per­fectly cur­able, but none­the­less do not re­ceive proper treat­ment.

One ex­am­ple is mo­tor com­pul­sory in­sur­ance, which has yet to be sorted out fully, even though it was man­dated four years ago by the then-new Lebanese traf­fic law. Specif­i­cally, third-party li­a­bil­ity (TPL) in­sur­ance against ma­te­rial dam­ages was made manda­tory for all mo­torists in this law, which was adopted in the sum­mer of 2014 and pur­port­edly started to see wide­spread en­force­ment by traf­fic au­thor­i­ties three years ago this month, in April 2015.

It was clear to key stake­hold­ers in the Min­istry of Econ­omy and Trade, in its af­fil­i­ated In­sur­ance Con­trol Com­mis­sion (ICC), and in the in­sur­ance in­dus­try why the sec­tor was not ready to de­liver the full com­pul­sory cover in 2015: Ex­pe­ri­ences with the com­pul­sory TPL against bod­ily in­jury, which had been im­ple­mented a decade ear­lier, showed that it would be nec­es­sary to mod­ern­ize mo­tor in­sur­ance pro­cesses and im­prove method­olo­gies to com­bat in­sur­ance fraud be­fore the in­dus­try could ramp up to the le­gal man­date of pro­vid­ing traf­fic par­tic­i­pants with bet­ter in­sur­ance safety. Im­ple­men­ta­tion of this com­pul­sory TPL against ma­te­rial dam­ages was pushed into the fu­ture at the time—jus­ti­fi­ably so in the eyes of many ob­servers.

Na­dine Hab­bal, the act­ing head of Le­banon’s ICC, writes in the re­cently pub­lished 2016 In­sur­ance Sec­tor An­nual Re­port that “work on the mo­tor third-party li­a­bil­ity (MTPL) track is nearly ac­com­plished” to­ward align­ing the MTPL with in­ter­na­tional stan­dards. “The key driv­ers in this con­text are the ad­e­quacy of the ben­e­fits paid to the vic­tims of road ac­ci­dents, the im­ple­men­ta­tion of a cen­tral­ized risk data­base, and a sound gov­er­nance for the stip­u­la­tions on min­i­mum tar­iffs,” she writes, af­firm­ing the ICC’s de­ter­mi­na­tion to com­bat prac­tices by some in­sur­ance in­dus­try play­ers that in the past un­der­mined full im­ple­men­ta­tion of MTPL.


The im­pres­sion these com­ments give is none­the­less that al­most four years af­ter the adop­tion of Le­banon’s traf­fic law, full im­ple­men­ta­tion of TPL against ma­te­rial dam­ages is still not achieved. This im­pres­sion is strength­ened by com­ments from Fateh Bek­dache, head of the Na­tional Bu­reau of Com­pul­sory In­sur­ance and gen­eral man­ager of Arope, a large mo­tor in­surer in Le­banon, who ex­plains to Ex­ec­u­tive that this doc­u­ment did not ob­tain all the re­quired sig­na­tures from the full Coun­cil of Min­is­ters, so the terms and con­di­tions im­posed on cit­i­zens were voided by the Con­sti­tu­tional Court.

Ac­cord­ing to Bek­dache, there are some pos­i­tive de­vel­op­ments in new ini­tia­tives to make sure mo­tor ve­hi­cles in Le­banon have ver­i­fi­able road iden­ti­ties. New li­cense plates with tam­per-re­sis­tant fea­tures were in­tro­duced just be­fore the be­gin­ning of 2018, and these plates are bound to sig­nif­i­cantly cut down on il­licit prac­tices such as swap­ping plates from ve­hi­cles that are pre­sented to mo­tor in­sur­ers to ve­hi­cles that have been in a col­li­sion in order to com­mit in­sur­ance fraud. “It is def­i­nitely a plus. We have been suf­fer­ing for a long time from hav­ing the same plates on two or three cars, as there were cars with fake li­cense plates in cir­cu­la­tion. It is a very im­por­tant move to now have mea­sures to make li­cense plates more se­cure. New reg­u­la­tions are al­ways help­ful, but the more im­por­tant thing is the im­ple­men­ta­tion of such mea­sures by the se­cu­rity forces,” he tells Ex­ec­u­tive.

How­ever, Bek­dache says, a com­bined pol­icy for the two branches of com­pul­sory mo­tor TPL, sought by mo­tor in­sur­ers, has yet to come into ex­is­tence and is “in the pipe­line” un­der a project to de­velop the coun­try’s com­pul­sory mo­tor TPL schemes in col­lab­o­ra­tion with the World Bank. “Un­til now, there is noth­ing that can be called com­pul­sory in­sur­ance for ma­te­rial dam­ages,” says Bek­dache, adding, “We have been promised that we will very soon have the re­port from the World Bank in order to im­ple­ment [com­pul­sory mo­tor TPL against ma­te­rial dam­ages].”

Just as the traf­fic law and its as­so­ci­ated com­pul­sory mo­tor in­sur­ance cov­er­age ap­pears to not be fully im­ple­mented yet, there are other ar­eas where old griev­ances seem to linger, and sound in­sur­ance de­vel­op­ment ob­jec­tives have yet to be im­ple­mented.

“The in­sur­ance in­dus­try in Le­banon is very re­silient, and the prob­lems that ex­ist in sec­tors like mo­tor and health are man­agable.”

For one, ban­cas­sur­ance—the prac­tice of banks sell­ing in­sur­ance—is in need of reg­u­la­tion. A re­minder from Banque du Liban to com­mer­cial banks at the end of 2017 that ban­cas­sur­ance is not cur­rently le­gal trig­gered a cu­ri­ous press re­lease by the ICC high­light­ing the (un­con­tested) fact that “in­sur­ance com­pa­nies owned fully or par­tially by banks form a fun­da­men­tal pil­lar of the in­sur­ance sec­tor.”


Sim­i­larly, prob­lems per­tain­ing to in­sur­ance sales by mu­tual in­sur­ance so­ci­eties that op­er­ate out­side of the over­all reg­u­la­tory frame­work do not ap­pear to have been re­solved, de­spite many years of ef­forts from the As­so­ci­a­tion of In­sur­ance Com­pa­nies in Le­banon, or ACAL. There are nu­mer­ous fur­ther prob­lems about Lebanese in­sur­ance prac­tices, the most cru­cial of which are the fail­ure to adopt a mod­ern and ad­e­quate in­sur­ance law (a draft law has been in the pipe­line of end­less de­lays for al­most 15 years), and the need to fos­ter con­sol­i­da­tion in the sec­tor through merg­ers and ac­qui­si­tions. Wishes voiced by in­sur­ance lead­ers to see the lat­ter, over­due process ac­cel­er­ated with the help of soft loans and in­cen­tives from the Lebanese cen­tral bank may have been de­liv­ered by mis­take to the Easter Bunny in­stead of Santa Claus.

With all that is not ad­vanc­ing, one can­not but note that there is a cer­tain de­gree of ex­as­per­a­tion in cir­cles of in­sur­ance ad­vo­cates who are des­per­ate to see the in­sur­ance in­dus­try live up to its po­ten­tial in Le­banon. How­ever, this is not to im­ply that the in­sur­ance in­dus­try in this coun­try is in a bad state when com­pared with the econ­omy, a fact that has been stressed by lo­cal and for­eign an­a­lysts in sev­eral re­ports over the re­cent past. BLOM Bank ti­tled a brief on the in­dus­try last year “Ro­bust Lebanese In­sur­ance Sec­tor De­spite Eco­nomic and Po­lit­i­cal Chal­lenges,” and spe­cial­ized in­ter­na­tional in­sur­ance rat­ings agency A.M. Best last month tooted the same horn by ti­tling a re­search note “Lebanese In­sur­ers Con­tinue To Demon­strate Re­silience, De­spite Chal­leng­ing Op­er­at­ing En­vi­ron­ment.”

The same is true for some (but in all like­li­hood not all) in­sur­ance com­pa­nies in Le­banon. Out­liers among the more than 50 sec­tor com­pa­nies in­no­vate, per­form, and de­liver im­pres­sive per­for­mances, if one makes al­lowances for the small size of many of these com­pa­nies. For ex­am­ple, a vo­cal com­pany in the do­mes­tic mar­ket is Se­cu­rité As­sur­ance, which boasted in a re­cent self-de­scrip­tion of its busi­ness of its ex­cep­tional growth. “Dur­ing the first quar­ter of 2017, the com­pany achieved more growth than in all of 2016,” it claimed in a pro­file doc­u­ment sent to Ex­ec­u­tive, adding that its growth in 2016 was more than 10 times in­dus­try av­er­age, at 30 per­cent. Se­cu­rité at­trib­uted its as­cent to the po­si­tion of fastest grow­ing in­sur­ance com­pany in Le­banon to hav­ing in­cen­tivized and ed­u­cated its staff, de­ployed new apps, stepped up its brand­ing and, as as­sis­tant gen­eral man­ager An­thony Khawam tells Ex­ec­u­tive by phone, to “serv­ing our clients in su­pe­rior ways.”

Farid Che­did, chair­man and gen­eral man­ager of the Che­did in­sur­ance group, tells Ex­ec­u­tive that a po­tent lo­cal in­sur­ance in­dus­try would have been a fan­tas­tic part­ner to the coun­try’s cur­rent in­fra­struc­ture de­vel­op­ment ef­forts. “The in­sur­ance in­dus­try in Le­banon is very re­silient, and the prob­lems that ex­ist in sec­tors like mo­tor and health are man­age­able prob­lems. It is a very good in­dus­try,” he af­firms, but then cau­tions that this in­dus­try is in need of “help, as­sis­tance, and sup­port from the govern­ment.”

He ex­plains that an in­sur­ance sec­tor, with its need for as­sets with long-term du­ra­tion, makes the per­fect in­vestor in in­fra­struc­ture projects, and that in­fra­struc­ture projects, in turn, are ideal for in­sur­ers to in­vest in (for more on in­sur­ance in re­la­tion to the Cap­i­tal In­vest­ment Plan of Le­banon, see page 36). The prob­lem, in his view, is that the de­vel­op­ment of in­sur­ance in Le­banon un­til now was sub­ject to to­tal ne­glect from the state. “If the [Lebanese govern­ment] as­sists the in­sur­ance com­pa­nies in grow­ing, the in­sur­ance com­pa­nies will be able to in­vest long-term and will be able to be a ma­jor player in the econ­omy of the coun­try. But they are to­tally ne­glected, which is a pity,” he says.

As the Lebanese Min­is­ter of Econ­omy and Trade, Raed Khoury, con­cluded in his in­tro­duc­tion to the ICC An­nual In­sur­ance Sec­tor re­port for 2016, “Prof­itable sus­tained growth in the in­sur­ance sec­tor needs to be achieved with an ob­jec­tive to nar­row the gap [with the bank­ing in­dus­try] and es­tab­lish a more bal­anced struc­ture in the fi­nan­cial ser­vices sec­tor.” Given the lack of po­lit­i­cal sup­port and sub­dued growth record of the in­sur­ance in­dus­try, which would need to take 10 steps of growth for ev­ery sin­gle step of ad­vance­ment by the bank­ing in­dus­try, what re­mains to be added is only one ques­tion: How?

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