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Sep 2015

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Lebanon - Getting through tough times

Source: Middle East Insurance Review | Sep 2015

On the back of a modest economic performance and ongoing socio-political unrest in the region, Lebanon’s insurance sector expanded slower in 2014, but players remain upbeat about the future.
By Cynthia Ang
 
Lebanon’s GDP is expected to grow by 2.5% this year, despite an internal political stalemate and the repercussions of the Syrian conflict, which are blocking the economy’s growth, according to IMF’s latest global report. The country’s GDP grew by 2% in 2014. 
   Like the Lebanese economy, the country’s insurance industry has shown resilience in the face of tough market conditions and posted a 6% y-o-y increase in premiums to US$417.7 million in the first quarter of 2015, according to figures released by the Association of Insurance Companies in Lebanon (ACAL).
   In 2014, total premiums grew by 6.7% to $1.5 billion in 2014, lower than the double-digit growth of 12.8% in 2013, according to Swiss Re’s sigma report. The growth rate is comparable to that of the MENA insurance market, which grew by 6.8% to $50.6 billion last year. Lebanon has the region’s highest penetration rate at 3.3%, almost double the regional average of 1.7%. 
 
On solid ground
The Lebanese insurance industry maintained healthy growth rates for gross written premiums over the first half of 2015. When compared with the expectations for GDP growth, the industry is performing well enough and stands on solid ground, said Mr Lucien Letayf Jr, CEO of Libano-Suisse. 
   Mr Fateh Bekdache, Vice Chairman and General Manager, AROPE Insurance noted that the Lebanese insurance sector is one of the most resilient sectors in the Lebanese economy. “It is a true fighter, proving year after year its immunity against volatile and unstable environments,” he said.
   Mr Letayf Jr added: “In recent months, inflationary pressures on the Lebanese economy have been removed by low prices for oil and international markets’ exchange rate shifts in favour of the dollar. This has helped Lebanese make ends meet, and we have not noticed any direct pressure on the insurance market from the financial difficulties that some client companies or consumers might feel.” 
 
Gross written premiums in 1Q2015
 
Growing life 
The main drivers of growth in the first quarter of 2015 were the medical and life segments, which constituted 38.9% and 24.4% of the market, respectively, and grew 14% and 5% in the first quarter, figures published by ACAL showed. With nearly a quarter of premiums from the life business, Lebanon has one of the most developed life markets in the MENA region, alongside Morocco and the UAE. 
   Given the long-term problems in Lebanon, the development of life insurance – which requires customers to engage in multi-year contracts – is especially encouraging, said Mr Elie Nasnas, General Manager at AXA Middle East. 
   But while there is continued strong demand for life insurance, “there are inevitably some financial constraints amongst consumers”, said Mr Jean-Claude Noujaim, General Manager of MetLife Alico in Lebanon. He added that the market potential is still attractive, but the industry needs to work harder to raise awareness of insurance, for example in explaining unemployment and retirement benefits, to grow the overall market.
   Mr Noujaim elaborated: “The life insurance sector is growing, but below the overall insurance growth rates in Lebanon. Pure protection products dominate, with little interest in with-savings policies. There is clearly potential to grow life generally and encourage and incentivise more with-savings policies. 
   “According to the 1Q15 ACAL figures, total life insurance claims disbursed declined 30% compared to the same quarter in 2014, while net income from life-related investments increased by 9%. So, there is motivation for the industry to continue to invest in developing further awareness of insurance benefits, and to look at developing some of the niche product areas.”
   Mr RenĂ© Klat, Chairman of ADIR Insurance, offered suggestions on how to further promote the life insurance in Lebanon. With all bank loans being subject to life insurance, he suggested cancelling the 5% tax on sum insured reimbursement in case of death, which is borne by the policyholder’s beneficiaries. 
 
Intense competition
The non-life sector, meanwhile, grew by 7% during the first quarter of 2015, representing 75.6% of total premiums compared to 70.7% in 2014. According to ACAL figures, medical premiums amounted to $162.3 million. Rising health premiums are driving much of the Lebanese insurance sector’s expansion as fierce competition and a slowing economy dent growth in other non-life segments such as cargo, fire and motor. 
   Mr Bekdache said: “Insurance in Lebanon represents over 3% of the GDP but currently lacks new regulations to better organise its work and witnesses a fierce competition where price sensitivity prevails over customer service. Despite visible stability and satisfying figures, the sector endures certain challenges and is growing at a slower pace.”
   Mrs Nadine El Habbal Assali, Acting Head of Lebanon’s Insurance Control Commission (ICC) said motor and medical lines are experiencing fierce price competition, with only a few players are capable of achieving reasonable margins. She noted that a thorough review of pricing practices is being considered, namely on the lines that suffered significant losses over the previous years. “The objective of this review is to enhance pricing processes and help the sector realise profitable growth.” 
   On balance, it can be said that the Lebanese insurance industry and its customers in some ways benefit from rigorous competition. While some insurers are deploying aggressive pricing strategies to gain market share, other companies are attracting potential clients through customer service skills, lowering interest rates for investment plans, and offering loyalty programmes. 
   “Working on enhancing after-sales support and claims management would make insurance a more appealing industry,” said Mr Bekdache. 
 
Consolidation overdue
With premiums of $1.5 billion per year shared by 56 insurers, of which the 10 largest control around 70% to 80% of the market, the Lebanese insurance sector is considered highly fragmented compared to other Arab markets. 
   Mr Nasnas said that given the challenges, insurers are adopting new business strategies. “The first is mergers and acquisitions among local insurers. The second is joint ventures with local and foreign companies. Surprisingly, the first trend, which is supposed to be the driving force, is lagging behind. The second trend, which if properly applied, is expected to have the highest profitability.”
   Consolidation in Lebanon’s insurance industry would also raise standards and help to build confidence in the market and lead to growth, said Mr Noujaim.
   With the insurance business becoming more complex and sophisticated, “small insurance companies will have to scale up or face increasingly limited breathing room. Top-flight corporate governance is being demanded by investors and consumers alike and beyond that, competitive pressures make greater sophistication a must”, said Mr Letayf Jr.
 
Managing challenges
In addition to enforcing mergers between inadequately managed firms, industry players are calling for a stronger regulatory framework to manage existing challenges and develop the Lebanese insurance market. 
   Greater regulatory control over the market entry of unqualified insurance firms would be especially beneficial to the industry and ultimately to the customer, said Mr Noujaim. 
   Mr Nasnas urged the ICC to look into illegal competition caused by either non-licensed insurance companies or mutual funds operating as full insurance companies without any technical or control framework.
   Mr Klat feels that mutual organisations should come under the remit of the Ministry of the Economy and not the Ministry of Agriculture, which has no control over such entities at all. “Mutuals should be built and constituted under a common denominator to avoid anti-selection,” he said.
   There is also a need for specific laws encouraging companies to offer their employees additional benefits, such as pension schemes and medical insurance, if related premiums are withdrawn from the end-of-service indemnity. This will help provide people with decent retirement and medical services, Mr Klat explained. 
 
Collaboration is key
While addressing the challenges of insurance industry will help improve the operating environment for the sector and support growth, Mr Letayf Jr cautioned against believing in one solution that fits all needs and challenges. He said: “These ‘super solutions’ do not exist and, as we have seen in some countries, are dangerous if tried, like attempting to inflate insurance penetration by prescribing compulsory insurance schemes before the market is ready. 
   “I hold the view that the process of addressing and solving challenges requires both enthusiastic competition among insurance companies, and equally enthusiastic collaboration on shared issues where companies must stand together. The latter is provided in Lebanon through the work of our insurance association, ACAL. As to the best solutions for our customers’ problems, the market will provide the evidence of who develops the best.”
   The status of the insurance sector in Lebanon is definitely better than before, with room for further improvements, said Mr Bekdache. “We are waiting for the new insurance law to see the light because it is still held in Parliament and hopefully—because we need this to get ahead—we will see the outcome soon. At the moment, the ICC is taking many steps in regulating the insurance sector, and we have invited them to closely collaborate with all players in the market on how to go further with these regulations.”
 
Regulation as a key enabler 
The draft insurance law, at the centre of many debates and discussions, has yet to be passed even after relentless efforts by the ICC over the past decade. Mr Letayf Jr said: “This law must be fully tailored to the Lebanese market and cannot be copied from another jurisdiction. At the same time, the law must be 100% compliant with international insurance standards in order to support our industry in its interaction with our regional and international partners.
   “I think it is time now to revisit the insurance law and make definite progress toward adopting a modern law that will act as an enabler for ever-increasing trust in our sector and growth of insurance in Lebanon.” 
   The opportunities that such regulatory changes could bring will be huge. As Mr Nasnas said: “The opportunity presented with the introduction of a new insurance legislation could open doors to high growth of the insurance sector in Lebanon – especially in terms of market for the life segment – and help the country reposition itself as a regional insurance and reinsurance centre.”
 
High hopes ahead
Lebanon’s insurance industry has so far proved resilient to the global economic downturn and regional political uncertainty. In a recent report, BMI Research has assessed the Lebanese insurance industry to be a “small but quite rapidly growing market” on the whole. 
   In addition, there are high hopes for the country over the recent discovery of large oil and gas deposits. According to reports, there is a 50% probability that Lebanon has 96 trillion cubic feet of gas and 850 million barrels of oil and energy, and net proceeds are estimated at more than $600 billion. ACAL is now rallying support from the authorities to set up an oil and gas syndicate, which is aimed to draw participation from all insurers.
   While it is too early to say how much of the windfall of oil revenues will trickle down to the insurance industry, the resources – if exploited correctly – is expected to have a tremendous impact on the whole economy.
 
Regulatory concerns
 
With the recent appointment of a new insurance regulator, we ask insurers what they feel are the major issues that the new head of ICC needs to address.
 
“More control on the insurance companies, and the application of the law should be stricter and should not be affected by political influence, to make sure that all companies are sound and able to face any major catastrophe.” 
– Mr RenĂ© Klat,
ChairmanADIR Insurance
“We definitely don’t want to become swamped in regulations, but new guidelines usually help keep the industry strengthened and moving forward. However, certain pricing regulations remove the incentive for insurers to provide more cost-effective coverage in order to compete. Furthermore, when governments attempt to shift prices against the rule of supply and demand, many insurers get discouraged. Nevertheless, insurers must also manage and abide by regulatory requirements. In certain markets for example, when regulators fixed prices, companies’ results improved and the market performed under better conditions overall.”
– Mr Fateh Bekdache, 
General ManagerAROPE Insurance
“A new modern insurance law is a must. The ICC has achieved a tremendous progress in the past years. It has developed good professional skills.
   We believe that an intense dialogue between the commission and the sector could be very beneficial to the sector.
   There still are many important topics that should be tackled, such a law on earthquake insurance. A practical procedure to put in place the new compulsory material damage third-party liability insurance is a must.
   The commission should also look at the illegal competition which is taking place either by non-licensed insurance companies or mutual funds operating as full insurance companies without any technical or control framework.”
– Mr Elie Nasnas,
General ManagerAXA Middle East
“Being the supervisor of the industry, the head of the ICC is responsible for monitoring the financial conduct of insurance practitioners and the market conduct of insurance providers, intermediaries and policyholders. 
   While these responsibilities will require the full attention of the new commissioner and the ICC team, it must be again emphasised that the supervisor’s work will have to be built on the foundation of a new insurance law. The combination of a new law and a strong supervisor is needed to develop the sector’s professional standing and improve the market by imposing corporate governance standards. On the part of the insurance sector, companies also have to make greater efforts to be rated by international agencies and this includes ourselves.” 
– Mr Lucien Letayf Jr,
CEOLibanon-Suisse
“From a regulatory perspective, we believe that greater control over the entry into the market of unqualified insurance firms will be especially beneficial to the industry and ultimately to the customer. We also see the potential for greater consolidation in Lebanon’s insurance industry, and this will raise standards as well as help to build confidence in the market and lead to growth.”
Mr Jean-Claude Noujaim,
General Manager,
MetLife Alico, Lebanon
 



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