Although Lebanese insurers are accustomed to operating in a challenging economic environment, the accelerating decline in investor confidence and US dollar cashflow constraints create further risks for insurers with fixed costs in US dollars, said AM Best.
The rating agency is closely monitoring the impact of heightened economic and political risk in Lebanon on local (re)insurers. The government announced on 17 October 2019 a planned tax on calls made via Voice over Internet Protocol (the ‘WhatsApp tax’). Since then, non-sectarian and mainly non-violent demonstrations have spread across Lebanon in response to political leaders’ inability to resolve the country’s economic deadlock, culminating in the 29 October announcement by Prime Minister Saad al-Hariri of his resignation.
In recent years, the Lebanese economy has been hindered by political gridlock, resulting in poor levels of real GDP growth and high inflation. Public debt is estimated to have risen, compounded by a ballooning annual balance of payments deficit and a rising current account deficit of $15.5bn in 2019 according to IMF forecasts (up from $14.4bn in 2018). Lebanon now has one of the highest debt-to-GDP ratios in the world.
In an effort to bolster its US dollar reserves and maintain the peg of the Lebanese pound, the Banque du Liban (the Central Bank of Lebanon) has been offering eurobonds at extremely attractive yields to counter diminishing investor confidence. However, these efforts have been unable to halt the slowdown in capital inflows, which has triggered short-term cashflow constraints in the highly dollarised economy.
“Given the worsening liquidity situation, insurers are taking steps to bolster their own dollar reserves, trying to maximise cash inflows in the currency whilst minimising outflows. A scarcity of US dollars in general circulation also has impacted insurers’ ability to collect premiums, with brokers and policyholders pressuring the market to accept Lebanese pounds,” said financial analyst Ben Diaz-Clegg in Best’s commentary, ‘Rising political and economic uncertainties constitute a new test for Lebanese insurance industry’.
AM Best is maintaining close contact with its rated Lebanese (re)insurers during this period of declining economic confidence and instability. Mr Ghislain Le Cam, director, analytics, noted, “AM Best will continue to monitor the situation, paying particular attention to asset-liability matching and how changing economic conditions are factored into reserving practices.” M