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Aug 2020

Growing despite headwinds

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Source: Middle East Insurance Review | May 2019

Lebanon continues to face tough economic conditions on both the macro and micro levels, which create a greater burden on insurers. Nonetheless, the insurance sector managed to grow over the past year, but sustainability remains a challenge in the coming period.
By Osama Noor
Lebanon has been under enormous pressure since the eruption of the Arab Spring around eight years ago. Since then, economic growth has suffered a sharp drop mainly because of the ongoing war in neighbouring Syria. According to the World Bank, one of the key issues facing Lebanon is the economic and social impact of the Syrian crisis. Around 1.5m Syrians have taken refuge in Lebanon, making up a quarter of the Lebanese population, and this has put a strain on the country’s public finances, service delivery and the environment. 
GDP growth in the past year is estimated to have grown by only 0.2% against 0.6% in 2017, according to the World Bank with projections of subdued growth of less than 1% for 2019. Other indicators portray frailty in the economic conditions where the fiscal deficit widened to reach 11.5% of GDP in 2018 compared to 7% in the past year, while primary balance saw a deficit of 1.8% of GDP from 2.3% surplus in 2017.
The political stalemate manifested in the country’s inability to form a government for eight months following the parliamentary elections in May 2018. This has further deteriorated the country’s economic situation.
Against such a bleak backdrop, it is considered an achievement for the insurance industry to have sustained growth. In 2018, the preliminary results issued by the sector’s regulator, the Insurance Control Commission (ICC), show that GWP grew by 3.2% to around $1.69bn, from $1.63bn in 2017. “The growth in the insurance sector has ranged between 3% and 4% in the past few years. This is a satisfactory growth considering the difficult environment at our borders with our trade with Syria at a standstill,” said Mr Max Zaccar, president of the Lebanese Insurance Association (ACAL).
The growth for P&C insurance has taken a slower pace over the past year which the ICC estimates to be a drop of around 1.2%. Mr Labib Nasr, CEO of ADIR Insurance Co attributes the drop to two major market changes. First, the decrease in loans disbursement and its high interest rate blocking the road for loans seekers, such as housing, motor and personal, which affects the overall economic sector. Second, the increase in interest rates on deposit accounts, where people prefer to lock their money in favour of highly secured returns rather than investing in new business activities, he said. 
In 2018, P&C business stood at around $270m, making up around 16% of total market premiums. It is understandable for this line to slow down considering the decline in businesses such as construction and real estate. The World Bank links the deceleration in economic activity to policy-based tightening of liquidity, specifically, the halt in subsidised lending by the central bank of Lebanon – Banque du Liban (BDL) – that was being channelled via commercial banks to mostly the real estate sector, providing a rare source of growth impetus since 2012.
Life dominates 
Lebanon is one of the few markets in the region which has a life portfolio accounting for the lion’s share of market operations. Life business reached around $522m, or 31% of the market GWP in 2018, showing an annual increase of 4.2%. Aside from size, life insurance has been the most profitable line as it contributed to around 66% of the market’s net income in 2017, up from around 54% in 2015 and 2016. It also preserved a CAGR of over 26% in the period of 2015-2017, whereas non-life stood at 2.2%.
The growth in life business in the past year has been in the range of its four-year average – around 5%. This is no mean feat, taking into account several pressures such as the significant increase in banks’ interest rates on LBP deposits and the housing loan crisis, noted Mr Ronald Chidiac, CEO of Broktech. He added that major banks offering life insurance through their bancassurance channel have grown their written premiums by more than 10%. “The sector seems to be growing steadily,” he said.
GWP by line of business
In 2017, the protection with savings life segment accounted for 37.5% of the overall life portfolio, followed by the protection covers (life) at 34% and unit-linked premiums at 28.5%. The latter grew by only 1.1% in 2017, down from the 6.7% increase in the past year, which is understandable in light of the general economic environment. However, the unit-linked business has preserved a positive trend over the past five years. 
Life GWP 2013-2017
Medical, a rising star 
Health insurance was the fastest-growing line of business in 2018 as it increased by 7% to $513m from $480m in the preceding year, dominating around 30.5% of the market GWP. 
According to Mr Chidiac, the major dynamics that could have played in favour of the sector’s growth last year are the increase in demand for personal lines, specifically medical and life, which witnessed a 7% and 4% jump, respectively, in terms of GWP. “The growth of medical premiums may be linked to several factors, namely the rising healthcare costs and the ICC’s decision which made the guaranteed renewability (GR) mandatory (Decision 186 on the guaranteed renewability of medical insurance) for all insurers,” he said.
In March 2018, the ICC issued Decision 186 on the GR of the medical insurance contracts which introduced a fundamental change in the industry and established a positive incentive for the economic agents to choose insurance as the better risk management alternative, according to the ICC statement. The Decision binds the insurance company from amending conditions of the medical insurance agreement following possible changes in the health condition of the insured person. 
The introduction of GR in 2018 was a great achievement, said Mr Zaccar. “The ICC also dedicated a hotline for any insurance problem that can arise between insurers and insureds.”
Mr Chidiac observed that, given all market factors, it is difficult to assess the impact of this decision, mostly on the individual line. “However, it seems to have had a positive impact as health insurance grew by 7% in 2018, compared to 4% in the three preceding years.” 
According to Mr Nasr, nowadays the ultimate challenge is to regulate the health insurance sector, where health mutuals are able to offer competitive prices compared to insurers, “since they work under the Ministry of Agriculture and their insurance is tax-free”.
Technology and distribution
Technology can be a new distribution channel to promote ‘light’ insurance products in terms of underwriting, such as motor bodily injury and TPL material damages, travel and foreigner medical insurance, said Mr Nasr. “Moreover, technology can help in developing new innovative types of insurance products such as digital home automation to prevent fire or burglary, as well as life and health insurance with on-going monitoring on daily activities, steps, and burning calories.”
He added that ADIR has started developing a new digital plan for 2020. “Our aim is to have a full-fledged mobile application that can assist clients on a day-to-day basis and ease their insurance experience with the company, from accidents declaration, request of quotations, policy issuance, expert inquiry, towing service, checking insurance portfolio, and unpaid follow-up,” Mr Nasr said.
Mr Chidiac said the sector’s challenges in Lebanon are far beyond just leveraging technology as a solution. “It is true that technology is playing a critical role in shaping the global market. However, it cannot bring the needed improvements to our local market, which suffers from much wider pressures, ie, the lingering economic recession and the continuous political pressures.” 
Yet, he stressed, Lebanese insurers which have already started developing their technological infrastructure to reshape their offerings and better meet their customers’ demands are reaping strategic advantages and larger market shares.
In general, the market still seems ripe for the intermediary channel, where according to the ICC statistics, the number of licensed brokers reached 2,659 by the end of 2017, against 2,289 in the previous year. 
Key insurance indicators 2015-2017
Crowded arena 
There are at least 50 licensed insurers in Lebanon, which makes it one of the most crowded markets in the region. Though diversified, in terms of having several international brands and the structure of ownership with bancassurance controlling a sizable chunk of the business (especially life), the market remains largely fragmented. The top 10 providers in terms of premium income control around 63% of the market GWP.
Top 10 insurers by GWP in 2018
“Indeed it is a very crowded market. However, it is still a profitable market,” said Mr Zaccar. Nevertheless, as the market is in the process of introducing corporate governance standards for insurers and implementing risk-based capital supervisory scheme, “this should encourage insurers to merge or be acquired”, he said.
Encouraging M&A among insurers would be of great added value to the sector considering the relatively small size of the pie, said Mr Nasr.
Last year, the Economy and Trade Ministry announced the preparation of a draft law that will incentivise insurers in Lebanon to merge by granting them subsidised loans. The move seeks to enable companies to increase their capitalisation and improve the quality of services – especially that the minimum capital requirement for insurance firms is $1.5m, which is very low by today’s standards.
Regulator actively seeking to improve the sector
The initiative to encourage M&A by offering subsidised loans has not been implemented so far, which is most likely due to the political deadlock the country has been witnessing in the past year. However, there is a great interest from the government to support the sector and raise its standards. 
Last March, the Ministry and ICC have reiterated their keen interest in increasing the level of transparency in the sector by mainly adopting risk-based capital supervisory regime as well as embracing international best practices. 
There is a need to update the insurance law, said Mr Zaccar, noting that this could be one of the biggest challenges. “We also need to work on the image of our profession. ACAL is in contact with all the ministries that are dealing one way or another with our sector. Of course, we are closer to the ICC, presided by Mrs Nadine El Habbal, who is doing a great job to protect the consumer as well as insurance companies.” 
The Ministry of Economy and Trade and the ICC are playing a great role in regulating the insurance industry in the best way possible, said Mr Nasr.
What to expect for 2019
The medium-term growth prospects for health and life lines remain satisfactory despite all the pressures, said Mr Chidiac. “However, the demand for non-life lines is shrinking due to the economic slowdown, which has now taken a stronger hold. Economic growth is expected to remain sluggish in 2019 as the dire fiscal situation and political instability continue to pose a significant downside risk to economic stability,” he said.
Mr Nasr agrees that the economic situation does not seem to be promising. However, Lebanon has a huge potential to grow with C├Ędre Funding (an international donor plan of over $11b in soft loans and grants to Lebanon) that will focus mainly on infrastructure which will also benefit the insurance industry. “Nevertheless, if the situation remains at a standstill, the insurance market might witness a decrease in GWP given that the unpaid ratio is increasing, loans are kept on-hold with limited disbursement amount and banking interest rates are high enough to overcome the life insurance investment plans,” he said. 
Hope for a better tomorrow
With the reconstruction of Syria and the opening of borders to activate the transit to the Gulf countries, insurance income will receive a shot in the arm, said Mr Zaccar. “Lebanese insurers have always been at the forefront of exploring new products… more sophisticated coverages on traditional insurance, but mostly in developing new products that accompany the internet revolution. The insurance of oil & gas, cyber, and professional indemnities are among the new products that are being marketed. We will also be exporting our expertise to Africa in particular,” he said.
He is optimistic that there will be broader prospects ahead for the industry in the coming period. “A new consensual government taking charge of the Cedre donor project for the rehabilitation and reconstruction of our infrastructure will represent an additional premium income for our market.”
The insurance sector in Lebanon contributes 3.5% to the country’s GDP, which is considered high among MENA countries. Considering the tough business environment and challenging conditions the country is undergoing, there is a big load on insurers to preserve a healthy outcome and continue satisfactorily in the future. M 
Digitalisation expected to drive sector
Mrs Nadine El Habbal, acting head of the Insurance Control Commission, said digitalisation remains a key priority on the agenda of the ICC. The initial benchmarks indicate significant improvements to the whole insurance cycle, from data capturing to analytics and pricing. Such enhancements would have positive repercussions on prices and services, which go directly to the benefit of policyholders. The ICC considers digitalisation to be a major component in preparing the insurance industry in Lebanon to play a major role as platform of services for the Levant region.
The new government endorsed the strategic plans of the ICC, and placed the focus on the following areas:
  • The issuance of the relevant legislations that would organise the motor third party liability;
  • The adoption of risk-based capital to assess the financial condition of insurance companies, which is expected to create an incentive for positive consolidation;
  • The improvement of transparency in the distribution process towards insured persons, and the combating of cash underwriting practices;
  • The enforcement of sound governance at the levels of shareholding and management; and
  • The incentivisation of life savings products.
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