Finance

Beating The Odds

Insurance

Data published by Swiss Re at the close of 1H2014 showed that Lebanon ranked first in the MENA region in terms of insurance penetration in 2013 with a rate of […]

Data published by Swiss Re at the close of 1H2014 showed that Lebanon ranked first in the MENA region in terms of insurance penetration in 2013 with a rate of 3.2% of GDP. The percentage was also a significant increase over 2012’s 2.85%. The penetration rate broke down to 2.2% in non-life business and 1% in life. This announcement marked Lebanon’s reclamation of first place from Morocco, as it moved up two places on the global insurance indices. Overall, Lebanon’s insurance penetration was twice the regional average of only 1.6%, which is well below the 2.7% average of emerging markets. In terms of insurance density, the total for 2013 was $341, well up from $302 in the previous year. These numbers put Lebanon in fourth place regionally, and 50th globally in terms of insurance density.

Medgulf held onto its market lead with $115.8 million in non-life premiums for 2013, translating into a growth of 14.8% YoY. Speaking to TBY, Lutfi F. El Zein, Chairman of Medgulf, accredited the company’s market position to rising demand for medical and auto insurance in Lebanon. In second place, AXA M.E. registered an impressive year-on-year increase of 24.4% to $94.8 million. A broader view of the industry showed that the top 10 companies in Lebanon accounted for 66.4% of total non-life insurance premiums in 2013, whereas the joint share of the top 20 companies reached 85%. The remaining 30 plus companies held a market share of only 15%. Of the total insurance companies, only five are dedicated life insurers.

These statistics must be considered in conjunction with the overall makeup of the regional insurance market. Compared to other countries, the Lebanese insurance market is small, accounting for only 5.3% of the MENA region in 2012. For comparison, the UAE accounted for 29.5%, and Saudi Arabia accounted for another 19.9%. While market dominance by major firms is the norm in the global insurance business, a high prevalence of smaller players in Lebanon is more common. In the case of Lebanon, local banks own many of the large firms. The proliferation of small firms is the result of low minimum capital requirements mandated by the insurance law of 1999. And while $1.4 billion is substantial for a population of around 4 million, the presence of over 50 insurance firms suggest market saturation, which is prompting calls for consolidation and the raising of the minimum capital requirements from $1.5 million. According to the World Bank, the current law has no sound basis for proportionate approaches to regulation, solvency and capital regulation is outdated, and powers of intervention are insufficient.

The Lebanese insurance market and its customers benefit from rigorous competition. While some companies are working to attract customers through aggressive pricing strategies, others are honing their customer service skills and offerings, lowering interest rates, and offering loyalty programs. Several major Lebanese insurance companies are bank owned, allowing them to offer bancassurance, by using their branches as points of sale. Bancassurance products allow customers to integrate their insurance coverage into their overall financial management, while banks cut out intermediary insurance salesmen. Competition is also expected to breed mergers and acquisitions in the near future, as Hala Haidar of AIG told TBY, “It is obvious that the major companies are getting a larger slice of the pie every year, meaning we need to see more mergers and collaboration.”

Current implementation of reforms is also sluggish. Implementation of the 2012 Traffic Law that extends third-party liability to also cover material damage, which, while enacted into law, has yet to be fully put into practice. In theory, the law is a boon for insurers. At 4Q2013, turnover for motor insurance was $338.7 million, with compulsory insurance contributing only $56 million to the total, which is equivalent to 16.5%, according to the Association des Companies d’Assurances au Liban (ACAL). The 2012 law has the potential to significantly grow compulsory insurance, however these gains are not yet realized. After a clumsy roll out of the preceding 2003 law for motor insurance, where weak regulatory control and cash underwriting deficits led to bankruptcy, the relevant bodies are circumspect. The National Bureau for Compulsory Insurance (NBCI) is currently working with the World Bank to set the optimal policy pricing, coverage, and conditions, in order to avoid the debacle of the previous decade.

Low barriers to entry and overcrowding are also hurting the long-term prospects of the Lebanese insurance industry. An updated insurance law that moves the industry towards a more risk-based approach and provides a more structured regulatory power would bring the industry in line with international norms and practices. World Bank officials have proposed a series of steps toward these ends starting with the development of appropriate fiscal regimes consistent with a competitive environment for savings and development products, as well as those related to retirement savings. The same report recommended new regulations that empower the Insurance Control Commission (ICC) to develop and enforce proportionate rules and supervisory practices that differentiate between large and small insurers. This will allow insurers that operate on the current basic model to continue doing so if they desire, while recognizing those insurers wishing to peruse more complex risks and business opportunities. Of course, regulatory reform is not a substitute for a stable business climate, which hinges on factors beyond the control of Lebanon’s industry and politicians, but for now, insurers in Lebanon are cautiously optimistic.

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