The Lebanese insurance Sector

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Stephanie Byrd
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1 BLOMINVEST BANK Top Premium Growth in 2011 March 24, 2012 Contact Information Research Department Head of Research: Marwan Mikhael Source: ACAL Quarterly Report - Q Life Segment versus Non-Life Segment Historic Trends Source: Business Monitor International Ltd, Blominvest Research Department

The Insurance Sector is under the Supervision of the Ministry of Economy and Trade Source: Consulting and Development Services (CDS) 2011 Performance The latest statistical figures published by the

2 The Insurance Sector is under the Supervision of the Ministry of Economy and Trade Source: Consulting and Development Services (CDS) 2011 Performance The latest statistical figures published by the Association of Insurance Companies, ACAL1, covering the insurance sector of Lebanon over the fourth quarter of 2011 reveal the resilience of the sector to substantial economic, financial and political challenges. The total Year to Date (YTD) Gross Written Premiums grew 10% to $1.2 billion in Life premiums of the Lebanese insurance market reached $343 million, up by 10% from Non-Life premiums, which represent the bulk of the insurance industry in the country, stood at $878 million, up by 9%. Swiss Re, a leading global reinsurer, ranked Lebanon 52 nd globally and first in the Middle East and North Africa (MENA) 2 in terms of total insurance premiums to GDP in 2010, also known as insurance penetration. 1 ACAL s acronym stands for "Association des Companies d'assurances au Liban" 2 The MENA average insurance penetration ratio stood at 1.3%, and that of the world at 6.9% 2

3 Yet the Lebanese insurance market growth decelerated in 2011 when compared to earlier years 3. Assaad Mirza, President of ACAL, said the overall performance of the sector has not been up to expectations last year. Hurdles included a 4% decline in Motor insurance policies over the first half of the year (it ended the year up by only 3%), and a fall in demand for housing loans, which entail borrowers to purchase Life insurance. He also asserted that the frailer economic activity, following declining number of Arab tourists, also took its toll on the insurance sector performance. Statistically, he claims, insurance companies used to issue a monthly average of 3,000 Orange Cards 4. However, in January and February 2012 combined, around 950 cards were issued. Also, lower number of Arab tourists resulted in weakening commercial and trade activities, which in return lowered sales and inventory turnover and shipments to Lebanon, and brought down demand for insurance policies by Lebanese wholesalers and merchants. Furthermore, in light of the gloomy economic environment, some clients resorted to downgrade their Medical and Motor insurance policies. While Life insurance recorded double digit growth of 10% in 2011, it remains underdeveloped in Lebanon. The segment averaged 28.1% of total insurance premiums in 2011, in line with its historical stand. The proportion is lower than in more developed countries but high than other Arab countries where Non-Life is still dominant. Statistically, the Life segment made up 61% of total European premiums 5 in 2010, and only 17.4% of the total MENA insurance market size 6. The obstacles are several: Life premiums are mostly perceived as investments for the future. Given the substantial numbers of households that rate below the poverty line, people are less likely to sacrifice today for their long-term future using Life insurance. Also, many companies that are active in the insurance sector lack the financial and managerial resources to operate in the Life segment and promote an awareness campaign on the cruciality of Life insurance. Non-Life insurance segment growth decelerated in 2011, pressured down by a mere rise in Motor insurance premiums. The segment grew by 9.8% to a share of 72.1% in 2011 up to a share of 71.9% of total insurance premiums. Medical and Motor insurance together contributed to more than two-thirds of total Non-Life insurance. Medical insurance topped the list in terms of share and growth with a 28.1% share and a 15% y-o-y growth. Yet the rise in the value of Medical insurance premiums, as claimed by Assad Mirza is caused by the hike in premium charges due to rising hospitalization costs rather than an increase in the number of issued policies. Motor insurance came in second in terms of share, with 26.8%, but recorded only a 3% y-o-y growth, standing as a major cause of growth deceleration for the insurance sector. MEDGULF sustained its first position with $100.8 million in Non-Life premiums, followed by Bankers with $79.7 million, AXA Middle East with $71.6 million, Liban-Suisse with $56.8 million and AROPE with $54.9 million, as the top five Non-Life insurers 7. Historical Background Historically, the Lebanese insurance sector has always maintained its open and liberal features with private insurers being key players in the local market, but never managed to grow itself into a large market. The former characteristic has boosted up rapidly the growth of the sector since its inception in the 1940s, focusing mainly on the Non-Life segment. While the civil war took its toll on the sector, the rebuilt of the economy in the 1990s boosted the insurance sector with insurance premiums growing by an average of 12% over the period extending from 1990 to The Lebanese insurance sector sustained its upturn and grew today into the most advanced and developed sector in the region. 3 The Lebanese insurance market growth stood at 13% in 2010; 22% in 2009; and 22.4% in Orange Card is a type of insurance that covers damages to third parties caused by accidents involving insured vehicles passing through countries such as Syria, Jordan, Iraq in accordance with the insurance laws of each participating country 5 According to CEA Statistics, European Statistics in Figures, statistics 7 According to Al-Bayan magazine s annual survey 8 According to local research firm, Information International 3

4 Current Landscape and Concerns While beneficial on several fronts, the liberal aspect of the sector and lack of proper management shaped the Lebanese insurance sector into a fragmented one with unfair and unregulated competition. 20% of insurance companies control nearly 80% of the market and the rest barely breaks even. The country is home to over 50 small, medium, and large insurance firms in Lebanon, while the market can only take 20 to 30 insurance companies 9. Though the government responded to this issue with the passage of a new insurance law that took effect in , replacing a 30-year old law, managing by that to reduce the number of players in the sector from 113 insurers in 1992 to around 56 in ; the lack of aggressive actions today continue to impose challenges on the sector with an indefensibly large number of players, leading to high market saturation. Local Insurance companies are swamped with management problems, short liquidity, and a lack of transparency. A key issue is the low minimum capital requirement for insurance companies, set at $1.5 million under the 2001 law, as small firms always find ways to come up with the capital by selling assets and properties they own 12. Also, as pointed out by Economy and Trade Minister Nicolas Nahas, Many insurance firms are selling policies against rules and regulations set by the ministry and in some cases they cut prices beyond reason to attract more clients. This is heightening downside risks on the sector. As perceived by Walid Mamlouk, a Sales Executive at Medgulf, when companies cut their prices, their liquidity reserves drop which prevents them from paying the full claims of their clients and this is affecting the overall reputation of the sector. Progressing Regulatory Reforms The Lebanese government has stepped up its efforts to modernize the insurance sector and insure a sustainable development of it from the standpoint of both the insurer s solvency and the buyer s safety. A completely new insurance legislation has been considered since end of 2011 by the Insurance Control Commission 13 (ICC) to strengthen the regulatory and supervisory frameworks. Included in its proposals are rules covering corporate governance, insurer licensing requirements, mergers and acquisitions, and brokers licensing, giving the ICC an efficient supervisory intervention and sanctioning power. It calls for the improvement of distribution networks 14 and the merger of some of the small insurance companies operating in Lebanon with more credible and affluent firms. It also aims at increasing total capital requirements in order to combat market saturation, ensure liquidity, and encourage mergers and acquisitions, which would represent a shift from traditional family-owned businesses to corporate institutions, as stated by Assaad Mirza. Mohamad Safadi, the Minister of Economy and trade, claimed that the ministry intends to prepare and publish all information on the insurance sector to ensure more transparency, in order to encourage sound competition and end bad practices. He also calls upon insurance companies to improve their performance by developing their human resources and offering staff with training courses for them to be able to deliver packages that better meet their clients needs; as well as to increase awareness about the importance of insurance. Some firms, such as Arab Re, have already initiated efforts by setting up internal regulations and corporate governance. 9 According to Nabih Baaklini, Chief Operations Officer at Arabia Insurance Company 10 Key provisions of the law included raising insurance companies minimum capitalization from $200,000 to $1.5 million; increasing the financial guarantees insurance companies must maintain at the Ministry of Economy for each category of insurance a company sells; and limiting companies to issuing premiums up to ten times their capitalization. Previously there were no such limits. By comparison, in Europe and the US insurance companies could only issue premiums up to between four and eight times their capitalization 11 The number of insurance firms in Lebanon today is estimated close to Leading to low barriers to entry and contributing to high market saturation 13 The Insurance Control Commission(ICC) is part of the Lebanese Ministry of Economy and Trade of Lebanon and regulates and monitors the Lebanese insurance sector 14 Global social progress is paving the way to the development of non-conventional distribution channels, which should be incorporated in Lebanon; citing, E-commerce. 4

5 While of high cruciality, the insurance legislation is not, by itself, enough to ensure that sound market practices are being practiced. Fadi Nader, partner at Levant Law Practice, believes a sound legal and regulatory environment should be nurtured. He calls for the regulator to force companies to adopt suitable accounting standards and create strong supervisory infrastructures. Also, Nabih Baaklini, Chief Operations Officer at Arabia Insurance Company, calls on the insurance companies to focus on improving their sales departments for them to better present their products to clients. Looking Forward 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 center. The existing potential leverages on Lebanon s geographic location and its skilled professional work force, as it has both the academic and professional environment to foster know-how in the region. Also, as stated by Minister Mohamad Safadi, the Lebanese insurance sector can captivate a lot of benefits if the economic free zone between Lebanon, Syria, Jordan, and Turkey is to be created. This will open a commercial and consumer market to 120 million inhabitants. Equally important is the growing demographic trends of Lebanon, which stands as indicative of promising growth potential, with Lebanon s large youth population and a yearly average population growth of 2%. For your Queries: BLOMINVEST BANK s.a.l. Research Department Verdun, Rashid Karameh Str. POBOX Riad El Soloh Beirut Lebanon Tel: Ext: 1283 research@blominvestbank.com Marwan Mikhael, Head of Research marwan.mikhael@blominvestbank.com Ext: 1234 Disclaimer This report is published for information purposes only. The information herein has been compiled from, or based upon sources we believe to be reliable, but we do not guarantee or accept responsibility for its completeness or accuracy. This document should not be construed as a solicitation to take part in any investment, or as constituting any representation or warranty on our part. The consequences of any action taken on the basis of information contained herein are solely the responsibility of the recipient. 5

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