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French Version

Insurance providers call for reform

New regulations and industry-wide Consolidation needed, insiders say

Although Lebanon's insurance sector is the leader in the region, it still lags far behind its Western counterparts, since the majority of Lebanese lack home, life and car insurance.

The $500 million spent annually on premiums is the highest per capita of all Middle Eastern countries except the U.A.E., but only 25 percent of the population holds an insurance policy of any kind. At the root of the problem is a fragmented, competitive and relatively unregulated market, governed by rules that facilitate the competition between undercapitalized, unreliable insurers and a handful of multinational companies.

Despite the recent push for reform, a consensus exists among leaders of the insurance sector that more consolidation must take place in order to raise the popular credibility of the sector on the whole.

"The market in Lebanon is small and can easily function with 20 insurers. We'd rather have 20 large, healthy, reliable insurance firms than 52 competitive, financially unstable ones," economist Nassib Ghobril told The Daily Star.

In the decade following the Civil War, Lebanon experienced an insurance boom, with the volume of premiums growing at a rate of 12 percent between 1990 and 1998, according to a report by local research group Information International. More than 70 firms competed with each other to offer the least expensive policies, prompting many financially unsound insurers to ignore consumer claims. In 1999 a new insurance law was passed which partially succeeded in excluding some of the least reliable insurers, shrinking the overcrowded market to 55 companies.

The 2001 legislation raised a firms' minimum required capitalization rate from $200,000 to $1.5 million, restricted premiums to 10 times the rate of capitalization and required companies to cover themselves with reinsurance firms with a "B++" rating or higher.

Both medium and large insurers favored the implementation of more stringent capital reserve requirements in 2001, with many calling for the adoption of even higher financial standards.

According to Nicolas Tabrawi, deputy managing director of the medium-sized insurance firm Security, the minimum reserve requirement should be increased to $10 million, meaning insurers must have $5 million in reserves for life insurance and $5 million for general insurance.

"Before you had five or six companies lowering their prices ridiculously, and not paying claims," Tabrawi said. "When compulsory auto insurance went into effect (in May 2002 the government of Lebanon passed a law requiring drivers to take out policies for protection against bodily damage, but law does not apply to vehicles) people were offering a LL75,000 premium, which is just not financially feasible. Then when they don't pay the claims there is no legal recourse - unless of course you know someone."

Paradoxically, while insurers collectively acknowledge the need for the enforcement of overall insurance regulation, many are calling for the Economy Ministry to relax the taxation and investment rules included in the 2001 law. Insurers maintain that Lebanon has a low rate of per-capita premiums because each policy is subject to an 11-percent tax, forcing companies to raise premiums. An insurer's ability to issue affordable policies is further undermined by a rule stipulating that only 10 percent of capital reserves can be invested in regional and international ventures.

Abraham Matossian, president of the Insurance Association of Lebanon (ACAL), maintains that the government's ambiguous commitment to insurance reform is embodied in such regulations.

Matossian echoed Tabrawi's call for stricter financial requirements, including limiting a firm to issuing premiums up to only five times their capital reserves.

"There needs to be a campaign to increase awareness of the necessity of insurance-especially car and health," Matossian said. "ACAL is advertising, but the government needs to give tax exemptions to people if they buy insurance, like in western countries where premium rates are deducted from taxes. If you relax the investment laws and give people incentives to purchase an intangible product like insurance, the government will ultimately make more money because they will get tax revenues from higher premiums."

Despite the recognition of the need for consolidation and reform of Lebanon's insurance industry, the prospect of consolidation is far off due to reluctance among the government and smaller insurers.

According to Fateh Bekdache, the general manager of Arope Insurance - the second largest insurance company in Lebanon - smaller, family-run insurers do not want to be acquired by what he calls the "mega-insurers."

"The smaller companies should either find a serious partner in a bank or foreign institution or find a local company to join forces with to stay in the market," Bekdache said. "We have talked to a lot of small-players and so far they want to keep things the way they are."

Although Bekdache refused to speculate on why firms are digging in their heels, when a smaller firm is acquired by a foreign insurer it must adhere to international insurance guidelines, including increasing levels of financial transparency.

Another reason that Lebanon's insurance market remains in limbo is due to political instability. In 2004 the Economy Ministry under Marwan Hamade passed, with the consultation of international experts, another set of reform laws intended to boost standards to international levels. But no progress has been made in implementing the law since Rafik Harriri's assassination.

"Since there has been no political continuity, there's been no continuity in the government's adoption of reform. It's just not a high priority right now," Ghobril said.

Beirut 07-02-2006
Lysandra Ohrstrom
The Daily Star

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