Lebanon's Insurance Sector Struggles amid Sluggish Economy

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1 Sluggish Economy BLOMINVEST BANK 07 December ember, 2013 Contact Information Head of Research: Marwan Mikhael Premiums and Claims Compositions in H Source: ACAL As one of the most resilient economic sectors in Lebanon, insurance industry kept on defeating the regional and domestic developments that mounted in In details, the geopolitical uprisings of the war in Syria, the Euro zone recession's spillovers as well as the local political stalemate amid an absence of a new Cabinet formation hindered the steady growth of the insurance sector in Lebanon but couldn t cease it. Even though several economic sectors were hit by the rocky domestic market, both insurance and banking sectors succeeded to show a satisfactory performance since the beginning of the year. Lebanon ranked 48 th globally and 2 nd in the MENA region in terms of insurance penetration rate, according to the latest report published by Swiss Re, a leading global reinsurer. Lebanon s insurance sector was closely behind Morocco which stood at the 47 th place and ahead of Jordan (54th) and UAE (58th), Saudi Arabia (80th), Egypt (81th), Syria and Iraq. Lebanon s 2012 market penetration rate was estimated by Swiss Re at 2.85% of the Gross Domestic Product (GDP) standing below 2011's figure of 2.9%. Yet, the sector's contribution in 2012 to the country s economic growth (represented by the penetration rate) remained relatively bigger than the 2.8% recorded in In more details, 2012 insurance penetration rate for nonlife business was 2.02%, while life segment grasped the remaining 0.83%. Lebanon is also well positioned in terms of insurance density that reached $301.9 in 2012 relative to $289.8 in Accordingly, an average of $301.9 was spent on insurance by each resident this year, revealing an improving population s consciousness of the primordial need of insurance protection that used to be extensively considered as a secondary necessity. Moreover, Lebanon s insurance density ranked 5 th among the MENA countries and captured the 51 st place globally, behind Kuwait (ranked 48 th globally) and ahead of Oman (ranked 54 th globally).

2 Insurance market in Lebanon is characterized by its small size and the presence of several players. The sector counts over 50 companies with several international and regional businesses. On a comparative scale, the market size of the Lebanese insurance sector remains relatively small compared to other regional countries, as it accounted for 5.3% of the MENA region in 2012, versus 29.5% for the UAE and 19.9% for Saudi Arabia. The Lebanese insurance sector benefits from a high degree of competitiveness. AROPE Insurance sources explained that several companies were adopting aggressive pricing strategies; while others are betting on their excellence in Customer Service, better interest rates for investment plans and loyalty programs. In addition, several insurance companies are bank-owned which is allowing them to benefit from an additional advantage as branches are supplementary Point of Sales (POS) handling a wide geographic scope. Bancassurance products allowed customers to simplify the management of their financial needs on one hand, and fastened the companies ability to promote their products and boost their insurance premiums on the other hand. Several barriers to growth still exist and need to be eliminated. First, the presence of several players isn t always profitable to the market given its small size and the fact that the majority of adherent companies found no barriers to entry given the low capital requirement of $1.5M. Therefore, the sector is suffering from an unclear regulatory frame with several laws held at the legislative level reducing the industry s effectiveness. Second, several challenges pushed numerous insurance companies to hedge their risk portfolio via the reinsurance scheme. This explains the proliferation of brokers and intermediaries in Lebanon that amounted to 1,626 companies by the end of 2011 according to the Insurance Control Commission annual report. As for the top five non-life insurers, MEDGULF maintained its leading position and topped the list in 2012 with approximately $100M non-life premiums and was tracked by AXA M.E. in the second place with $84M. BANKERS came third with total non-life premiums of $83.7M, while LIBANO SUISSE and AROPE ranked fourth and fifth with respective $72M and $55M. Although the regional tensions had their impact on Lebanon, the insurance sector continued to register a decent growth, yet a decelerating one. Total premiums rose by an annualized 7.4% in the first half of 2013 compared to a 17.2% and 9.4% growth rates recorded in the first half 2011 and 2012, respectively. In fact, premiums reached $739.02M by End June compared to $688.29M in This value is almost at half Business Monitor International s (BMI) forecast of $1.41B worth of premiums at end of December BMI s forecast may not be reached if the second half s developments burdened the sector s performance. In addition, BMI expected a 9% increase in total life premiums to attain $411M by the end of 2013, while we are still at 8.3% at mid-year. 2

3 On the claims level, total indemnities paid to beneficiaries reached $333.32M according to ACAL, jumping by 12.5% in H compared to the same period in Cultural Resistance, Social and financial factors keep on weighing over life insurance progress in Lebanon. Worth noting that life insurance isn t a legal requirement and has no current benefits which gives the priority to other insurance segments in Lebanon such as motor and medical insurance. When comparing to other countries, the aforementioned division remains scarcely exploited with its market share standing at 27.2% by June 2013, and at 29.1% as at end December Luxembourg, Ireland and Hong Kong were the leading countries in terms of life insurance share of total premiums in 2012, grasping respective stakes of 88.7%, 83.8% and 88.6%. Yet, the growing awareness for savings importance and future protection increased the number of licensed companies under Lebanese Law to carry-out life insurance operations to 34 establishments. Life insurance stake during the first six months of 2013 was relatively higher than 2012 s stake of 26.9%. According to ACAL statistics, total premiums for life insurance increased by 8.3% y-o-y to reach $200.85M as at June end, with 84.6% of contracted agreements relating to life protection but contributing to 42.1% only of total value. This rise is partially attributed for life insurance standing as a major condition for banks to grant loans especially housing loans. Meanwhile, 57.9% of total life premiums came from savings insurance on a lower number of contracts. Total paid claims in life insurance amounted to $50.77M by June 2013, slipping by 6.2% y-o-y compared to last year s similar period. Total Non-Life Premiums by June Total Life Premiums by June ((In $, 1/1000) (In $, 1/1000) (In $, 1/1000) Source: ACAL 3

4 The non-life insurance businesses showed a 7.0% yearly improvement during the first 6 months of 2013, representing 72.8% of total premiums compared to 73.1% in 2012, with medical insurance and motor insurance leading divisions. Total non-life premiums stood at $538.17M by June 2013, while non-life claims jumped 16.6% y-o-y to reach $242.28M. Medical insurance, which accounts for 44.7% of the non-life sector and 32.6% of the total sector, witnessed growths in both premiums and claims following the increasing hospitalization fees. Accordingly, premiums reached $240.64M million by June, rising by an annual 11%, resulting of respective 11.0% and 7.0% yearly increases in premiums of medical and expatriates accounts. The progress of this division was supported by the low portion of population that benefits from the National Social Security Fund (NSSF) scheme. The medical insurance took up 41.9% of total claims by June 2012 reaching $139.55M and growing by 13.0% on higher medical costs. Motor insurance in Lebanon barely moved in the first six months of 2013, recording a 1% increase to $161.85M. The growth in the mentioned line of business was mainly attributable to the rise in motor non-compulsory premiums (accounting for 85.0% of total motor premiums) by 3% y-o-y to $ M that offset the 11% yearly decline in the compulsory segment to $24.14M. As for claims, total paid claims up to June 2012 rose 4% to $92.13M contributing to 27.6% of total claims in the sector, the second highest contribution after medical insurance. The motor section was hardly hit by the Syrian influx to Lebanon as many Syrian cars were uninsured despite the Syria, Jordan and Lebanon arrangement to oblige motorists to buy liability insurance policy in order to cross borders. In addition, the orange card insurance scheme between most of Arab Countries only covers damages to third parties caused by accidents occurred from insured vehicles according to the compulsory insurance laws of each participating country. As a market leader in Motor non-compulsory insurance, AROPE Insurance explained that premiums haven t increased following the Syrian influx to the country as no new laws were implemented to cover the material damages; only bodily injuries are concerned. On the claims side, AROPE declared that Syrian refugees aren t insured in Lebanon forcing companies to pay additional claims without being able to recover them. Net investment income to the insurance sector edged 2.0% up to reach $54.17M up to the 2nd quarter of Around 72.4% generated by net income from life related investments growing by 6% to $39.24 million. Net income from non-life investments has generally seen a drop especially in the most heavy-weighted divisions, with net income from investment in medical and motor recording each a double digit yearly decline of 10% to $4.45M and $5.77M, respectively. 4

5 Regarding Takaful scheme, the Islamic alternative to insurance that complies with Sharia rules, it is still timidly present on the Lebanese insurance market with only one company operating in the field. The system is underexploited due to the lack of public awareness, a shy demand, as well as the shortage in well-trained specialists. To sum up, Lebanon s insurance sector kept on posting profits and maintained its strong position despite the continuous domestic and regional uprisings, yet at a slower pace. The industry s overall development could show better results in the future after the implementation of several reforms. Public awareness of the sector s importance should be enhanced, strengthening the existing underdeveloped divisions, reinforcing the actual regulatory system as well as investing in many new lines of business like political risk or unemployment insurances. For your Queries: BLOMINVEST BANK s.a.l. 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