Mergers, capital hike key to bolstering insurance sector
The insurance industry is set for a shakeout of mergers, given increased competition during the tight economy and possible changes in regulatory capital requirements, which would favor larger companies with more money in the bank, according to industry sector experts.
Like much else in the Lebanese economy, the insurance sector reported numbers this week that do not bode well for the near-term health of the business. While profits from premiums were nominally up, the total number of contracts written going forward dropped a precipitous 13 percent for the first quarter of 2012, compared to the same period a year ago.
Bassam Khoueiss, chief sales officer for Allianz SNA, said that the current environment favors larger companies both in terms of potential increased capital requirements and consumer confidence.
Khoueiss said: “Lebanon is passing through some tough times. It would be healthier for the whole industry [insurance sector] to undergo some mergers and acquisitions.”
The Allianz executive supported a tighter regulatory regime which would entail increasing capital requirements for insurance companies to, in effect, insure the insurers against failure and safeguard policy holders. “We are a service industry, like banking. We need to raise capital requirements. Consumers need more security,” Khoueiss said.
While not stating an exact ratio for capital requirements, he said it could easily be reached by consensus between the industry and government and should be comparable to “market standards” in Europe and the United States.
The government of the late Prime Minister Rafik Hariri set the minimum capital for insurance companies at $1.5 million only, a figure seen by experts as too low to stimulate this sector.
“In an era of [economic] stagnation, certainly the sector is affected,” Khoueiss said. “In terms of economic problems, people want the security of being with a larger [insurance company]. Allianz is in a good position in the number of contracts.” He noted, however, that during tight times, “it is not only a matter of recession, we [the sector] need to be proactive, to go to the client.” Despite tough times, consumers should not view insurance “as a luxury,” Khoueiss said. Byblos Bank chief economist Nassib Ghobril noted the increased competition in the industry resulting from a tighter economy.
“Given the prevailing political uncertainties for more than a year, the ongoing economic stagnation means the economic pie is not growing, this is making insurers compete for a slice of the same pie,” Ghobril said. “What is [even] more alarming is that economic prospects do not look promising for this year. So the outlook for the sector is affected as a result.” The other key challenge Ghobril noted was the lack of awareness in Lebanon about the role that insurance plays.
“It is still viewed mostly as a cost rather than as a necessity.” Ghobril said. “So when consumer confidence recedes, mainly because of political and security factors as reflected by the Byblos Bank/AUB Consumer Confidence Index, households either postpone spending on what they view as unnecessary items, or look to reduce their current expenditures and consider insurance.”
Consumer confidence has reached very low levels since the fourth quarter of last year and has remained at this level into the first quarter of this year. “It is not surprising that demand for personal insurance products has stagnated,” Ghobril said.
Another key industry figure noted that unless there was a sudden turnaround in sales for the insurance industry, layoffs are expected and that insurance companies are suffering across the board – big and small – with the larger companies being saddled with higher operational expenses.
Asaad Mirza, the head of the Association of Insurance Companies in Lebanon, blamed it on macro-economic factors – including stagnating trade and commerce activities – as being mainly behind the drop in contracts. He added, however, that it was a “vicious circle” for Lebanese consumers because as the economy contracts, and the cost of living rises, they are left with the choice of what to cut back from expenses.
“The question with consumer confidence is how to give confidence back to the consumer given the economic situation. Commerce is stagnant, and consumer confidence is going down,” Mirza said. “It [the insurance sector] is all about consumer confidence.” He complained of the lack of political stability and noted that the behavior of politicians was fueling the insecurity of the average Lebanese. He noted that amid a myriad of economic and political problems, there is the knock-on effect of the UAE, Qatar and Bahrain recommending that their citizens avoid visiting Lebanon this summer because of potential security problems.
“The insurance sector is asking [Lebanese] politicians to tone down their rhetoric,” he said, adding in a note of confidence. “I still think we have the best country in the Middle East in terms of diversified economic potential.”
While the insurance association views a renewed marketing campaign as necessary, Mirza noted that it would be “costly” and that the sector must wait to target potential insurance shoppers after the summer season. In addition to heading the industry association, Mirza is the chairman and general manager of Capital Insurance and Reinsurance.
Meanwhile, consumers are watching their pocket books. The fact that insurance has become an “elective” expense is in many ways a leading indicator of future consumer confidence that does not comment well on expectations for the Lebanese economy.
In usual economic times, it seems reasonable to many, if not most consumers, to get a policy and pay the premium, so if they do crash their car – or worse – they are recompensed for the resulting damage. “It’s simple,” Mirza said. “People need coverage.”
Figures released Sunday by ACAL reported that insurance premiums in Lebanon totaled $317.6 million in the first quarter of 2012, an increase of 4 percent from the same quarter of last year and a marginal rise of 0.2 percent from the final quarter of 2011.
In marked comparison, insurance premiums grew by 8 percent year-on-year in the first quarter of 2011. According to the ACAL report, the fire, life and cargo categories were the main drivers of premium growth in the first quarter of 2012 as they posted year-on-year increases of 14 percent, 11 percent and 11 percent respectively.
Medical premiums rose by 1 percent year-on-year in the first quarter of 2012, while motor insurance premiums and workmen insurance premiums remained unchanged. While medical insurance posted a nominal increase, this category of insurance premiums reached $96.9 million in the first quarter of 2012, 30.5 percent of the sector’s aggregate premiums.