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Insurance sector faces stagnation in 2013

Arope insurance building is seen in Beirut, Sunday, June 16, 2013. (The Daily Star/Mahmoud Kheir)

BEIRUT: Activity in the tourism, real estate and trade sectors stagnated in 2012, Lebanon’s business leaders warned last week, and the insurance sector will follow suit in 2013, according to industry experts. With the economy forecast to expand by less than 2 percent in 2013, growth in the insurance sector is expected to be flat or turn negative by year-end, head of the Lebanese Insurance Association Asaad Mirza told The Daily Star.

Though the sector posted 20-percent growth in premiums in the first quarter of 2013 compared to the same period last year, the trend won’t continue throughout the second quarter, Mirza said.

“First-quarter results aren’t an accurate indicator for the entire year because a bulk of delayed insurance policies is issued during this time of year which inflates the results.”

Insurance companies intentionally avoid issuing policies by year-end until after Jan. 15 of the following year when they are required to pay taxes and reinsurance premiums on policies issued during the previous fiscal year.

Therefore, a bulk of policies is issued in the first quarter after Jan. 15 of every year, Mirza said.

Despite the 20-percent growth in premiums, the number of issued contracts only increased by 3 percent in the first quarter of this year.

Mirza said the downtrend started in 2012 when the number of issued contracts declined by 13 percent, despite a 4-percent growth in premiums with medical insurance topping the list.

Mirza explained that such growth had mainly been the result of a government hike in hospitalization fees.

“A true indicator of the sector’s performance is both the growth in motor and cargo premiums, which unlike other lines of business require contracts to be issued on time. ... The decline in these two LOBs, as a result of weaker trade activity and a declining number of tourists, shows what to expect,” Mirza explained.

Motor and cargo premiums fell by 2 and 3 percent respectively in the first quarter of 2013, compared to the same period last year, amid weaker trade activity and a stagnating tourism sector due to the ongoing civil war in neighboring Syria.

The tourism sector, which accounts for 9.3 percent of GDP, according to a World Tourism and Travel Council forecast in 2012, was dealt a blow by the deteriorating security situation after GCC countries warned their citizens, who make up 40 percent of tourist spending, against visiting Beirut.

The number of tourists dropped 12.5 percent in the first quarter of 2013 following a 17.5-percent decline in 2012.

A diminishing number of tourists indirectly results in lower retail sales and accordingly lower demand for insurance policies by wholesalers and merchants. The stagnant trade activity consequently means fewer cargo insurance contracts.

The declining number of tourists also results directly in lower demand for the Orange Card, which is a type of insurance that covers damages to third parties caused by accidents involving insured vehicles passing through countries such as Syria, Jordan and Iraq.

Weaker economic growth in other sectors also weighs on the insurance sector. Declining car sales mean less insurance of commercial vehicles while sluggish real-estate activity means a drop in demand for housing loans, which require borrowers to purchase life insurance.

Besides suffering from slower economic growth, the insurance sector is also in need of long-awaited reforms by the government, starting with a decision to raise capital requirements in a bid to encourage mergers and acquisitions, which would represent a shift from traditional family-owned businesses to corporate institutions.

The current minimum capital for insurance companies is only $1.5 million, a figure that many experts think is too low and that results in over 50 insurance firms in Lebanon. Only 10 of these firms control nearly 80 percent of the market share.

 
A version of this article appeared in the print edition of The Daily Star on June 17, 2013, on page 5.

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