A recent AM Best report has affirmed that two years after the Beirut explosion, operational risk has risen to an extremely high level, and the ease of doing business has declined materially amid several crises faced in the last three years, with Lebanese re/insurers having to contend with hyperinflation and multiple divergent currency variations due to capital controls.
The challenges faced by Lebanese re/insurers have significantly increased as the financial and economic conditions of the country deteriorated. The devastating explosion at the Beirut port on August 4, 2020, combined with the COVID-19 pandemic has exacerbated the issues faced by the country.
Mounting pressure on the creditworthiness of the insurance market is forcing Lebanese re/insurers to be reactive to their risk management approach. Economic turmoil has also damaged the growth prospects of the insurance market. In 2021, the ICC reported that gross written premium (GWP) in Lebanon increased to LBP 2.6 trillion, a 14% increase compared with 2020.
GWP growth in 2021 should be viewed in light of inflation, which was estimated by the World Bank to have exceeded 155%, implying a GWP decline in real terms. This growth also needs to be considered in the context of the two previous years, when GWP contracted by 7% in 2020, and 2% in 2019.
AM best see the decline of GWP in recent years was largely associated with decreasing levels of real GDP growth, which the World Bank estimated to have contracted by 10% in 2012 and 26% in 2020.
While insurers have developed offerings, such as microinsurance products, to make insurance more affordable in the context of hyperinflation, economic headwinds remain, with the World Bank estimating that Lebanese real GDP will contract by 6% in 2022, placing further pressure on the market’s top line.
The development of a de-facto three currency economy, with Lebanese pounds, “lollars” and “fresh dollars” operating in parallel, has deeply affected the way premiums are collected and paid. Lebanese re/insurers are faced with the issue of how they remunerate their staff, as a persistent financial crisis may lead to the risk of human capital leaving the country.
AM Best suggest that this could result in significant operational disruption for Lebanese re/insurers that fail to retain key personnel and develop in-house talent.
Lebanese re/insurers’ balance sheets also remain pressured and further challenges are likely as investment portfolios are highly exposed to domestic issuers, exposing the market to the elevated economic and political risks that persist in the country.
