A ROADMAP FOR REFORMING THE LEBANESE INSURANCE INDUSTRY
By Elie Maalouf*
The Lebanese insurance sector stands at a crossroads, urgently requiring comprehensive regeneration amid complex challenges at both the national and international levels. Once acknowledged as a beacon of innovation and success in the Middle East, Lebanon now is regressing behind its regional counterparts in the development and regulation of this pivotal financial sector.
Historically, Lebanon has served as a launchpad for numerous success stories in the insurance industry, setting benchmarks for neighboring countries. However, a convergence of factors has since restrained its growth and innovation. At the center of these challenges is a persistent underestimation of the sector’s impact within the broader economic ecosystem and its profound societal implications. This oversight has, in turn, slowed legislative enthusiasm for the deep-rooted reforms desperately needed to modernize the existing framework of laws and regulations governing the industry.
The catastrophic Beirut Port explosion on August 4, 2020, marked a turning point, exposing the sector’s vulnerabilities while simultaneously underscoring its critical importance. The unprecedented financial toll of this tragedy not only illuminated the urgent need for a robust insurance industry, but also ignited a nationwide debate on the imperative of aligning Lebanese insurers with global standards. This incident, though devastating, has highlighted the long-standing necessity for reform – independent of the calamity itself.
No stakeholder can go it alone in reforming the Lebanese insurance sector. It is a multi-dimensional, cross-cutting exercise that involves the entire ecosystem, from the boardroom to the brokers.
- Developing an Insurance Corporate Governance Regulation (ICGR)
In Lebanon’s insurance sector, the framework for Corporate Governance is notably absent from the existing regulatory landscape. While scattered elements hint at governance principles, a unified and robust Insurance Corporate Governance Regulation (ICGR) is critically needed. Such a framework should capture several foundational principles to ensure the sector’s integrity and accountability:
A cornerstone of the proposed ICGR should be the establishment of clear procedures for adherence to compliance measures. This includes the mandatory designation of a compliance officer. This role, infused with a degree of autonomy and unfettered access to regulatory bodies, is pivotal in supervising the adherence of the company to regulatory demands. Responsibilities extend across the spectrum of Anti-Money Laundering (AML) practices, data protection norms, and broader regulatory compliance, ensuring a holistic governance approach.
The culture of disclosure and transparency towards both regulators and policyholders must be a pillar of the ICGR. This principle ensures that all parties are well-informed of the insurance company’s operations, financial health, and compliance status, fostering a culture of trust and openness essential for the industry’s sustainability.
A clear framework for accountability within the corporate governance structure ensures that decisions and actions of the company’s leadership are made in the best interest of policyholders and stakeholders. This principle underpins the ethical foundation of the company, promoting responsible management and oversight.
The ICGR must articulate mechanisms for identifying, managing, and mitigating conflicts of interest. This ensures that the company’s decision-making processes remain unbiased and aligned with the best interests of all stakeholders, thereby safeguarding the integrity of its operations.
- Revisiting capital requirements for a resilient insurance sector
The existing capital framework for insurers and intermediaries in Lebanon is visibly outdated, falling short of its critical role in ensuring the financial stability of risk carriers and service providers. The current regime, anchored in a one-size-fits-all approach, mandates a uniform minimum capital requirement. This outdated model overlooks the nuanced financial health, scale, and risk exposure of individual insurance companies, rendering the capital standards ineffective for guaranteeing the sector’s robustness.
A transformative shift towards a risk-based capital (RBC) model is imperative. Such a model, which adjusts capital requirements based on the specific risk profile of each insurer, is not merely an improvement but a necessity. It promises to restore trust and confidence in the sector’s durability by ensuring that capital reserves more accurately reflect the inherent risks of insurance operations.
Despite recent regulatory attempts to address these shortcomings amidst a challenging political and legislative landscape, these measures have suffered from a lack of legal grounding and effectiveness. In contrast, risk-based capital requirements are designed to fortify the financial system, safeguarding insurers, investors, clients, and the broader economy.
Regulatory authorities bear the responsibility of ensuring that insurance firms maintain sufficient capital to meet their obligations to policyholders. Implementing a risk-based capital requirement achieves this by setting a statutory minimum capital level informed by the insurer’s size and the risk characteristics of its assets and operations. The primary objective is to pinpoint undercapitalized entities, thereby enhancing the sector’s overall health and stability.
Under the risk-based system, regulatory bodies are empowered to enact both preventative and corrective actions tailored to the specific deficiencies revealed by the RBC metrics. These actions are calibrated to the company’s capital sufficiency, defined as the ratio of total adjusted capital to the Authorized Control Level RBC, including Basic Operational Risk.
Adopting such a nuanced and responsive capital requirement framework is not only beneficial but rather critical for the sustainability and growth of Lebanon’s insurance industry. It paves the way for a sector characterized by financial resilience, capable of withstanding shocks and protecting the interests of all stakeholders involved.
- Empowering a strong, independent regulatory authority
Since its establishment in 1999, the Insurance Control Commission (ICC) has served as the regulatory authority for Lebanon’s insurance sector – while the Insurance Law, amended in 1968, endowed the Commission with the jurisdiction to oversee the industry. The effectiveness of the ICC’s regulatory mission and performance has encountered significant obstacles, undermining its ability to fulfill its mandate successfully.
A core issue is the legal ambiguity surrounding the Commission’s nature, which has sparked extensive debate. The intricate tripartite relationship between the ICC, the Ministry of Economy and Trade, and the National Insurance Board further complicates this scenario. The question of the Commission’s independence from Lebanon’s public sector laws, and, crucially, from the public treasury, has posed significant challenges in recent years. This entanglement has not only diluted the ICC’s regulatory efficacy but also raised questions about its autonomy and the integrity of its oversight functions.
It is increasingly apparent that a comprehensive reform of the ICC’s status and internal regulations is critical for enhancing its operational effectiveness and independence. Key reform measures should include:
Dissolving the Tripartite Relationship: A clear demarcation of roles and jurisdictions is necessary to eliminate the current interdependencies that hinder regulatory processes. By defining the specific responsibilities and boundaries of each entity, the potential for conflict and confusion can be minimized.
Reaffirming Independence from the Public Treasury and Administration: Granting the ICC’s autonomy from the constraints of public administration and the public treasury is essential. This independence is pivotal for the Commission to act without undue influence, enabling it to enforce regulations and oversee the insurance sector effectively.
Empowering the ICC with Legislative Authority: Providing the ICC with the prerogative to issue insurance legislation within the legal framework will further fortify its authority and effectiveness as a regulator. This empowerment would facilitate the adoption of timely and relevant regulatory measures, adapting to the evolving needs of the insurance market.
- Introducing a new brokers’ regulation
Insurance intermediaries often face a reputational challenge, perceived by many as being primarily motivated by commissions, with minimal added value to the clients they serve. However, this perception doesn’t align with the critical and complex role they play within the insurance industry. While it’s true that instances of misconduct have tainted the sector, the essential function of these intermediaries in the insurance cycle cannot be overstated.
Recognizing this discrepancy between perception and reality, there’s a pressing need for comprehensive reform within the industry. A pivotal aspect of this reform is the introduction of new Brokers’ Regulations. These regulations aim to enhance the professionalism, accountability, and overall value that intermediaries bring to the insurance process. Key areas that the new regulations should address include:
New Licensing Requirements and Procedures: Establishing more stringent criteria for becoming a licensed broker to ensure that only qualified individuals are providing insurance advice and services.
Capital Requirements Reflecting Fiduciary Duties: Implementing capital requirements that recognize the broker’s fiduciary responsibilities, thus ensuring they have sufficient financial backing to support their obligations to their clients.
Professional Indemnity Insurance: Mandating that brokers carry professional indemnity insurance to provide a safety net for both the broker and their clients in the event of professional negligence.
Clear Reporting Requirements: Introducing transparent reporting standards to enhance the accountability of brokers and their adherence to regulatory and ethical standards.
Approved Functions: Defining specific approved functions for brokers, such as underwriting claims and compliance, to clarify their roles and responsibilities within the industry.
Electronic Insurance Regulation and Aggregator Relations: Modernizing regulations to address the digitalization of insurance services, including clear guidelines for the relationship between brokers and online insurance aggregators.
- Delineating reinsurance
The expansion and resilience of the insurance industry hinge significantly on the foundational support and security provided by reinsurers. Insurance, by its very essence, operates on a global scale, illustrating how a risk emerging in a local context can ripple through to insurers across international financial hubs like Munich or London. The interconnected nature of these risks underscores the indispensable role of reinsurance in the ecosystem.
Reinsurance is more than just a safety net; it’s a crucial pillar for the insurance sector, offering a multifaceted range of benefits. It not only bridges the local market with global insurance players but also acts as a sophisticated financial stability mechanism. Through risk mitigation and capital relief, reinsurance enables insurers to manage and distribute risks more effectively, safeguarding their business and that of their stakeholders against potential solvency issues.
Moreover, the introduction of reinsurance into a market opens doors to new lines of business that might otherwise be inaccessible due to their risk or capital requirements. This expansion is further supported by the transfer of underwriting expertise and best practices from international partners, enhancing the local insurance landscape’s overall quality and competitiveness.
Given these profound contributions, it is imperative that any forthcoming regulations within the insurance sector acknowledge and cater to the unique dynamics and requirements of the reinsurance industry. This entails aligning with international standards and market practices, ensuring that local regulations do not hinder but rather facilitate the constructive engagement between insurers and their reinsurance partners.
As the insurance sector stands on the brink of significant reforms, a pivotal aspect of this transformative journey involves ensuring protection against unfair competition, notably from entities like Mutual Funds. These entities, while important in their own right, necessitate a comprehensive reevaluation of their social role, regulatory framework, and oversight mechanisms to ensure a level playing field.
The essence of any reform should inherently embody a spirit of collaboration among all insurance industry stakeholders. This inclusive approach can be operationalized by introducing mechanisms for knowledge exchange and joint action – for instance, sharing consultation papers with insurers and organizing open meetings. Such forums are invaluable for openly discussing the myriad challenges and opportunities facing the sector, fostering a sense of community and shared purpose.
Central to the reform agenda is the objective of striking a delicate equilibrium. The goal is to safeguard the rights and interests of policyholders, ensuring they remain paramount, while simultaneously nurturing an environment conducive to investment. The overarching aim is to stimulate sectoral growth without compromising value or deterring new entrants.
This balance is delicate yet achievable. It requires a nuanced understanding of the sector’s dynamics and a commitment to transparent, participatory regulatory processes. By prioritizing fairness and equity, reforms can catalyze positive change, ensuring the insurance industry’s resilience and adaptability in the face of evolving market demands and competitive pressures.
*Attorney at Law
Former Head of the Insurance Control Commission by Interim
Chedid Capital Legal Advisor