THE BRITISH MIDDLE EAST LAW COUNCIL
"THE LEBANON - LEGAL UPDATE FOR REDEVELOPMENT AND RECOVERY
8 - 9 - 10th September 1994
INSURANCE LAW PANEL
"LEBANESE INSURANCE LAW: FACTS AND ISSUES"
BY: GHASSAN MOUKHEIBER
ATTORNEY AT LAW
HATEM, KAYROUZ, MOUKHEIBER & MESSIHI
Some facts about the insurance market in Lebanon:
Insurance is one of the many sectors of the economy, where the lebanese developed their entrepreneurial skills as quality service technicians and specialists. This is true not only in Lebanon, but also throughout the Middle East and even in some capitals of Europe and Africa, where a number of Lebanese companies established joint ventures and incorporated subsidiaries and affiliated companies, even during the hardest preriods of the war following 1975.
The insurane sector in Lebanon is now constituted of 113 licenced insurance companies of which 69 are active Lebanese companies and 10 foreign. (Al Bayan, March 1993).
The total written business in 1992 was aproximately $75 Million in Net Premium. In 1993 $110 Million This amount is expected to reach $200 Million by 1996 (i.e. an increase of 300% aprox. of the 1992 figure).
By branch of insurance, Health comes first (with aprox 36% of the market), followed by Life (aprox. 25.33%), General accident, Personal Accident & workman compensation (14%). Vehicle (aprox. 12.45%), Fire (aprox. 7.13%), Marine cargo, including marine hull (aprox. 4.9%), Other promising insurance classes of activities expected to develop sizeably, include the insurance of construction, engineering, banking and financial risks.
To maintain and develop the level of skills of its staff and management and to draw on trained university students, the Association of Insurance Companies in Lebanon (ACAL) established in 1977, jointly with the St. Joseph University, the Centre for the Study of Insurance (Centre d'Etudes d'Assurance) which was very successful in reaching its set goals. In 1992, it totaled 196 enroled students.
Despite its enormous hardships and losses since 1975, the insurance sector faces the nineties with increased hopes and ambitions. Development and improvements are under way within all major insurance companies to cope with a very difficult and challenging environment. One of the areas that are in the focus of the market players and the Government alike is the improvement of the laws and regulations governing insurance.
This short paper will review very briefly the present status of the law, with a focus on a number of organizational and regulatory issues facing Insurance in Lebanon.
The Legal background:
The insurance operations (from a substantive point of view, i.e. general conditions, obligations of each of the insured and insurer, claims ... etc) are governed by Book 10, Chapter 1 (art. 950 et s.) of the Lebanese Code of Obligations and Contracts, enacted in 1930. It was directly inspired by French law and case precedents. Furthermore, it carries special provisions for Fire, accidents and life insurance. Maritime Insurance is governed separately by the Maritime Commercial Code (art. 293 et s.).
The insurance business (from an organizational/regulatory point of view), is governed by a statute published by Decree No. 9813 dated May 4, 1968. The Law provides for the conditions of licensing Lebanese and foreign companies, language of insurance contracts, solvency, reserves and investment, supervisory authorities, professional organization, brokers, experts, control and supervision, liquidation and winding-up of insurance companies, penalties.
Since its enactment in 1968, this law was not substantially amended. Recently, a number of amendments relating to financial and solvency matters were enacted. A Bill that introduces a large number of substantial amendments is due to be tabled in Parliament.
I shall review briefly the various legal -- mainly regulatory -- issues that challenge the insurance market in Lebanon, covering first the present legal status, then the problems that are raised and the solutions that are suggested.
The insurance Law in Lebanon is strongly protective: only companies and organizations, (either Lebanese or foreign) licensed under Lebanese Law may carry-out insurance operations per licensed branch or branches. The only exception allowed is for insurance policies written against transportation risks on imported and exported goods. (art. 9.2.). Policies written in violation of these provisions are considered null and void. Furthermore, any violation by the organizations, its directors, officers and employees is criminally repressed with prison sentences varying from a month to a year in addition to a fine (art. 58 et s.).
The Law defines Insurance operations very broadly. Art. 950 COC provides that "Insurance is a contract through which a person (the insurer), in return for a remuneration called premium or participation fee, takes the liability of a number of benefits upon the eventual occurence of events relative to the goods or to the person of the insured."
Defining some operations as being or not insurance has raised a number of problems, particularly when some organizations and companies started engaging into operations that lie into an uneasy to clearly identify legal "twilight zones".
1. Self Funded Schemes (or self-insurance):
This is the instance when an organization or company feels financially large enough to carry its own risks or its employees risks (or at least some of them). At its simplest, this means making deductions from the organization's revenue each year to create a reserve fund to cover future losses. Does this activity need to be clarified or regulated in order to maintain the stability of the market and in order to secure the rights and finances of employees and organization alike?
2. Mutual Societies:
The Law provides that the insurance organization must take the form of a corporation (joint-stock company). An ambiguity remains for Mutual Societies. The Insurance Law up until 1977 allowed "Professional Cooperative Societies" to write direct insurance provided they are appropriately licensed. That whole section was deleted and repealed from the law in 1977 when a separate statute governing "Mutual societies" was enacted, allowing the latter to "indemnify its members" under limited classes of operations. These societies are subject to the control and supervision of the Ministry of cooperatives, and follow a separate set of rules. Many Mutual Societies were charged by Insurance companies to be illegally practicing insurance, as well as unduly competing on similar coverage, particularly in the field of healthcare.
The draft insurance Bill provides for subjecting Mutual Societies to the same licensing authority than insurance companies (i.e. the Ministry of Economy); however, its leaves the problems of its supervision, control and conditions of operations open for a later regulation to be enacted by agreement between the two competing Ministries: Economy and Cooperatives. The substantive debate is therefore still open and seeks an appropriate solution.
3. Third Party Administrators (TPA):
They are specialized companies offering a range of services to insurance organizations, to assist them in the management of their policy portfolios. The need for such services was felt particularly in Lebanon to pool-in resources and skills relating to loss adjustment and claims control of healthcare insurance. Several such TPA companies are now operating in Lebanon.
Many issues were raised following the creation of such companies: Can their activities be assimilated to insurance, if and when the scope of their services extend to cover a wider range of activities than pure loss adjustment? do they need to be regulated and controlled, particularly to ascertain technical abilities and competence? Do they need to be mandatory in team with Mutual Societies and Self Funded Schemes?
II. ORGANIZING AND REGULATING INSURANCE INTERMEDIARIES:
With the exception of the Chairman, Administrators of insurance companies and legal representatives of foreign companies, the Insurance Law provides that only licensed brokers can act as insurance intermediaries. The licensing conditions (both technical and financial) being relatively light, a recent Ministerial Order has raised the bank guarantee that must be offered by brokers to LL 25 Millions (aprox. $15,000.-). After a period when licensing was practically halted, licensing has now resumed by the Ministry of Economy. It is expected that this will start a long expected process for an organization and regulation of brokers. Innumerable complaints are always voiced by insured and insurance companies alike against the lack of clarity in the role and responsibilities of brokers, while the market is very dependent on their activities.
There is almost consensus on the need to organize and regulate the insurance brokerage profession and activities. A number of brokers have incorporated into an Association. It is hoped that with time, this association will gain the stature and role of a self-organizing and controlling body, similar to an "Ordre", and that it will develop a professional code of conduct for brokers and assist in defining and controlling their profession.
III. CAPITAL REQUIREMENTS AND SOLVENCY:
It appears from reviewing the number of licensed insurance companies and the statistics relating to their activities, that the insurance market in Lebanon is highly fragmented. These problems are compounded by solvency weaknesses in many of the licensed companies, both at the level of their capital, the constitution of sufficient reserves and the existence of appropriate assets necessary to meet their incurred liabilities.
Efforts have been made to straighten things up in this context, with the aim of improving the insurance companies solvency and strengthening the overall market, by creating the pressure on smaller companies to merge or leave the market.
The capital requirement for licensing companies and maintaining the license of existing ones was increased to LL 300 Million (aprox. $ 180,000.-) with the aim of reaching later LL 1 Billion (i.e. $600,000.-). Furthermore, an additional Preventive Reserve of LL 750 Million was mandated by licensed insurance company, part in cash deposits of Lebanese State Bonds (60%) and the other in real-estate (40%).
The insurance Law bill provides particularly (i) for appropriate reserves and special guarantees per licensed Branch of insurance, thus allowing solvency margins to commensurate balance sheet and performance positions; (ii) for a controlled process to reconstitute the insurance company's capital following substantial losses; (iii) new investment regulations; (iv) It also regulates the merger of insurance companies and provides for incentives to that end.
IV. SUPERVISING AND CONTROL:
The insurance licensing, supervising and controlling authority is the Ministry of economy.
The Minister is assisted by an advisory committee, the "National Insurance Board", constituted of the Minister (chairperson), a judge (vice-chairperson), senior directors of the Ministries of Economy and Finance, a university professor specializing in insurance, and four representatives of Lebanese and Foreign insurance companies.
In addition, a Supervisory Commission of insurance companies is set-up within the Ministry of Economy, constituted of at least three sworn comptrollers, of which an actuary.
The Association of Insurance Companies in Lebanon (ACAL) has played a very active and effective role in fostering a practical internal supervision from within the insurance market.
It is generally admitted that the existing supervisory and controlling functions could not be effectively fulfilled. The new Insurance draft Bill provides for amendments in the Law that affirm this multi-layered supervision and control with the aim of improving on its effectiveness.
At the level of public/ministerial control: the Bill particularly adds to the role and authorities of the National Insurance Board, and reinforces the effectiveness of the Supervisory Commission and provides for an appropriate funding of its activities.
At the level of the private/professional control: the Bill reinforces and adds to the role and prerogatives of the ACAL. The latter association would then evolve into a status close to that of a professional "Ordre". It would enjoy exclusivity in the domain of its prerogatives; its membership would be mandatory to all insurance companies; it would have the opportunity to establish an arbitration system, and a "Centrale des Risques" (a statistical center of insurance risks).
The draft Bill adds a new layer of control, by giving a new role to the corporate auditors, who would be entrusted with a duty to report violations to the Ministerial Supervisory Commission.
This multi-layered system certainly has many advantages, But it certainly has some disadvantages, that relate particularly to reaching a efficient coordination of the efforts and policies of all the controlling and supervisory bodies. Furthermore, no solution is yet planned for the specific issue of the control and supervision of organizations other than insurance companies (e.g. Mutual Societies).
V. INTERVENTION IN POLICY WORDING:
The Lebanese Law provides for limited intervention in policy wording, to the extent necessary for the protection of the insured. Thus, the Code of Obligations and Contracts considers null and void a number of clauses considered abusive. The Insurance Law also provides for the language of the policy, which must be in Arabic or translated into Arabic, to allow the understanding of its conditions by the insured (with the exception of a number of imitatively listed types of policies). Also, one of the conditions for the licensing of insurance companies is the submittal of the text of the general conditions of all policies intended to be used.
In practice, the Ministry of Economy does not get involved in the control of the policy wording. However, it is feared that a trend be started, following a recent request addressed by the Minister of Economy to all insurance companies through the ACAL, inviting them to agree on a standard health insurance policy that includes a clause of guaranteed renewability.
This does pose the issue of the extent to which the Law or the regulatory bodies can intervene into Policy wording, without jeopardizing the contractual freedom and a healthy business competition.
VI. THE REGULATION OF PRIVATE HEALTHCARE INSURANCE:
This is critically important issue in Lebanon; not only to the insurance business, where Health premiums represent the single most important part of the insurance business (35% of the total net premiums in 1993), but also to the insured, who faces problems similar to those faced in the United States: (i) A highly sophisticated sector of healthcare providers whose spiraling costs have become out of reach for most Lebanese; (ii) a weak public sector and Social Security plans and services; and (iii) a developing but highly competitive private insurance market.
I will very briefly list a number of issues that need to be addressed:
1. Is there a need to regulate specifically the medical branch of insurance, alike Life, fire and marine?
2. How to resolve the legal and financial problems of an eventual guaranteed renewability clause of the insurance policy?
3. How to establish an effective and efficient coordination between the public and private sectors (particularly with the National Social Security Fund), to insure maximum coverage of all and limit duplication?
4. How to maximize the efficiency of claims control as well as cost control, while respecting the independence of the medical professions and medical ethics (particularly when it comes to the issue of duty of disclosure)?
5. Shouldn't health insurance be tax exempt alike life insurance?