ExecutiveMagazine - 4/12/2018 11:54:05 AM - GMT (+2 )
Adding to the misty picture of insurance industry prospects in Lebanon are uncertainties over the sector’s ability to exploit three major opportunities which are slowly taking shape inside and outside of Lebanon: energy, infrastructure, and reconstruction. The book of doubts on the purported three new miracles includes some question marks if the industry will be able to develop a profitable pool for energy insurance related to the new oil and gas contracts. However, much more precarious are the opportunity prospects themselves as far as cross-border reconstruction projects in Syria and beyond, oil and gas finds offshore on Lebanon, and, the newest, but existentially old, prospect of insuring infrastructure projects laid out in the recently announced Lebanese Capital Investment Plan (CIP).
Max Zaccar, the president of the Association des Compagnies d’Assurances au Liban (ACAL), current president of the General Arab Insurance Federation (GAIF), and chairman and general manager of Lebanon’s Commercial Insurance, is enthusiastic about all three development prospects. He tells Executive, “Regarding the infrastructure program, everything under the Capital Investment Plan will need insurance, and the CIP projects will bring additional work to the insurance companies. But this is just the tip of the iceberg, because we are all waiting for the reconstruction of Syria and Iraq. Africa is also full of insurance needs where Lebanese companies can play a role. We have to get ready for all this.”
However, his greatest enthusiasm is reserved for the project of constructing the ACAL energy pool for insuring the oil and gas industry locally, on the reasoning that the Lebanese insurance law mandates all assets are insured in Lebanon. “The contract for oil and gas exploration was signed between the government and the operators as of February 2018, which means operators will start drilling in 2019 and should prepare themselves by importing their equipment and materials in 2018.
“Under the law, all assets have to be insured in Lebanon, the insurance [for local oil and gas industry assets] has to be made in Lebanon, and we as insurance [providers] have to prepare ourselves to serve this new industry. ACAL wants all interested member companies to participate in this new insurance, and this is why we developed the idea of a pool. The pool should see many companies participate and be managed by ACAL. It will create new job opportunities and expertise for ACAL, and we will export our pool in the future to other Arab countries,” Zaccar says.
In the overall move to fulfill the national resource dream, an important milestone for implementing the long-awaited exploration and eventual exploitation of Lebanese offshore gas has indeed been reached in the awarding and signing of contracts with the consortium that emerged last year as sole bidder for Block 4 and Block 9 (out of 10 maritime exploration blocks in Lebanon’s Exclusive Economic Zone). Even before these contracts were signed, however, ACAL had been working to ensure the rights of Lebanese insurance companies in the national energy industry.
For at least the past three years, the association centered its outbound lobbying efforts in a dual track emphasizing the law’s requirement for local insurance on the legal side, and the project of an energy insurance pool on the technical side. Additionally, the association made efforts to internally marshal local insurers toward readiness for participation in such a pool, with the rationale that the project would serve the primary purpose of expanding the skills of the local industry, which has never before been exposed to oil and gas risks. With these core messages, ACAL had been vocal through 2015–2017 by participating in or staging dedicated conferences on energy insurance, and by lobbying public officials and stakeholders with the message that Lebanese insurers are ready, willing, and able to take on the responsibility for oil and gas insurance contracts.
According to Zaccar, ACAL’s effort to rally skeptical member companies behind the idea of a pool has borne fruit as demonstrated by a survey earlier this year, in which a majority of the over 50 insurance companies in Lebanon stated their interest to join. “We did a survey with insurance companies about their interest in the pool two months ago and had the support of 31 insurance companies which expressed their interest in taking a $21 million retention,” he told Executive in an interview last month. Equally, while the external lobbying initially had met with lackluster responses from government officials, comments by officials in the Lebanese Petroleum Authority (LPA) since last year turned more favorable to the involvement of Lebanese insurers.
However, that does not mean that all concerns over the idea of an insurance pool as a risk sharing mechanism for Lebanon’s energy assets have vanished. Elie Hanna, the president of the Lebanese Insurance Brokers’ Syndicate (LIBS), tells Executive that some insurance brokers in Lebanon may even have expertise in coverage of oil and gas risks that is superior to that of local insurance companies, and that LIBS would be opposed to any pool that does not include a role for brokers.
More technically, a vehement questioning of an energy pool’s rationale comes from Lebanon’s prominent Chedid group of companies, which includes insurance and reinsurance broking services, and insurance consulting companies in the Middle East. Farid Chedid, the group’s chairman and general manager, details several concerns over the viability and wisdom of having a Lebanese energy insurance pool when taking into account the number of risks that can be insured, the potential for profit or loss from such a pool for insurers, and the circumstances of oil and gas exploration.
“Oil and gas insurance is a global business because you need a large number of homogeneous risks that are diversified globally. You need to spread your risks on a global basis, or you always lose money. I think there is a misunderstanding [in Lebanon] as to the benefit of the pool. You would organize a pool if you have a large number of homogeneous risks that cannot be insured by one or two companies,” he says and explains that the consortium, which won the bids for oil exploration in the two awarded Lebanese offshore Block 4 and Block 9, cannot be expected to deploy more than four or five drilling rigs at most. “This is not a large number, and for Lebanese insurance companies to come and say, ‘We want to insure three or four rigs and want to do a pool,’ I think is a very wrong decision,” he adds.
According to him, the resulting exposure for the Lebanese insurance industry would be huge in relation to the premium incomes that it could achieve. Moreover, the potential to make profits would, at best, be slim, while a loss would potentially be a financial catastrophe as claims incidents in the oil and gas sector can become huge.
“It is in the interest of the international [energy] companies to lure and attract the Lebanese companies [into having a pool]. But it is not in the interest of the Lebanese to be involved in this, because there is a certainty of a loss. Even if [things initially go without accident and claim for years], in case of a loss [event], you have risk for the Lebanese insurance industry to lose $20 million in one event, with zero possibility of payback,” Chedid explains. He reasons that this risk is juxtaposed with a potential to earn only some $200,000 in premiums income (collectively) over 10 loss-free years when prevailing rates in oil and gas insurance are taken into account.
Regarding the circumstances for operating oil projects offshore Lebanon, he points to the fact that the Arabian Gulf region has shallow waters, and an almost total absence of natural perils, whereas Lebanon has deep waters and has to take the possibility of natural perils, such as an earthquake and related floods, into account. In light of the low profit potential, high risks, and overall circumstances of having a Lebanese energy pool, Chedid is openly dismissive of the idea that Lebanese insurers would acquire greater knowledge about oil and gas insurance by operating a pool at a potential cost of millions. He suggests that a company with a small stake in the pool could earn no more in premiums than it would from insuring a single motor vehicle and calls the plan “an absolute waste of time.”
If and if
It cannot be ruled out at this point that the idea of a Lebanese oil and gas insurance bonanza could, despite all such technical considerations, hold some appeal to local companies in the case that the current scenario of drilling in two blocks by one consortium would result in rich finds, and that subsequent bidding rounds would generate a far-flung industry with a multitude of operators digging and drilling in Lebanese waters. However, this possibility is not one that anyone should be holding their breath for, given that the national reserves are still unclear, and that a large oil industry in Lebanon is, at best, many years away.
Similar to the risk for evanescence of Lebanese energy prospects, recent history can nurture only the most fugacious of hopes for Syria and Iraq to be reconstructed without any delay or backsliding into conflict and violence. As ACAL board member Karim Nasrallah, chairman and general manager of the Lebanese Credit Insurer (LIC), says, “We don’t know when the war next door will end. You don’t want to build your future on the back of the rebuilding of the infrastructure of Syria.”
So what about insuring the CIP and its legion of hot infrastructure projects? Nasrallah and Chedid are both insurance professionals with direct expertise in the issues that relate to coverage of cross-border investments and loans, which is certain to be one of the first issues of concern for international investors who are looking through the proposed Lebanese infrastructure investments. As a matter of fact, insurance needs for CIP projects will entail two dimensions. Chedid confirms that the first dimension is insurance of assets in Lebanon, with coverage needs stretching from construction related policies, such as Contractors’ All Risk (CAR), to covers protecting equipment and materials during transport, etc. Lebanese insurers are well versed in the issuance of the related policies and highly qualified to insure all first-party assets in Lebanon, which moreover is their prerogative under the Lebanese law.
Contrary to this need for local insurance is the scenario when it comes to safeguarding financial commitments that are dedicated by a foreign investor. The topic then, Chedid says, “is a foreign investment in Lebanon, whether through a loan or through equity. As this is foreign money coming into the country, you can insure it against political risk, such as confiscation, expropriation, and nationalization; you can insure it for inconvertibility of currency, [and] for frustration of contract (breach of contract) that is due to political reasons, [meaning] a political decision in the country to stop the contract. From that perspective, foreign lenders or investors expect their insurance [against political risk] to be done from outside [of Lebanon].”
Beware black swans
Nasrallah, whose company LCI operates as a private sector player in the space of insuring trade and investments, confirms that he has seen “definite appetite for Lebanon” coming from actors in the international cross-border insurance of investment risks, and also says that there is some room for insuring projects of the type listed in the Lebanese Capital Investment Plan (which he had not seen, and which seemed to not have been provided to the relevant local insurance stakeholders by the government’s team). However, according to him, capacity for insuring large infrastructure projects is internationally limited. “The capacity from the private market [for insuring such investments] is small, and the tenor of insurance will be very short. [Such] risks are mainly covered by governmental export credit agencies, or ECAs. ECAs can cover long-term projects that have grace periods built into their repayment plans, and they can cover all these ambitious projects,” Nasrallah tells Executive.
As he explains, international rules for export trade credit are defined according to categories set by the Organization for Economic Cooperation and Development (OECD). One has to differentiate between marketable risks (that can be covered essentially by a provider in the private sector) and non-marketable risks that only are assumed by the insurance units of multilateral agencies, such as the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), and governmental or quasi-governmental ECAs that have governmental mandates to support exports or foreign direct investments.
According to Nasrallah, some small short-term Lebanese projects in infrastructure could be syndicated in the private market for political risk insurance, but, by and large, all political risk insurance for projects related to Lebanon is going to be ECA business as long as a cross-border component is involved. “Anything related to infrastructure, anything that goes over seven to 10 years, which will be the case, will be purely for multilaterals and ECAs to cover. This is not something that any insurer in the local market will be involved in. The local market will not benefit from any of this,” he says.
The prospects of insuring the projects related to CIP and the final implementation of infrastructures in Lebanon thus, while this implementation seems not quite to be just around the corner, look to be the bets that the Lebanese insurance sector cannot afford to miss, even as the political risk side of the coverage looks to bypass many local players. As far as the categories of political risk, Nasrallah says that the main coverage category from a claims point of view for Lebanon would be war and civil unrest, since the track record of Lebanon has been very good in recent years as far as expropriation and breach of contract risks.
Both Chedid and Nasrallah confirm that coverage of political risk in the context of the CIP will be available, and that international trade credit agencies perceive Lebanon as a very insurable market. Chedid additionally emphasizes that, on one hand, investors in Lebanon will expect to be covered against political risk and loss of profits, and that, on the other hand, Lebanon cannot afford going into projects uninsured as they typically represent the risk combination of very low probability coupled with very high severity in case of an event that would qualify as a Black Swan. “On your probability distribution, the Black Swan is the fat tail, something that has a very remote probability of failure, but if you have failure, the consequences are horrendous and catastrophic. For a country like Lebanon, we cannot afford to not insure against fat tails,” he says. Nasrallah, on his part, ends by voicing concerns that more investment and their insurance is needed for the government’s plans to work. “All the CIP projects will be great, but I do not perceive any lender as being comfortable to lend if there are not basic reforms that are done. You cannot pour money into the country as it is today. It needs restructuring.”