Medical staff members work at an intensive care unit at Rafik Hariri University Hospital in Beirut. (Credit: Emilie Madi/Reuters)
BEIRUT — “More and more cancer patients tell me that specific medications are not being covered by insurance … while it was previously covered,” said Cherine Bazzane, a family medicine specialist who practices in Clemenceau Medical Center. “They are now told to pay for the difference or pay for it themselves. The same goes for laboratory tests. Some out-of-pocket payments in labs have ballooned from LL600,000 to LL2.5 million and more.”
She added, “Even doctors, we were previously fully covered through our syndicate, but are now paying large sums out of pocket.”
Since the onset of the economic crisis, much ink has been spilled on the size of the losses in the Lebanese financial sector, but the insurance sector has been largely overlooked, despite its significant impact on many people’s lives.
While the banking sector plays a crucial role in the development of a country’s economy, intermediating between depositors and borrowers, and simultaneously managing the resultant risk, the insurance sector plays an equally important role in society by transferring risk from the few to the many.
At its peak, the insurance industry’s combined shareholders’ equity in Lebanon reached $1.2 billion, or just 5 percent the size of the banking sector on an equity-to-equity basis.
When the central bank recognized the looming risk to the Lebanese economy and currency, it conjured up complex financial transactions to cushion banks’ bottom line. The insurance industry was not afforded such preferential treatment. As Lebanon’s GDP growth flatlined, the industry struggled. Overall growth in written premiums slowed down to less than 2 percent in the three years immediately preceding the crisis, reaching $1.66 billion for all insurance categories in 2019.
Data aggregated by the Insurance Control Commission further shows that during that same period, companies were witnessing an increase in claims and general expenses as well as financing costs. As a result, the consolidated net income after tax for the whole industry slipped into the red in 2019, recording a loss of around $12 million, the first loss since 2007, the year when the ICC started posting the data.
For patients and other insurance customers, the industry’s financial woes have translated into more out-of-pocket expenses, higher costs for insurance and, in some cases, to individuals being denied policies altogether.
The disruption
In the aftermath of October 2019 protests, banks closed for two weeks and as soon as they reopened, unofficial capital controls were already in full force. Depositors’ access to their accounts became severely limited and the value of the trapped funds was sinking daily. Insurance companies were no exception.
Since then, insurance companies’ dealings have been in many ways similar to that of banks. Companies insist that their clients should be paid out in the original currency of the contract when redeeming their policies, meaning lollar for lollar. Lollars, an invention of Lebanon’s banking crisis, are US currency deposits in commercial banks initially exchanged at LL3,900 to the US dollar, and later at LL8,000 to the US dollar. While higher than the lira’s official peg to the dollar of LL1,507.5, the lollar rate has consistently been significantly lower than the lira’s exchange value on the parallel market.
Insurance experts L’Orient Today spoke to said that insurance companies must fully bear the losses of their exposure to government debt and central bank’s certificates of deposits. However, they added that the insurers should not be responsible for the losses incurred on their bank deposits, and these should be borne by the final clients.
The impacts on customers have varied between life insurance and health insurance policies.
On the life insurance side, the insurance customers themselves, in some cases, had signed up for riskier policies, as in the case of unit linked notes, wherein the policy holder has personally chosen the investment funds. With these policies, the premium the insured pays is divided, with one part going towards insurance and the other getting invested.
Some clients when setting up their savings plan through a unit linked note knowingly chose to invest in Lebanese Eurobonds and other local products, while others completely shunned any exposure to Lebanon and only ticked the boxes directing their monies to be invested in international markets, such as the stock index and US Treasury funds.
Even under these scenarios, insurance companies are now proposing to pay back their clients in lollars instead of fresh US dollars, when clients ask to surrender their life insurance policies.
An insurance consultant who spoke on condition of anonymity told L’Orient Today that some companies are taking advantage of the disruption in the market and choosing to use the difference between lollars and fresh dollars to their personal benefit.
The consultant added that not only have they acted against the law, but they have discriminated against their clients, with some getting preferential treatment and being paid in fresh US dollars and others being denied this option.
Elie Nasnas, president of the Association des Compagnies d'Assurances au Liban (ACAL) and general manager of AXA ME, told L’Orient Today that “the association is aware of these practices, and these practices are against regulations.” He added “the ACAL has no regulatory authority, but it is in constant contact with the ICC to make sure that transgressions are properly handled.”
The ICC is meant to be a watchdog for the industry, describing itself as “an independent institution, in charge of maintaining an efficient and stable insurance market and protecting the interest of policyholders and other stakeholders.” Despite its stated independent status, the ICC’s decision-making capabilities are concentrated in the hands of the economy minister and without his direct intervention nothing moves forward.
When asked about what the ICC is doing to protect clients from abusive practices, the acting head of the ICC Elie Maalouf told L’Orient Today that since funds under saving plans are invested in local markets, the market dynamics had made it impossible for insurers to pay back policyholders in a currency other than lollars.
However, on the matter of unit linked notes Maalouf said that in cases where the client specifically asked for his money to be invested outside of Lebanon, there is no excuse for insurers not to pay back their clients in fresh US dollars. He pointed to Capital Market Authority’s announcement number 71, which stipulates “that in the event a client decides to liquidate his positions from foreign securities located outside Lebanon, the institution shall transfer the net funds resulting from the sale to the client, either to a ‘Fresh Funds’ account in Lebanon or to an account outside Lebanon, upon the client’s request.”
When it comes to life insurance, insurance companies can manage to ride out the storm given the long-term nature of the contracts. Industry insiders told L’Orient Today that when clients were given only the possibility to be paid back in lollars, most of them grudgingly kept their policies active, hoping that in 10 or 15 years the whole situation would revert to normal and they would be able to cash out without any losses.
Health insurance: spiraling costs and dubious practices
The impact on the health insurance business is more pronounced and is likely to lead to even more people going uninsured, in a country where already more than half the population is not formally covered by either public or private health insurance.
In Lebanon there are six publicly-managed employment-based social insurance fund. The largest one is the National Social Security Fund. It is mandatory insurance for the formal sector employees. Civil servants and armed forces are covered by the Civil Servants Cooperative and four other military schemes. Those who are not eligible for public coverage must turn to the private insurance market or go without insurance.
The health insurance industry is facing a widening gap between the premiums it is collecting and the claims and expenses it is paying. At the start of the crisis, the premiums were still priced at a US dollar to lira rate of LL1507.5, while claims paid were gradually repricing at the prevailing parallel market rate.
Hospitals had to adapt, as the cost of medical supplies and equipment was priced in US dollars. For insurers, the annual maturity of health policies meant that there was a lag between premiums collected and expenses paid.
The mismatch went straight to the bottom line and, in many cases, customers ate the cost. A recently released report by Research for Health in Conflict about the political economy of health in Lebanon noted that “as recently as November 2021, all health services now demand an out-of-pocket payment of 20 percent of medical bills regardless of any level of insurance coverage.”
Even those insured through the public system are now facing increased costs.
Jean, a soldier in the Lebanese Army who declined to give his real name as he’s not authorized to talk to the press, told L’Orient Today that, although he and is family are insured through the army, he was dealt a devastating blow when, after his father got diagnosed with cancer, he found out he that he had to pay tens of millions of Lebanese lira out of pocket for his father's cancer treatment. His most recent payment for his father’s chemo treatment, scans and bloodwork set him back LL20 million.
“As you know, our [monthly] salary is now worth less than $100. Who in Lebanon has this kind of money? I can’t describe the feeling of seeing your father suffer and instead of being by his side, I have to spend most of my days trying to find money to pay for his treatment,” he said. “If it wasn’t for my friends and family I would’ve had to watch him die because no one else will help us.”
To work out a way around the dilemma of rising lira medical costs, companies resorted to dubious practices.
They first asked for the full prepayment of premiums — it is common practice to pay the annual premium in several installments — in exchange for maintaining health coverage intact.
Then when policies came up for renewal, they started requiring clients to pay premiums in lollars. But many customers did not realize that unless they paid in fresh US dollars, the mismatch would remain, and in the event they needed health care services they would have to pay out of pocket for the difference between the lollar rate and the parallel market rate which for a period in January exceeded LL30,000 to the US dollar and is presently around LL20,000 to the dollar.
People who thought that they had acted wisely and invested in health insurance found out they were barely covered, and if they didn’t cough up tens or hundreds of millions of lira they could not access urgently needed treatment. The market was left to its own devices, in a period when the number of hospitalizations was going through the roof because of COVID-19.
When asked if the ICCs failed to provide proper guidance as to the new exchange rate being used when pricing the premiums, Maalouf said the “ICC has never provided any directive concerning the exchange rate” and “it is up to companies to price their products properly, this is, after all, a contractual agreement between the two parties.”
He added that there are several reasons why policyholders had to pay out of pocket at hospitals. First, every contract contains a limit amount for coverage, and when this ceiling is exceeded, it would be up to the policyholder to cover the difference. The drop in the lira’s value meant that limits can be quickly reached.
Another reason is that some hospitals were not providing policyholders with an invoice that they could use to reclaim the money paid from their insurance company.
However, he insisted that in cases where there were actual breaches of fiduciary duty by insurance companies and these violations were reported to the ICC, the commission immediately acted to get the person reimbursed. Customers with complaints should contact ICC Care, a specialized unit tasked with handling complaints.
The move to fresh dollar policies
With no end in sight to the country’s currency crisis, insurance companies are increasingly moving to fresh dollar policies.
For customers who can pay, Nasnas told L’Orient Today that fresh US dollar policies are a win-win for policyholders as well as insurance companies. But in spite of discounts companies have offered on fresh dollar policies, few can afford to pay premiums in dollars.
In fact, the industry forecasts that 20 to 30 percent of existing policyholders will not be able to renew.
Meanwhile, a broker who asked to remain anonymous told L’Orient Today that some companies are denying some clients the switch from a lollar to a fresh dollar policy if they assess the case to be unprofitable due to a chronic medical condition.
Maalouf says this practice is illegal and the ICC will soon issue a new circular stating that insurance companies must continue covering their clients, whether the premium is in lollars or fresh US dollars.
However, many customers’ inability to pay, combined with the denial of renewals by insurance companies, is likely to further decrease the percentage of the population with health insurance.
The case of the Beirut port explosion
Then there is the case of the Beirut port explosion, which has brought its own set of issues for insurance policyholders. Given that no official finding has been released as to whether the explosion was an act of terrorism or an accident, many insurance claims remain on hold.
The ICC’s progress report as of November 2021 shows $900 million in estimated liabilities on insurance companies in connection to property claims resulting from the blast, of which $230 million has been paid so far.
Maalouf added that MP Tony Frangieh (Marada/Zgharta) has made a proposal for a law that forces insurance companies to pay claims related to the port blast in fresh US dollars, which is a positive development for claimants.
But Nasnas worries that “unofficial capitals control put in place since 2019, has made it impossible for insurance companies to transfer money abroad and some fell behind in their payments to reinsurers.” So now when reinsurers are settling the Beirut port explosion claims, they are deducting whatever premiums are in arrears. This puts the pressure on local insurance companies to pay the difference in fresh US dollars, money not all companies can access.
Moreover, there are also allegations that some insurers are attempting to pay the claimants part in lollars and part in fresh dollars, under the excuse that not all the reconstruction costs are in fresh US dollars; for example, labor is still paid either in lira or lollars.
The future of the industry
Ziad Diab, Allianz’s chief financial officer, expects written premiums to shrink by 50 percent, due both to decreases in premium amounts and to churn from customers unable to afford paying fresh dollars. He says many insurance companies will suffer and some may not make it.
So, what does that mean for customers?
Nasnas says if insurance companies want to compete in the health insurance segment then they should start offering cheaper premium products, with higher copays and/or a smaller selection of hospitals and health providers.
Some believe the current crisis should be a catalyst to move away from Lebanon’s currently highly privatized health care system. Given the cash-strapped state of the government at present, this would likely require investment by international organizations.
The Research for Health in Conflict report suggested that donors “need to focus future investment in the public health care and welfare sectors. This will provide a much-needed buffer against future crises for the millions who lack insurance or sufficient incomes.” At the same time, it acknowledged that “the lucrative nature of the private sector is partly what attracted so many highly skilled physicians and nurses to Lebanon. Future health system reform needs to maintain some element of a profit-driven approach in order to re-attract human resources.”