CONSOLIDATION is now the buzzword in the Beirut insurance market after the government passed legislation to encourage mergers among local groups. The sector's predicament largely mirrors that of the banking sector, with too many companies chasing too few clients. Up to 80 companies service a population of less than 4 million, less than one of which hold any kind of policy. The need for stronger, bigger and more efficient insurance firms prompted the government to introduce legislation aimed at consolidating the insurance sector.

As well as granting the Economy Ministry greater regulatory powers, the new insurance law has increased the required capital base for insurance firms from $200,000 to $1.5 million, and provided tax incentives for mergers. There will also be new measures injecting greater transparency into the market. Industry experts expect the minnows to begin to feel the strain.

Besides the increase in minimum capital requirements, the government is also demanding more reserves. Deposits required for each of the six classes of insurance range from $500,000 to $800,000, though not all companies will offer policies in all classes of insurance. 'Insurance firms will need to have at least $5 million-$6 million in capital,' says George Ferzli, deputy general manager of Libano-Suisse Insurance Company. 'As a result, a lot will merge and some will disappear.'

The reforms are also designed to boost the efficiency of the insurance sector with the establishment of arbitration councils set up to address disputes in health and automobile insurance for amounts of less than $50,000. Economy Minister Nasser Saidi predicts that around half the insurance firms will meet the new capital requirements. Most analysts predict the sector will eventually shrink to between 25-30 companies following a bout of merger activity expected over the next two years.

Former prime minister Rafiq Hariri attempted to kick-start the process last year when his Mediterranean Investors Group (MIG) joined forces with Prince Alwaleed Bin Talal's Al-Azizia Commercial Investment Company to take a majority stake in local insurance firm Medgulf Strikers Holding (MSH). MSH also acquired insurance group Arab Universal, which was previously owned by MIG, creating one of the sector's major players valued at $30 million.

Despite the proliferation of companies, the market remains highly concentrated. The top 20 firms control around 70 per cent of the market, the largest operator being American Life Insurance Company (Alico), which had premiums of $57.4 million in 1998, followed by Societe Nationale d'Assurances (SNA) with $22.3 million and Bankers Assurances with $16.8 million. Aggregate premiums were $450 million in 1998, a 7 per cent increase on the previous year. Health insurance dominates, but general accident and fire insurance have shown substantial growth over the last year.

Analysts predict foreign ownership will increase once the sector has consolidated. Alico is the largest of seven foreign operators active in the sector, but local insurance firms are increasingly looking to form partnerships with foreign companies. In one of the most significant deals of recent years, France's Assurance Generale de France (AGF) acquired a 30 per cent stake in SNA for $11 million in 1998. AGF's stake will give also it access to SNA's regional operations. 'Local companies need international operators' know-how. They need to become more professional,' says Ferzli.

An area that remains underdeveloped is motor insurance. Unique in the region, there is no compulsory third party insurance in Lebanon, though the government is reluctant to legislate for mandatory policies until local insurance firms are capable of handling the increased volume of claims, which currently constitute about 15 per cent of total premiums. Analysts believe an avalanche of claims would bankrupt half of the country's operators. Moves to introduce compulsory motor insurance do not yet have widespread support in the industry. 'The most important thing is for the government to make companies solvent. At the moment third-party insurance isn't profitable,' says Ferzli.

Banks' increasing focus on the retail market could provide a new source of competition for insurance companies, as they begin to offer insurance products tailored to their customers. Banque Audi took a 10 per cent stake in SNA in 1998 with the aim of marketing some of its insurance products under the Audi brand name. 'SNA has a good name and good products, and we can learn something about insurance business while they will learn how to market their products,' says Banque Audi deputy general manager Michel Sarroufim. The bank is preparing to launch a basket of low-premium bancassurance products targeting the low-to-medium market.