The explosion in the port of Beirut on August 4, 2020 left more than 200 dead, countless injured, as well as huge insured losses today estimated between $ 1 billion and $ 1.5 billion by the ReinsuranceNew.ws site. If some of the damages were reimbursed, according to the specifics of the insurance policies, others were not, pending an official report on the causes of the explosion in the port of Beirut.
In principle, damage to insured property would be reimbursed by private insurance companies, in accordance with insurance policies signed between the owners and the said companies. Although from a legal and contractual point of view this seems like a simple question, the reality is far from it, in part due to the obscure reasons for the explosion and the economic situation in Lebanon which resulted in a readjusting policies to account for the difference between “real” dollars and dollars held in banks and subject to capital controls.
Lollars and dollars
The first problem that came to the fore in policy reimbursement was that of paying the insurance policy in local or “real” dollars. As the Lebanese dollar (dollars held in bank accounts before the onset of the financial crisis and capital controls) has lost value against real dollars (the current discount as of February 24, 2020, being 30% for dollars due to informal capital controls and a lack of liquidity, the underlying asset to be insured could no longer be paid in local dollars, if the insured were paid in full in the event of damage An asset valued at $ 20,000 before the crisis, if it were to be replaced, would require either the same amount in cash or a check with a higher value in lollars to be discounted for cash. translated, during the past year, by a readjustment of the insurance policies to their fair value. In addition, the Lebanese Association of Actuaries in a report dated February 16, 2021, recommended “a revision of the pricing approach, including matching of the premium with the cost allocation by currency”, and the introduction of an inflation index to correctly reflect the asset value and claim costs.
According to Elie Hanna, former president of the Lebanese Insurance Brokers Union, if policyholders have readjusted the sums insured in their insurance policies to take into account the real value of the underlying asset, and if the policy covers the cause of the damage, then they are fully reimbursed by the insurance company. According to Hanna, it follows the law and the logic, “but since this is the first time that we have different exchange rates, the judges can decide otherwise.” This payment can be made in checks taking into account the discount from dollars to lollars. Moreover, according to Elie Torbey, president of the Association of Insurance Companies of Lebanon (ACAL) in a television interview dated February 12e 2021, insurance companies sent experts to the field, the day after the explosion, to assess the damage. According to him, 50 percent of the reported damage has led experts to investigate, and the insurance valuation will be done in real dollars to take into account the cost of reconstruction.
In conclusion, the value of the underlying assets had to be readjusted to take into account the presence in Lebanon of a non-transferable currency sold on the black market at a discount against the real dollar. Insurance companies have successfully readjusted these policies for many of their clients. For clients who have not chosen to renegotiate their policies and agree to pay high premiums, payments should be made in local dollars. The difficulty with many non-adjustments is due to the higher cost of living: with the Lebanese pound depreciating over 85% against the dollar since the onset of the crisis, many Lebanese simply cannot afford it. allow their insurance policies to be readjusted. . In addition to the need to adjust to the strongly depreciated pound, the insurance cost environment has become tougher internationally, resulting in upward pressure on insurance premiums on most markets. markets.
Vehicle damage and other property damage are covered under different terms. Most of the insured damage to the cars has been reimbursed, according to Hanna. “Others have paid on a compromise basis”, he specifies, when the adjustments of the sums insured have not taken place, and when the policies do not cover all the causes (war and terrorism in particular) taking into account difficulty renegotiating policies at some point. of scarcity. In the case of property insurance, on the other hand, settlements have taken place for small amounts but not for large amounts, as insurance and reinsurance companies are still awaiting an official report.
Reinsurance and official reports
A thorny issue that is accused of delaying the settlement of larger property insurance claims following the port explosion is that of relationships with international reinsurance companies. According to Torbey, in the same TV interview, most insurance companies are reinsured for Beirut damage, with international reinsurance companies and with reinsurance companies covering more than 95 percent of insured damage. The main concern regarding reinsurance companies is the need for an official report on the causes of the Beirut Port explosion, as the report would then clarify whether or not this cause is included in the reinsurance policy, and therefore result in reimbursements. by said reinsurance companies to local insurance companies.
There are two basic types of reinsurance arrangements: facultative reinsurance and conventional reinsurance. Facultative reinsurance is designed to cover single risks or defined sets of risks, while conventional reinsurance covers the entire business portfolio of a ceding company, for example the home insurance portfolio of a primary insurer. Facultative reinsurance is generally used for high value or dangerous risks, as policies can be tailored to specific circumstances.
Regarding reimbursements, according to Hanna, it would all depend on the insurance policies, terms and methods of payment: some reinsurance companies have negotiated with local insurance companies a certain amount of reimbursements, others are still waiting. an official report. , while some have reimbursed partly according to the premiums and on the basis of a compromise. In addition, self-imposed capital controls by banks since late 2019 have prevented local insurance companies from transferring money to their reinsurers. For companies that have already made these transfers to their reinsurers, the latter have offered to deduct these amounts from their reimbursements due to their local customers instead of canceling reimbursement policies, given their long-term relationships with counterparties. local.
A report must still be published, to allow reimbursement by international reinsurers. It is still unclear whether the explosion in the Port of Beirut was the result of an act of war, terrorism, negligence on the part of port authorities and / or government, or a combination of these factors. Some insurance policies mention these specific acts as reasons for reimbursement, while others exclude them. The responsible reinsurance companies would therefore request a report that would follow a judicial investigation to determine the causes of the explosion. To date, no official reason has been given as to what caused the Beirut port explosion, therefore, many reinsurance payments are still in limbo.
Another aspect of damage is business interruption, which is typical for large hotels or other businesses relying on a constant supply of customers. Unlike property insurance, business interruption would include coverage over a period of time not for damage to property per se, but for loss of customers resulting from the damage. In the case of a hotel, for example, such insurance would cover part of the losses resulting from the lack of customers who would otherwise have spent time at the hotel.
Again, in this case, the devil is in the details: every insurance policy should be reviewed. Unlike property damage which requires official reporting, business interruption insurance is simpler and therefore most companies that have purchased such insurance will manage to be reimbursed. The amounts will depend on the fact that they have readjusted their depreciation policy for the Lebanese dollar, and whether they can in certain cases negotiate the sums due to certain reinsurance companies that have not fully reimbursed the sums due in the absence of payment. transfer of their Lebanese. clients.
According to latest report of the Lebanese Insurance Supervisory Commission, the amount of outstanding claims over the Beirut port explosion reaches 1.5 trillion Lebanese pounds, with insurance losses estimated at 1.6 trillion Lebanese pounds. Overall, the damage from the explosion resulted in partial payments of 74 billion Lebanese pounds, with some reinsurance companies still awaiting the official cause of the explosion in order to assess whether or not policies would cover the cause of the explosion. the explosion. Nonetheless, if this happens, most of the damage will not result in payments, as Lebanon does not impose home insurance, unlike other countries. According to Torbey, most homes are uninsured, and only businesses and homeowners with home loans have been fully insured, while homeowners are typically uninsured. Therefore, if refunds are made in full, the explosion of the Port of Beirut will most likely result in most of the owners in Beirut having to pay the damages themselves.
In conclusion, insurance after the explosion will be different. International reinsurance companies will become suspicious, believing that Lebanese insurance companies should have been aware of the risks, and therefore reinsurance premiums will likely increase and, in turn, impact the price of insurance premiums in Lebanon. . Insurance companies in Lebanon are regulated financial companies and therefore cannot exchange money on the black market and are forced to operate within the banking sector for transfers; they are therefore strongly impacted with regard to the payment of reinsurance premiums abroad (they are not allowed to discount checks in Lebanese dollars against real transferable dollars). Insurance, after the explosion, can become a luxury when it is in fact and above all a necessity.