Business News Mon, 17 Jan 2022

Local insurers risk losing big-ticket transactions under AfCFTA

With indigenous businesses having an opportunity under the Africa Continental Free Trade Area (AfCFTA) to consider insurance prices and offers from other markets on the continent, the local industry risks losing big-ticket transactions to other markets and subsequently being wiped out, Head of Corporate Affairs-SIC Insurance PLC, Nana Yaw Mantey, has said.

Equally, the operationalization of the continental agreement gives impetus to insurance companies on the continent to venture into the Ghanaian market and do business, a situation that could put local insurers in stiff competition with continental giants.

But Mr Mantey said recapitalization, consolidation of most fragmented insurance entities, the digital revolution, and addressing the penetration agenda of insurance in Ghana are key components that must be urgently addressed for opportunities under AfCFTA, adding: “Without these, local and multinational businesses operating in the country will begin to search for reasonable offers, prices and low-risk offers in other markets as permitted under the treaty.”

Insurance penetration in key AfCFTA markets

Local insurance penetration still wobbles below two per cent, with the penetration rate in South Africa currently at 16.5 per cent.

The 50 biggest insurance companies on the continent operate in South Africa, Egypt, Algeria, Morocco, Kenya, Angola, and Botswana, with almost 30 of these companies headquartered in South Africa.

The assets and value of the insurance industry in South Africa before the outbreak of COVID-19 amounted to US$240.6billion, according to Statista, with the value of the industry in Ghana reaching US$1.1 billion during the same period. Questions have been raised by experts on the Ghanaian insurance industry’s capability and size to fund big-ticket transactions that will come from prospects under AfCFTA.

Challenge of big-ticket guarantees

Indeed, any of the five biggest insurance companies in Ghana could struggle to underwrite a US$3million deal a year in terms of premium without offloading close to 95 per cent of the deal to a reinsurer, as most local insurers are not in a position to pay claims should there be any unfortunate happening about tickets of such magnitude.

With a continental trade area such as AfCFTA, the quantum of demand for insurance will likely be so much in the coming years, to the extent that no single local insurer can underwrite or finance such deals as they come.

Enterprise, GLICO, Hollard, and SIC, all in the top-five, might find a reinsurer for such tickets. But the major worry is that 70 per cent of the market is controlled by these five, with the rest of the around-24 companies only comprising 30 per cent of the market and most often able to raise only half a million cedis annually in terms of premium.

A South African company that wants to invest in Ghana may not consider such small insurers in terms of liquidity, Mr Mantey said, indicating, “This is the right opportunity for consolidation of the many fragmented insurance companies; not necessarily by acquisitions, but mergers to create a formidable industry as was done in the banking sector”.

The conundrum of ‘uncompetitive’ recapitalization amount>

The Insurance regulator, National Insurance Commission (NIC), has since 2019 stated a new capital requirement of GH¢50million (US$8.1million) for life and non-life insurers; with that of reinsurance companies moving from GH¢40million (US$ 6.4million) to GH¢125million (US$20.2million).

But this, stakeholders have said, will require a step-up as these recapitalization amounts, when dangled before most big companies in South Africa, Nigeria, and Egypt, will be considered paltry, especially with the AfCFTA’s advent.

“A lot will have to be done by the regulator to make the industry more liquid and customer-friendly. About utilizing digitization, we will go nowhere if it is business as usual, pasting stickers on cars to show that we have insurance. That time is long gone,” Mr Mantey indicated.

Steps by the NIC

However, the Commissioner of Insurance, Dr Justice Ofori, told the B&FT that the NIC is cognizant of AfCFTA’s operationalization and is taking steps to deepen efforts in making local insurers competitive on the continental market.

Directive for defaulting insurers to cease operations

It, however, remains clear that the regulator will not increase its newly stated recapitalization directive, as the NIC is on the verge of withdrawing the licenses of those insurance companies after they were unable to recapitalize to the GH¢50million.

The NIC, in a letter to insurance companies on January 6, 2022, warned all defaulting insurers who could not recapitalize to cease operations by February 1, 2022. The original directive to recapitalize in 2019 elapsed in June 2021. It was, however, shifted to the end of January 2022 due to the impact of COVID-19 on businesses.
Source: thebftonline.com