Changing shape of Ghana’s insurance industry

Over the past month, virtually every trend or event in Ghana’s insurance industry – life and non life inclusive – has been eclipsed by the announcement from the National Insurance Commission, which is the industry regulator that it intends to increase the minimum capital for both categories of primary insurance firm from GHc15 million as obtains currently, to GHc50 million. This almost precisely matched the 233 percent increase in minimum capital imposed recently by the Bank of Ghana on the country’s universal banking industry.

The timing of the announcement, which came just a few days after the NIC had to publicly refute rumours that several insurers were tottering on the brink of insolvency, had initially intensified the fears of the insuring public which interpreted the decision as an effort to forestall the kind of problems which had afflicted the banking industry between mid 2017 and the end of last year. However, the public now has a better understanding of the situation; that recapitalization requirements aim to enable Ghana’s insurers take on more risk rather than give them the financial muscle to pay for inordinate risks already taken on.

To be sure, Ghana’s insurers have been far more prudent than their banking sector counterparts with regards to taking on risk; they tend to pass on about two-thirds of the risks implicit in the policies they underwrite to reinsurers, mot of them large international firms. However this means an inordinate outflow of foreign exchange in the form of reinsurance premiums and this is what the NIC is seeking to stem by forcing local insurers to recapitalize, hereby giving them more capacity to retain risks – and thus premiums – locally.

The impending increase in the minimum capital could enable Ghana’s insurance industry to retain up to 40 percent of its business in-country, up from about 30 percent currently.

Unsurprisingly though, many insurers are unhappy about the sheer scope of the increase being proposed. Smaller insurers have indicated that it will be hard to raise the requisite new equity capital. The NIC in an equally predictable manner has dismissed this on the grounds that all that insurers have to do is to merge or take on new shareholders arguing that those protests are by existing shareholders who do not want their equity stakes – and accompanying corporate governance authority and influence – be diluted.

The NIC ‘s position has been made harder to defend however by a technical argument presented by the Actuarial Society of Ghana through a position paper that insists that the continuous use of minimum Fixed Capital Standards – and at a significantly higher level than hitherto – is likely to discourage investors from providing the requisite new capital because it is effectively demanding insurers to over-capitalize to levels where the returns on equity their activities will generate may not be attractive enough compared with the alternative investment options available to them.

However, the NIC remains confident that the impending recapitalization will be successful since the industry has developed rapidly over the past two decades.

Since the enactment of the 2006 Insurance Act, which promoted the development of local content requirements, the Ghanaian insurance industry has experienced a decade of rapid growth, and the proliferation of private companies and brokers.

However, following the influx of foreign capital on the back of oil and gas production, the size of the sector in relation to the broader economy has diminished. Prior to the development of hydrocarbons projects, insurance premiums looked set to breach 2 percent of GDP, but this has since fallen because of the relatively faster growth of the economy as a whole.

Nonetheless, government efforts to strengthen the country’s financial sector and new leadership of the National Insurance Commission (NIC) contributed to rising optimism since late 2017. The Ministry of Finance and Economic Planning (MoFEP) and the NIC are in talks to expedite the passage of a new Insurance Act, and the NIC is targeting a penetration rate of 10% of GDP by 2021, as part of the four-year mandate laid out by its new commissioner, Justice Yaw Ofori, appointed in August 2017. The growth of new business lines such as bancassurance, micro-insurance and mobile insurance should help bring this target into reach, although there is still ample progress to be made. Instructively, the impending new Insurance Act will set frameworks for micro-insurance and agricultural insurance, both of which have the potential to dramatically improve the insurance penetration rate, since the Ghanaian economy largely comprises small and micro enterprises and the agricultural sector is the biggest employer of labour.

Insurance penetration has shown the potential to rise but until these two aspects of insurance are given the requisite boost of formalized frameworks it is unlikely to go significantly higher than the two percent where it has stood since the middle of the decade. This places it in the same range as most other African insurance markets.

The Ghanaian insurance market was overhauled with the 2006 Insurance Act, which introduced comprehensive legislation designed to effectively administer and supervise the industry, and provide better policyholder protection.

Central to the act was the focus on local content, obliging firms operating in Ghana to seek policies abroad only if domestic capacity was unable to provide coverage. Another key feature was the greater empowerment of the NIC as regulator.

First established in 1989 but now operating under the 2006 Insurance Act, the regulator licenses new insurance companies and brokers, sets industry standards, approves rates of premiums and commissions, and arbitrates disputes over claims. The body is also responsible for collating information from member companies and publishing statistics, principally in its annual report.

Other measures taken by the commission to secure and promote the industry include the Micro-insurance Market Conduct rules, put in place in 2013. Under these regulations, a company is not allowed to market or renew a micro-insurance product until it has been licensed by the NIC. Insurance contracts cannot be designated as micro-insurance unless they meet a number of criteria, which require them to be affordable and straightforward.

Key regulation was introduced in April 2014 as the No Premium, No Cover policy was adopted, which requires insurance companies to collect premiums before providing coverage. Prior to this, most insurers regularly provided insurance cover on credit, just to try and win market share. This was alright as long as claims did not arise, but when they did, insurers could find themselves in dire straits because the policy was legally enforceable despite the requisite premium income not having been received. The No Premium No Policy regulation this provides protection for all stakeholders by preventing companies from reporting huge amounts of outstanding premiums, while at the same time making large amounts of provisions for bad debts without significant recoveries, leaving them unable to cover potential claims.

In September 2017 the NIC unveiled its four primary policy goals: increasing the role of insurers in the broader financial sector, with greater investment of funds in the bond market; improving claims payment systems; boosting penetration in the informal sector, such as in agricultural and micro-insurance; and passing new legislation in 2018 to improve the commission’s enforcement and oversight.

This ties in with government’s overarching goals of extending the role and strength of the nation’s financial and capital markets sector.

Central to this process is the passage of a new Insurance Bill, which has been under discussion and review since 2013. It would seek to update the framework passed in 2006 and provide a platform for effective risk-based supervision, ensuring that regulators have the ability to review the manner by which insurance companies identify and control risks. According to local press reports, the bill would also establish control functions such as internal audit, risk management and actuarial functions.

The Ghanaian life insurance industry has enjoyed mixed fortunes in recent years. While some are finding it eminently profitable, nearly half are making underwriting losses more often than not, but are saved by strong investment income, itself the result of the high interest rate regime in Ghana.

The life segment, popular with mobile insurance customers (see analysis), is considered to be a high-growth segment. In April 2016 a report by Timetric Insurance Intelligence Centre forecast total life premiums would reach GHS1.6bn (US$601.3m) by 2019 as a result of the growth of the middle class and the expansion of micro-insurance products.

In the non-life insurance segment, which accounts for around 55 percent of industry premiums, underwriting losses are more modest and financial results are significantly better.

Of the 27 non-life companies, very few register net losses in any given year, and the industry as a whole clocks regular profits. As in the life segment, the biggest players are Enterprise Insurance and SIC Insurance, but a number of firms – including Star Assurance, Vanguard Assurance and Hollard Insurance – are not far behind.

Motor is the biggest segment of the non-life segment accounting for about 40 percent of total premiums, because it is compulsory. In 2016, Ghana became the first English speaking ECOWAS country to automatically issue Brown Cards to all motor insurance policy holders, making their cover applicable in all the countries in the sub region.

Fire, theft and property comes next accounting for about a quarter of non life premiums. Since 2006, insurance cover for private commercial buildings including third party liability has been compulsory although enforcement has had shortcomings. Plans are afoot to extend this requirement to government buildings to

In 2015 the sector as a whole achieved an annual investment yield of 17 percenty, only slightly down on the rates for 2012 and 2013. A number of firms’ portfolios performed significantly above the average.

Insurance firms are conservative in their investment strategies, the most popular investments being term deposits with licensed banks, which account for about half of total investments while government securities are also significant investment outlets. Real estate and listed equities are also significant investment outlets too.

The NIC’s regulations on local content play a strong role in capturing premiums from multinationals that might otherwise be lost to foreign insurers. Major international insurance firms – such as Allianz, Zurich and AIG – offer global programmes aimed at providing a single plan for a firm’s worldwide entities and activities.

Under Ghanaian law, however, risks taken in Ghana must be insured in country. As the insurance requirements of multinational companies often extend far beyond the basic fire, theft and property policies traditionally offered in the local market, dealing with multiple insurance firms can leave gaps in coverage, leaving the companies exposed.

Ghana’s first bancassurance policies reached their 10-year anniversary in 2017. Under this model, banks sell insurance to clients alongside their own banking products and receive the government-mandated agency commission.

The segment remains small, accounting for approximately 1% of non-life and 7% of life premiums in 2015, according to NIC data. However, the model has proliferated, with dozens of partnerships between the country’s insurers and banks.

Crucially, given the challenges insurers have faced with premium payments in the past, selling through banks also allows for the payment of premiums on a monthly, interest-free basis – which is frequently a more attractive option for customers than paying an up-front annual sum.

This has added to increased competition for insurers looking to establish new partnerships. The proliferation of insurance companies means that banks can shop around for the most attractive partnership. Whereas previously they only received a commission, they are increasingly looking to strike profit-sharing deals with insurance firms.

To strengthen activity further, regulatory changes to allow the sale of bancassurance to corporate clients are currently under discussion.

Despite developments in bancassurance, traditional brokers still have a large role to play.

Brokers are paid on fixed-commission terms mandated by the NIC that vary depending on the type of policy.

Along with increased competition, the sector has been affected by the new sales channels. The way insurance is sold in Ghana is changing. Many insurance companies are rolling out branches in district capitals to attract direct customers. For smaller companies, the future is digital. More insurance is sold through banks these days, but as they move to a branchless model, insurance companies will have to follow suit.

Roughly 14 percent of life insurance premiums and 30 percent of non-life insurance policies are sold through direct business. Tied agents, who work exclusively for one insurance company, sell an additional 63 percent of life and 30 percent of non-life premiums. Bancassurance accounts for 1 percent of non-life and 7 percent of life.

The gradual raising of minimum capital requirements on insurance companies, promoting the consolidation of the market and merger of insurers, could also have a parallel effect on brokerages.

While motor, and fire, theft and property insurance make up the biggest segments of the non-life insurance market, many believe that the government’s economic policy and future NIC regulations could open up new areas for growth.

At present, marine and aviation insurance contribute 7 percent to the overall non-life market, but this could be boosted if existing regulations are enforced. For instance marine insurance has massive potential.

Ambitious plans for the industrialisation of the countryside through a national programme known as One District, One Factory – aimed at building a factory in each of the districts in the country – could also spur greater coverage for engineering and building. The government’s development plan requires bold construction. In the future, engineering policies are going to increase, and Ghana’s insurance industry will see a parallel rise in marine policies as much of the materials and equipment needed are imported.

Private pension represents another area that could be tapped for growth. The private pension market is still young, but it does have enormous growth potential, especially in the informal market. However, in order to attract voluntary participants to third-tier schemes, additional incentives need to be provided

While the country’s insurance companies face tough competition to win lucrative corporate and upper-income clients, there is a significant evolution occurring in other brackets.

Ghana is a regional leader in terms of the uptake of micro-insurance, a product range marketed to small businesses and low-income families. A large proportion of premiums for this market are sold through mobile phone operators, with a combined 2.7m policyholders registered on the three major networks by June 2015, according to a study by the NIC and German development agency GIZ.

The products are also sold through rural banks, post offices and government outreach programmes. One example, the Fisherman Life Insurance Scheme – launched in January 2016 by the Ministry of Fisheries and Aquaculture Development and local firm Star Micro-Insurance – aims to provide life and equipment and tools coverage for an estimated 200,000 individuals upon completion.

Although mobile insurance is the primary distribution channel for micro-insurance, there is evidence that growth of this product line has spurred consumer education more generally, as well as boosted sales of micro-insurance sold through other channels.

Enhancement of human resource capacity and expertise is crucial as Ghana’s insurance industry expands and the markets it serves become more sophisticated. Here insurers are pooling not just their financial muscle but their professional skills base as well where possible. For instance, the Ghana Oil and Gas Insurance Pool, formed in 2011 after the discovery fossil fuel in the country, is made up of general insurance companies in the segment and endorsed by the regulator. Given the combination of market fragmentation and local content rules, the GOGIP is designed to create shared capacity to handle and disseminate insurance risks, as well as provide advice and technical support for matters related to risk management, and the insurance of oil and gas.

As well as training underwriters and brokers, there is a wider need to improve education and awareness about insurance among potential clients. While micro-insurance may be finding ways to connect with the informal sector, there are still large segments of the Ghanaian population that remain uninsured.

With both the regulator and the government pushing towards an ambitious target of 10 percent penetration, the coming years should see the insurance market become a larger and more central part of the Ghanaian economy.

The increase in minimum capital requirements for the insurance industry, proposed by the NIC,appears sufficiently steep to force a consolidation of the sector, a process that will lead to more sustainable profits and greater specialisation in a market that is witnessing increased competition.