Returning to Underwriting Profits: Focusing on the Ghanaian insurance industry

The primary objective of every business is to make a profit and grow. Hence, most insurance companies see profitability as the most appropriate way of assessing a company's performance than Gross Written Premium (GWP). For insurance firms, the bottom line, which comes after deducting operating budgets, shows whether the company is experiencing losses or earnings.

The Ghanaian insurance industry learned some vital lessons from the devastating banking crisis 2017. The National Insurance Commission (NIC) implemented regulations to abate shocks should they occur in the insurance industry.

For instance, the newly passed Insurance Act 2021 (Act 1061) has provisions that spell out the required shareholding and capital structure of all regulated entities and investment options, among others. These provisions in the law ensure good corporate governance targeted at increasing insurance penetration, which has been below 2% for many years.

Looking at the current global economic conditions coupled with the effects of COVID-19 and the Russian-Ukraine invasion, most economies have been affected. Even the wealthiest countries are yet to recover from the risks of these unforeseen circumstances. In Ghana, the fall of the cedi, and high inflation, among others, have affected our economy.

Hence, we need to heighten our discussions on profitability in the insurance industry. At the recent Insurance Brokers Association of Ghana (IBAG) conference held at the Eusbett Hotel in Sunyani, one of the topical issues discussed was the need for the insurance industry to return to Underwriting Profit.

For many years, insurance companies in Ghana have been making Underwriting Losses mainly due to undercutting and high operational expenses. There are various regulatory and good governance requirements to ensure the return to Underwriting Profit, including a review of tariffs and prompt payment of premiums. Companies must also adopt the IFRS 17 Accounting standards of reporting to ensure transparency and easy comparison of their performances.

Insurance companies rely on investment income for the efficient running of businesses. It is sad to note that the investment revenue, which is the industry's solace, has been adversely impacted by the Domestic Debit Exchange Programme (DDEP) established by the government. The industry's core business is underwriting risk, acceptance of premiums and payment of legitimate claims.

Insurance companies no longer have the luxury of relying solely on investment income to make a profit. They must pay closer attention to making a profit from their core business, that is, risk underwriting. Investment is not the core business of insurance.

The Way Forward

Insurance companies can still make underwriting profits despite the prevailing economic challenges. In any case, the insurance business is about managing risks(uncertainties), and in times like this, adopting new strategies to be more efficient and robust is possible. The following are some strategies to engender profitability within the insurance industry in Ghana:

1. Prudent Underwriting Measures: Underwriters, while assessing risk, must exercise reasonable discretion and be more professional. It is essential to seek reinsurance support for high-risk businesses to reduce the impact of significant losses on insurance companies' books. It is also crucial for all underwriters to recommend loss mitigation measures at the time of inception to avert avoidable claims. Underwriters must also recommend measures like pre-loss surveys to improve the risk.

2. Proper claims handling: From the client's perspective, claims payment is the only reason people buy an insurance policy. Claim officers must pay legitimate claims within the standard required period. They should be meticulous and open-minded, promptly pay genuine claims while detecting fraud and report the perpetrators to appropriate authorities.

3. Timely receipt of premium and Charging the Right Premium: The NIC is commendable for enacting the 'No Premium, No Cover' (NPNC) policy. Hitherto, insurance companies were accommodating huge sums on their balance sheets for bad debts, which affected profitability. The NPNC implementation has enabled real-time premium collection, resulting in improved liquidity in the industry, and more funds are now available for claim payments and operational expenses. Companies must also comply with the minimum premium set by the NIC to ensure that the premiums they charge are commensurate with the risk they write.

4. Internal Controls: It is now more crucial than ever for companies to intensify financial control and realign expenditures into more profitable areas. The management of insurance companies must enhance the function of robust internal auditing. By so doing, they will be able to identify risks, ascertain good practices and develop recommendations for risk management.

5. Product diversification: This is the time for all insurance companies to review products, policy offerings, terms, and conditions for a balanced policy portfolio. Some policies have proven riskier regarding their loss ratio, while others are less risky. For instance, motor insurance tends to have a higher loss ratio than non-motor policies like material damage policies. Insurance companies must review and align their marketing activities to achieve a favourable balance.

In summary, Ghanaian insurance companies can make Underwriting Profits, and there is no better and more crucial time to do that than now. It is in the interest of the insuring public for their insurers to stay in business to pay genuine claims as and when they arise. Overreliance on investment income to make a profit must be a thing of the past, and Underwriting Profit should be the future goal.