A potential rise in minimum capital requirements has dominated insurance industry discussion throughout 2018, leading some insurers to voice concerns over their ability to meet more stringent regulatory requirements. However, increasing the industry’s capital base has been an ambition of sector regulator the National Insurance Commission (NIC) for some years, and will likely ensure domestic insurance industries are more stable, and capable of promoting broader economic growth. Ghana’s insurers are therefore likely to face a challenging regulatory hurdle in the short term, but one which promises to shore up the industry.
The NIC has been adjusting the industry’s regulatory framework since 1989, when it included minimum capital requirements for providers in the Insurance Law of that year. However, by the early 2000s the 1989 framework was deemed inadequate, prompting the regulator to act again, this time under the Insurance Law of 2006, which raised the minimum capital requirement to $1m. Seeking to defend the sector against economic shocks in 2012, officials increased the minimum capital levels to GHS5m ($1.1m), with insurers covering the oil and gas sector required to retain $5m on their books. In 2013 the regulator once again raised requirements to GHS10m ($2.2m), and at the start of 2015 the current minimum was increased to GHS15m ($3.2m).
For some firms, the prospect of increasing their respective capital bases to meet a frequently shifting target has been challenging. However, the NIC has adopted a liberal stance in the implementation of its latest decision, moving the deadline for compliance from end-2015 to 2017, and more recently giving two insurance companies that failed to meet requirements to the end of 2018 to do so. Nevertheless, those insurers that failed to comply with the regulator’s prudential demands face the threat of compulsory closure.
For the regulator, ramping up the industry’s capital base is crucial to its long-term development. “If you cannot do big business, you cannot benefit from all the projects coming on,” Simon Nerro Davor, deputy commissioner of the NIC, told the local press in November 2017. According to Davor, prior to the 2015 increase in the minimum capital requirement, the entire insurance industry in Ghana was only able to take on GHS2m ($432,000), or about 1% of the total value, of the floating production storage and offloading (FPSO) vessel Kwame Nkrumah. However, as a result of the increase, the industry was able take on 2% of the investment portfolio from subsequent FPSO vessels, the Atta Mills and JA Kufuor.
New Way Forward
While the majority of insurance companies were able to meet the current capital requirement, a recent proposal by the NIC may prove a more demanding prospect for a number of players. Together with the Ministry of Finance and Economic Planning, the regulator discussed in 2017 implementing another significant rise in the minimum level of funds companies will have to keep on their books. While the official decision has yet to be announced as of February 2018, suggested levels have reached as high as GHS50m ($10.8m), with more recent reports putting the proposed change at GHS30m ($6.5m).
Ghana’s focus on capital levels is in line with a global movement of strengthening balance sheets in order to reinforce domestic insurance sectors. One of the key drivers of this trend is the EU’s Solvency II framework, currently being implemented across Europe with various degrees of stringency. Solvency II adopts a risk-based approach to capital requirements, meaning that the riskier an insurance company’s business is, the more capital it is required to hold. Under the new regime, EU providers are asked to ensure that they have sufficient capital to have 99.5% confidence that they are capable of meeting the worst expected losses over a year. While an absolute minimum capital requirement has been established, under which an insurer is considered insolvent from a regulatory perspective, the solvency capital requirement is fast becoming accepted as the industry best practice for demonstrating financial stability and is being adopted by mature insurance markets across the globe.
A Subtler Approach
Along with other regulators on the continent, such as those of Kenya and Botswana, the NIC has introduced a range of systemic changes over recent years, which taken together are intended to perform a similar function as the EU’s Solvency II framework. By the end of 2015, for example, all insurers were required to have a capital adequacy ratio (CAR) of at least 150%. Although it is not as comprehensive as Solvency II, a sufficient CAR is widely regarded as an important step towards implementing a risk-based solvency framework.
The NIC has also increased its ability to monitor Ghanaian insurers through the introduction in 2016 of a mandatory annual financial condition report (FCR). This extensive document covers all of an insurer’s core functions, including investment strategy, profitability, action plans for identified risks and capital implications arising from the conduct of business. The company’s board is required to give its approval to the completed FCR prior to submission to the regulator, and appointed arbiters provide feedback to the NIC and the board on various issues raised by the survey. The result has been a greater level of industry transparency, beneficial both to the regulator in its capacity of market supervisor, as well as individual insurance companies, which, through meeting the stringent requirements of the FCR, are granted a better understanding of their operations.
For observers, the most interesting aspect of the regulator’s recent moves regarding capital adequacy and solvency are their potential effect on market structure. The proposed change to the minimum capital requirements, in particular, raises the possibility of a new era of mergers and acquisitions in the insurance arena. This would be a welcome development to those who believe that Ghana’s insurance industry is fragmented and contains too many low-capacity insurers. Ghana’s GDP is considerably smaller than that of Nigeria, for example, amounting to around $48bn in 2017 compared to the regional giant’s $405bn, and yet it has almost the same number of licensed insurance companies, 29 compared to Nigeria’s 28. Reducing the number of insurers operating on the domestic market is therefore seen by many as essential to long-term sustainability.
Recent history suggests that this outcome is a realistic possibility, with the last recapitalisation demand made by the regulator in 2015 resulting in significant mergers activity. Regency Alliance Insurance Ghana, for example, joined forces with NEM Insurance to create Regency-NEM Insurance Ghana. With assets of GHS1.8m ($389,000) as of the fourth quarter of 2017, however, the company would still find itself under proposed capital requirements. “Consolidation will ultimately be beneficial for the market,” Victor Obeng-Adiyiah, managing director at Unique Insurance Company, told OBG. “However, the NIC must be cautious in how it achieve this. Using recapitalisation rates as the only tool may leave us with a severely stunted home-grown market, with only those with access to foreign capital injections benefiting.”
Since the global financial crisis of 2008, most deals have taken place between private firms and on a relatively modest scale. A regulatory push towards consolidation will therefore likely receive broad support from stakeholders within and outside of the industry.
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