Interview: Lydia Lariba Bawa
How should the risk-based supervision model work alongside minimum capital requirements?
LYDIA LARIBA BAWA: Minimum capital requirements ensure that insurance firms have the means to acquire the basic resources they need to be efficient, and that they build capacity to optimise retention. Taking into consideration the nature, scale and complexity of an insurer’s business, as well as its risk profile, an insurer would be asked to have adequate capital above the minimum capital. Risk-based supervision ensures firms have capital commensurate with the level of risk inherent in their business. This means that in the event of an unfavourable outcome, companies can survive and continue to honour their obligations, especially to policyholders.
What is your initial outlook for the low-income segment and alternative delivery channels?
BAWA: The low-income segment makes up the majority of the population, so any effort to increase penetration without considering it will not yield the desired result. Low-income earners usually operate in the informal sector, do not earn regular incomes and do not operate bank accounts. Conventional insurance products, therefore, do not serve their needs. Neither are the conventional delivery channels suitable for their needs. Brokers and agents will usually want to sell high premium products in order to make more commission, so microinsurance is least attractive to them.
It is therefore imperative to find alternative delivery channels that are suitable and accessible to the lowincome segment. The “freemium” business model is another option, but documentation is a challenge, as the sale is made over the mobile network. Associated with this is the legality of electronic documents and signatures, as we do not yet have electronic signature legislation in Ghana. Furthermore, although the model does introduce insurance to the subscribers of the mobile phone network, it may not be a good measure of insurance consumption behaviour, as the subscriber only needs to consume more airtime to “win” insurance.
What impact has the Local Content Act had?
BAWA: Section 37 of the Insurance Act, 2006 (Act 724) requires all risks located in the country, liabilities arising from the country and goods being imported to Ghana to be insured locally with licensed insurance firms. Section 53 also requires all insurance and reinsurance companies to exhaust available local capacity before recourse to overseas reinsurance.
To increase their financial capacity to serve oil and gas needs, the companies need to effectively improve and manage their capital, embrace effective risk management to ensure financial soundness and liquidity, and formulate appropriate reinsurance strategies. The only way to increase human capacity is through training and development. Firms must pay more attention to their training budget, and see it more as an investment than expenditure. Written manuals of processes, procedures and techniques to guide underwriters of oil and gas risks will also help. International energy reinsurance and broking companies must be required to help build the capacity of the local market as a condition for coming to do business in Ghana.
What are the key challenges to insurers presented by the currency depreciation seen in 2014?
BAWA: For insurers it poses insurance risk, which arises from uncertainties over the ultimate amount of payouts to be made to policyholders or beneficiaries. For policies denominated in foreign currencies, insurers have had to pay claims in excess of what was originally anticipated due to the depreciation of the cedi. Multinationals especially preferred their sums insured in dollars because of the depreciating cedi, but the Bank of Ghana directive restricted them. Insurers that have foreign currency exposure lose out, because the depreciation of the cedi slows down business and its resultant insurance. To mitigate this, insurers and policyholders should determine the exchange rate for existing dollar-denominated policies, but no new business should be written in any currency other than the cedi.
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