The large number of insurers in Ghana – and the high level of fragmentation at the lower end of the market – has led to intense competition and a history of rate-cutting, which has often softened margins and led to higher expenses. This in turn led to a situation where a number of firms were unable to quickly settle legitimate claims, resulting in lower consumer confidence. As a result, the National Insurance Commission (NIC) instituted a series of measures to strengthen solvency and sustainability in the industry.
Npnc Scheme
First, in 2014 the NIC launched a No Premium, No Cover (NPNC) policy, which stipulated that customers pay the full policy premium before coverage was initiated. Previously, insurance companies extended credit to customers that requested to pay their premiums over time. This resulted in higher credit risk on companies’ books and severely limited the liquidity available to pay claims in a timely manner. Bode Oseni, managing director of RegencyNem Insurance Ghana, told OBG, “The implementation of the NPNC policy provides insurance companies with liquidity and an ease in being able to pay out claims in a timely manner. It is the best thing that has happened in the industry in the most recent past.”
The NPNC included a new claims management directive that required insurance firms to pay claims within a pre-defined timeframe. Combined, these two measures were intended to provide the industry as a whole with the liquidity necessary to fulfil claims and provide consumers with the assurance that individual firms would do so. In its early days, the NPNC policy led to reduced coverage and an increase in short-term policies. Michael Agbleke, head of operations at RegencyNem Insurance Ghana, told OBG that as stipulated by the NIC, the premium for short-term polices was unevenly distributed. “There is a percentage calculation,” Agbleke said. “If it is one month, it is 20% of the annual premium. For two months, it is 30%. If it is eight months, it is equal to the annual premium.”
There is anecdotal evidence, however, that brokers are paying the premium to the insurance company on behalf of their most trusted clients, allowing beneficiaries to repay the broker over time. While this practice simply transfers the credit risk from the insurer to the broker, it ultimately does not affect the ability of insurance providers to settle claims.
Minimum Rates
Aware of the fact that the competitive environment was driving rates too low, the NIC is in the process of instituting a system of minimum premium rates. This price floor is designed to provide the market with confidence that all firms will have a minimum level of liquidity to settle the claims that they have written. While clear in its purpose, there is concern that the minimum rates could have the unintended consequence of slowing growth in the sector.
Capital Reforms
To strengthen the industry in the long term, the NIC is poised to introduce two regulatory initiatives at the end of 2016, the first of which is an increase in minimum capital requirements. The 2006 Insurance Act set the minimum capital requirement for direct insurers at $1m. After a series of hikes, the rate stood at GHS15m ($3.9m) in December 2015. With about 50 insurers in the market, that translated to an industry-wide minimum capital requirement of just $195m. The market expects to see further increases in capital requirements down the road.
As the industry grows, the gradual increase in capital requirements will serve two purposes. First, it will build capacity in the industry to take on more risk. When considering the large energy projects that are under way in Ghana, whose value runs into the hundreds of millions of dollars, the minimum capital for the Ghanaian insurance industry as whole can only cover a small percentage, resulting in premiums going to overseas providers. Second, it will spur consolidation in the sector, as the smaller firms that are not able to raise the capital will merge or be acquired.
Risk Supervision
The second move by the regulator expected at the end of 2016 is a shift towards risk-based supervision, which the NIC initiated in 2012 by requiring companies to electronically file more robust risk management documents. The regulator is now on the path to implement the 26 core principles developed by the International Association of Insurance Supervisors. Risk-based supervision is common in many countries, but full adoption of these principles would put Ghana on the forefront of insurance regulation in sub-Saharan Africa.
In January 2016 the NIC implemented a risk solvency framework, which is intended to strengthen risk-based supervision with a move to higher risk-based capital requirements. A risk-based component, expressed as the capital adequacy ratio (CAR), seeks to match the amount of capital required by the firm to its size and the level of risk that the firm has taken on. The NIC increased the CAR from 130% in 2015 to 150% in 2016. “The regulators are asking firms to submit the details of their principal offices to comply with four critical functions: actuarial, risk management, audit and compliance,” Kwame Asare Nkansah-Abankwah, actuarial analyst at Hollard Insurance Ghana, told OBG. “Now, we are submitting details. By the end of 2016, we will be measured based on the minimum capital requirements and CARs.”
An additional requirement of the risk solvency framework is the annual submission of a financial condition report (FCR). Topics covered by the FCR include risk management and internal controls, solvency and investment. To prepare the market for this focus on risk, the NIC issued a governance and risk management framework in 2015.
Coming Years
The NIC is working diligently to ready Ghana’s growing insurance sector for the world of tomorrow. New high-risk endeavours stemming primarily from the energy sector will offer more opportunities for the sector, but also present a significant increase in complexity and risk. Together, the new governance framework, risk-based supervision, more stringent capital requirements and other measures will prepare the sector for the challenges that lie ahead. Reflecting this new chapter in the sector’s history, a replacement to the 2006 Insurance Act is expected to be passed by early 2017. This new insurance statute is likely to codify the changes the NIC has put in place and provide the sector with the legal foundation that it requires to attract investment.
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