The impending new insurance law will aim, among other things to facilitate access to micro insurance by the informal sector. This will require innovative, but prudent regulation of a brand new, and direly needed industry in Ghana
Ghana’s insurance industry is now eagerly awaiting the passage of a new Insurance Law that will replace the one passed in 2006, and which radically transformed the regulatory environment for an industry which is crucial to business activity through effective risk management, but which has been grossly under-utilized at sore cost to economic expansion in the country.
The impending new law which was initially scheduled to be passed in 2017, but now is expected over the coming months, will not introduce quite as much regulatory overhaul as its predecessor did. However it will introduce facilitating regulations for two key aspects of insurance in the country that have the potentials to serve as game changers for Ghana’s economic growth efforts.
One is the introduction of dedicated regulation that will promote agricultural insurance. The other is the introduction of a regulatory framework that aims to promote and facilitate micro insurance.
The latter is key to Ghana’s efforts at financial inclusion which so far has been expressed primarily in attempts to make financial intermediation products and services – savings and investment products and the provision of formalized credit – available to the informal sector and the rural hinterlands where even formal sector businesses lack sufficient access.
In 2010, the findings of a Finscope Survey in Ghana revealed that only 5% of adults have access to either formal or informal insurance services. The findings of the survey pointed to an urgent need to take some action to improve insurance inclusion. The low coverage was mainly due to the fact that the majority of Ghanaians operate in the informal sector as small-scale farmers, carpenters, artisans, petty traders or fishermen. Little has changed since then in concrete terms but innovative planning since then has brought Ghana to the brink of a potential transformation of the situation.
Even though these people face significant social and economic risks, they have struggled to access insurance because providers had not figured out a business and operational model to reach this mass market.
The National Insurance Commission of Ghana (NIC) has over the past half a decade collaborated with the German Development Corporation (GIZ) to develop the micro-insurance market and help improve access to insurance for low -income earners, as well as adults working in the informal sector.
The project has comprised of four main components. One has been to develop a regulatory framework that defines micro-insurance, specifies the regulatory approach and lays out the product and consumer protection requirements. It has been difficult to apply a quantitative approach to defining micro-insurance. The NIC now applies a qualitative approach with very clear criteria. The definition now states that a product may be designated as a micro-insurance product if it is designed to meet the needs of a particular target market, is affordable to that target market, and is accessible to that target market. The onus is on insurance companies to prove that their products meet the criteria.
The second is to increase the technical capacity of insurance providers to develop and market micro-insurance. This has been used to build capacity in the areas of product development, pricing, reserving, marketing and back office administration. For example in 2013, the UK Government Actuary’s Department conducted a training workshop on the Micro-insurance Actuarial Toolkit. An Actuarial Capacity Development Strategy has also been developed after extensive stakeholder consultation.
The third component has sought to increase consumer awareness. This has entailed several activities including the development of movies in local dialects (with English subtitles) using local content. The movies and other materials were then showcased on road shows to educate various communities.
The final component has involved research into various issues that pose challenges to financial inclusion. This has included research into the impact of insurance awareness measures on the behavior of low- income households and market surveys on both the demand and supply sides of micro-insurance. In addition, a proposal for an insurance industry database has been prepared and discussed with relevant stakeholders for implementation.
The NIC launched the legal framework in the form of Micro-insurance market conduct rules in February 2013. Since then tremendous gains have been made in the design and implementation of micro-insurance in Ghana.
Key in all this is delivery channels that can effectively reach low income target markets especially in the rural hinterlands.
As Roland Steimann, a senior consultant at the Micro-insurance Centre explains it “Good products, marketing and financial literacy of clients are prerequisites but delivery is the key to turning micro-insurance into a real business.”
Mobile phones are one of the most popular modes of micro-insurance distribution in Ghana. Providers are developing innovative products to use with this channel. Three out of the four major telecommunications companies in Ghana offer micro-insurance on their networks. This includes loyalty schemes whereby consumers of airtime get rewarded with free insurance policies, fully paid schemes where consumers can pay with either airtime or mobile money; or a combination of loyalty and paid schemes. These products have proven extremely popular and the World Bank’s Consultative Group Against Poverty [CGAP] estimates that one particular product (Airtel-Tigo Family Care) has more than doubled the number of people in Ghana with insurance cover.
Indeed, as at 2016, it was estimated that at least 7.5 million people in Ghana were covered with at least one micro-insurance policy or the other. Beyond mobile phones as a distribution channel, retailers, churches, funeral parlours, community based organizations and even non-governmental organizations are proving to be useful conduits for distributing micro-insurance products in low income populations located in rural communities.
Although the strong take-up of these products is encouraging, the NIC is concerned about some of the challenges posed by this mode of distribution. First, there is the need to be a balance between transparency and consumer protection on the one hand and cost effectiveness on the other. Insurance offered through the mobile phone is all done through electronic texts on the phone, and no “paperwork” is involved. The consumer must submit personal information on the phone to activate a policy. With no paper documents to reference, it can create problems for consumers attempting to file complaints.
Another challenge is the security of the partnership or collaboration between the telecommunication company and the insurance provider. If the parties decide at any time to discontinue the collaboration, there would be serious repercussions for the policyholders if pragmatic steps are not taken to properly manage the disengagement. The NIC wants to work with the telecommunication industry regulator, the National Communications Authority (NCA), to discuss and formulate measures to mitigate this risk.
Aside from the challenges posed by mobile insurance, the NIC is also very much concerned about consumer awareness since the best way to protect consumers is to educate them. Informed customers are less likely to be victims of mis-selling, fraud or other undesirable practices. A demand side assessment conducted in 2012 showed that lack of knowledge and trust are the major impediments to insurance take-up especially in the low-income segment.
The NIC has sought to engage experts to conduct a country study and risk analysis of the mobile insurance market and consequently has adopted recommendations to mitigate any potential risk and to develop effective supervisory strategies. In addition, the NIC has also reviewed the regulatory framework to enable mutuals and cooperatives to enter the micro-insurance market in the areas (especially non-urban) that have been neglected by the conventional insurance companies.
The sheer potential for using micro-insurance to improve insurance penetration in Ghana is huge since the country still lags far behind many of its peers. While Ghana’s conventional insurance penetration is still a measly 2% of Gross Domestic Product, penetration in South Africa is 15.4% of GDP, in Mauritius it is 7.5% and in Namibia it is 5.7%.
The globally renowned Lloyds, in a recent study report asserted that “Micro-insurance is effective even in markets with little exposure of insurance as long as products procedures and policies are simple, the premiums are low, the administration is efficient and distribution channels are innovative.”
The successful introduction of micro-insurance into Uganda two decades ago is most enlightening. In 1997, American International Group, one of the biggest global insurers partnered FINCA, a local insurance firm, to introduce affordable personal accident products, as well as health and agricultural products. With the right procedures and administrative processes, these proved so successful that millions of people quickly bought policies and this in turn led to a surge in micro-insurance offered by micro finance institutions. This success then spread across three countries in the sub region.
Such transformational prospects now face Ghana. Crucially micro-insurance cover will open the doors to better priced micro-credit for small entrepreneurs and artisans. Even though profit margins will be low, micro-insurers can look up to cumulative large volumes of diversified and therefore relatively safe insurance contracts and portfolios.
All that remains now is for the enabling law to be passed. Little wonder that the insurance industry is impatient.