Two years ago, a merger between the then Regency Alliance and NEM Insurance raised expectations of consolidation within Ghana’s insurance industry. Belatedly moves to increase the minimum capital will make this happen.
The proliferation of insurance companies in Ghana in recent years is indicative of the growth potential of the industry but has also hindered its maturation. As with many financial services industries in Africa’s emerging markets, companies are needed to take on the scarce risk inherent in the country’s major energy, mining industry and infrastructure projects.
Stronger insurers would also have the capacity to train and specialize in different segments, allowing for higher quality underwriters and the development of new policies. This will be crucial to the insurance industry’s efforts to become more relevant to the growth and development of the sectors that hold the most potential for fuelling the expansion of the Ghanaian economy.
In particular, micro-insurance and agricultural insurance, the bedrocks of the changes to the regulatory and facilitation framework, being ushered in by the impending new insurance law, creates new opportunities for the industry, which however must be backed by bigger capital to cover the accompanying new risks.
National Insurance Commission
In recent years, the sector regulator, the National Insurance Commission has tried to encourage the formation of stronger firms by raising capital requirements. Insurers have, for the most part, resisted the push towards consolidation, in order to avoid the dilution of current shareholders equity stakes and subsequent management control, though this is changing.
In September 2017, the then newly appointed Insurance Commissioner Justice Yaw Ofori, proposed to the Bank of Ghana that the minimum capital requirement be doubled to GHc30 million. This has started a process, that if actually seen through, could change the landscape of the insurance industry.
Currently there are some 22 life insurers and 27 non-life insurers registered with the NIC. Ghana’s 2006 Insurance Act initially set the minimum capital requirement for local insurers at the cedi equivalent of one million dollars but this was steadily increased and later stated in local currency, reaching GHc15 million [5.6 million dollars at the time] by the end of 2015.
The policy of raising minimum capital requirements has yielded mixed results. In October 2016 Regency Alliance Insurance and NEM Insurance Ghana merged to reach the new standard. This was the first ever major merger in the history of Ghana’s insurance industry and was expected to pave the way for consolidation that would reduce the inordinate fragmentation in the industry. The merger enabled the two companies to put up GHc9.6 million as their own capital and combined with retained earnings for the year and fresh capital injection from shareholders of the two parent companies in Nigeria, this was enough to meet the GHc15 million minimum capital requirement.
The merger came at a time that the NIC’s annual report for 2015 was showing that 14 non-life and 17 life companies received less than GHc20 million in premiums that year, indicating continued fragmentation in the market.
The resultant merged Regency NEM illustrates how consolidation can create a relatively strong insurer. By June 30, 2017, Regency NEM had total assets of GHc30.018 million, up from the combined balance sheet size of the two component companies of GHc27.02 million immediately prior to the merger.
Interestingly though, while this has been accompanied by even faster profitability growth, the company has derived this operational cost savings resulting from the synergies the merger has created, rather than from revenue growth. The company has passed on what would have been increased revenues from its expanded clientele base, to those customers in the form of better price competitiveness.
Ghana’s larger insurers see the higher minimum capital requirement as beneficial to the industry. “We’ve talked about consolidation as a way to sanitize the industry for many years: says Daniel Addo, General Manager of Hollard Insurance. “We thought raising requirements would lead to mergers, but that process has been slower than expected and needs to be reinforced. Too many companies in the market has led to unhealthy undercutting and prevents firms from building the muscle required to take on big ticket deals with international investors.”
The situation has largely mirrored that in the banking sector, with regards to the need for service providers to acquire more financial muscle. The strategy of regulators to achieve this is also similar – using a sharp rise in minimum capital requirements to force consolidation through mergers and acquisitions. This is expected to solve an identical problem – lack of financial capacity which even consortiums among the operators cannot overcome.
With the discovery of the country’s oil deposits, firms grouped together in 2011 to form the Ghana Oil and Gas Insurance Pool, but this grouping could only cover 5% of total policies in the sector. The creation of a two-tiered system would also allow for greater specialization in an industry in which all non-life providers compete.
“As well as creating larger, more capitalized firms, regulation should probably be introduced to allow lower capital requirements for specialized insurance companies” Solomon Lartey, managing director and CEO of Activa International Insurance in Ghana says. “That way we can expand the market without each company focusing on the same markets.”
The country’s major brokerages could also benefit, according to Patrick Dughan, assistant general manager of KEK Insurance Brokers. “Fewer insurance companies will lead to specialization and an incentive for excellence, both for the companies themselves and the brokers that sell the policies” he says.
With the regulator, major insurers and brokers pushing in the same direction, consolidation in the industry looks quite likely. In the past the NIC has encouraged this by modestly raising capital requirements, but smaller insurers have managed to find the extra capital rather than merge. A move to GHc30 million would be a decisive action from the NIC and essentially force the hand of smaller players. It will be up to the large firms, thereafter, to deliver on their promises of higher quality, specialized services.
This means scope to expand up market just as the introduction of a formal framework for micro-insurance will enable expansion down market.
By Onajite Sefia