Following the controversy that has quietly engulfed Ghana’s insurance industry over the new across-board minimum capital requirement of GHc50 million for both life and non-life insurance firms, as announced by the National Insurance Commission in April this year, the industry regulator has changed its decision and opted for a risk-based minimum capital regime instead.
This means that each insurer will be required to maintain a minimum capital level that supports its specific risk profile as reflected in the structure of its balance sheet. Under this regime, a minimum capital level applicable to all insurers, no matter their peculiar risks, will be imposed, but as yet, the level has not been decided.
Risk based capital requirements are in line with best regulatory practice globally and several stakeholder groups, led by the Actuarial Society of Ghana had reacted to the NIC’s proposal for the new across-board minimum by advocating for it to be used in this country too.
Consequently, the NIC is using both Ghana’s Actuarial Society and the Actuarial Society of South Africa to do an independent review of the Commission’s technical specifications to be applied, a process scheduled to be concluded by the end of this month. This is being simultaneously accompanied by consultations with industry operators.
The NIC has scheduled a pilot stage for risk based recapitalization involving six selected firms, for completion before the end of 2019 to be followed by a wider pilot exercise using the entire industry during the first half of 2020. Before the end of next year, risk based recapitalization would be undergoing full implementation.
Risk based capital requirements encourages the pooling of risk through diversification of risks which allows for more stable profitability results. Indeed, most insurance jurisdictions are adopting a sophisticated capital requirement regime and best estimate liabilities, due primarily to the increased transparency it gives.
It is still unclear whether the decision to opt for risk based capital requirements will generally lead to higher or lower capital required of insurers. However it is instructive that the minimum capital requirement in European Union member countries is 3.2 million Euros, which is equivalent to just about GHc19 million for life and reinsurance companies and 2.3 million euros (about GHc14 million) for non-life insurers. Indeed, this supports the arguments of Ghana’s insurance industry that the GHc50 million across board new minimum proposed originally by the NIC is too high. Indeed there have been widespread worries that many indigenous insurers in Ghana would not be able to meet the original GHc50 million target and since government would not be willing to provide them with bridge finance, this would open the doors for their foreign owned counterparts to acquire them, thus significantly reducing indigenous participation in Ghana’s insurance industry.
Instructively however, the primary objective of the NIC’s hike in minimum capital is to encourage them to take on more risk, rather than to protect them against the current risk levels, as has obtained in the financial intermediation industry. Ghana’s insurers are very conservative with regards to the risks they are willing to take on and so have tended to pass an inordinately high proportion of the risks inherent in the policies they underwrite to foreign reinsurers. In turn this has required them to pass a large proportion of their premiums on to those reinsurers which has translated into inordinate outflows of foreign exchange.
The technical specifications that the NIC intends to use for computing the minimum capital requirements of each insurer factor in risks incurred from operational risks, market risks, equity price risk, property value risk, foreign exchange risk, bond valuation risk, interest rate risk, and counterparty risk.
However, the decision to implement risk based capitalization should not be seen as an admission that the NIC was going to demand inordinately high capital levels in Ghana. Justice Ofori, Ghana’s Insurance Commissioner, asserts that “Ghana is not the country with the highest minimum capital requirement in the world. There are African countries such as Kenya whose minimum was higher than Ghana’s. We have done a lot of research. Kenya is about US$8 million or so and in Ghana the GHc50 million which was supposed to be US$10 million will probably come low depending on exchange rate and other things.”