The recapitalization of the insurance industry

The long anticipated compulsory recapitalization of Ghana’s insurance industry is finally about to commence. Over the next two years, both life and non-life insurance firms will be required to pay more than triple their capital from the current minimum of GHc15 million to GHc50 million.

Inevitably, there will be protests. The insurance industry’s required increase in minimum capital more or less matches the 233 percent increase imposed on the banking industry, and it is enough to cause deep consternation among shareholders in the insurance industry, which is not as attractive to investors as the banking industry is.

However, this newspaper holds the view that the newly announced increase is in order; indeed, if the National Insurance Commission (NIC) has erred at all, it is in setting the new minimum too low.

To be sure, the need for recapitalization in the insurance industry arises from a very different reason that of the banking industry. Whereas banking sector recapitalization arose from the need to prepare banks against the dangers imposed by taking on too much risk, that for their insurance cousins aims at getting them to take on more risk, since they have been passing on too much of their risks to foreign reinsurers which has caused a preventable outflow of premium income from Ghana in the form of reinsurance premiums.

Thus, there is no need for the insuring public to get jittery the way the banking public did as one bank after another was compulsorily liquidated by their regulator, the Bank of Ghana, for reason of insolvency. This will not happen in the insurance industry.

However, despite the fact that insurance industry recapitalization is happening for the opposite reason from the reason for banking industry recapitalization, the case for raising the new minimum even higher than where the NIC has set it is just as strong.

Simply put, the higher the new minimum capital, the less reinsurance that Ghana’s insurance firms will require, and thus the less the outflows of capital from Ghana in the form of reinsurance that will be required.

Indeed, this also makes a case for a dramatic increase in the minimum capital for the three indigenous reinsurance firms; the more capital they have the more risk they can reinsure locally on behalf of Ghanaian primary insurers.

Besides this primary rationale for recapitalization of Ghana’s insurance industry, there are other key benefits to be derived as well. Bigger insurers will mean better economies of scale, and more potential to increase Ghana’s abysmally low penetration rate of barely two percent.

If consolidation within the industry has to happen for these benefits to be derived then so be it – after all, the NIC itself has been pressing for consolidation for several years now, but the only merger that has occurred has been that which created Regency Nem Insurance.

Instructively, that merger has been a success that provides a model for other smaller sized firms in the industry to replicate.

We support the impending recapitalization and hope that it produces consolidation as well, for a bigger insurance industry with better in-country risk retention capacity.