Ghana’s insuring public are becoming increasingly nervous with regards to the capacity of their insurers to meet claims and other obligations to customers should they arise, as last week’s announcement by the National Insurance Commission that the minimum capital requirement for insurance firms is being raised from the current GHc15 million to GHc50 million, is being widely interpreted as a move to forestall imminent insolvency in the industry.
The timing of the announcement, which has come just a few days after the NIC had to publicly denounce rumours that several insurers were tottering on the brink of collapse due to their insolvency, has for many, simply confirmed the veracity of those rumours.
As a result of this situation, top executives of both the NIC and the insurance companies themselves are having to reach out to the insuring public to assuage their fears by correctly pointing out that the situation in the insurance industry is completely different from that which Ghana’s banks faced in the run up to, and during their own recapitalization exercise.
This is because in insurance business, it is the quality of the re-insurance done by each insurer – which involves insures passing on part of the risks they take on with each policy they accept to write, by placing some of that risk with re-insurers who consequently receive a commensurate share of the premiums paid as well – that determines its capacity to meet claims, rather than its own financial solidity as measured by its capital.
Indeed, Ghanaian insurers have proved very prudent in this regard, passing on more than two-thirds of their customers risks to re-insurers, most of whom are very large international firms.
Actually, this is the real reason for the increased minimum capital requirement – the NIC worries that Ghanaian insurers are passing on too much of the domestic business they underwrite to foreign insurers to whom they have to pay a commensurate part of the premiums paid by the customer and whom they have to pay in foreign exchange. The increase in the minimum capital therefore aims to increase the financial capacity of Ghana’s insurers to retain their customers risks locally, and with this, to retain an increased proportion of the premiums paid as well, which means significant foreign exchange savings.
Currently, Ghana’s insurers, on average, only retain about 30% of the risks they underwrite for their customers and a commensurate proportion of the premiums paid too, with most of the rest going to predominantly foreign owned re-insurance companies. The impending increase in the minimum capital could enable Ghana’s insurance industry to increase its capacity to retain business in-country by as much as 10%, especially since the three local re-insurance companies are also being forced to increase their minimum capital, and thus their capacity to underwrite insurance business in-country.
Actually, the impending recapitalization exercise will hardly affect the value proposition that Ghana’s insurance industry offers its customers. Premium rates are determined by insurers prior to their passing on part of the risk to re-insurers so their higher retention of customers business will not affect the cost of the insurance they offer.
The digital transfer of communication, data and financial payments will ensure that the use of re-insurers does not affect the speed with which claims are paid, no matter how much of a business is retained and how much is passed on to re-insurers, wherever they are located. Indeed, insurers usually pay a customer’s claims before the re-insurer pays up its own share and simply collects a refund later.
However, over the next couple of years, customers will need to monitor the efforts of their respective insurers to meet the new minimum capital requirement within the deadline because those that do not will have to hand over their customers businesses to a compliant competitor, as selected by the NIC. This means that a customer would do well to choose where to move the business to before the NIC chooses for the customer.
By Toma Imirhe