It must be acknowledged that the ingenuity of Finance Managers, (i.e. Chief Finance Officers (CFOs) considered as the ‘front liners’ in this battle, could be the springboard for building resilience in the insurance sector during and beyond this pandemic.
In a May 2020 publication by McKinsey & Co, the article, “How the CFO enables the Board’s success-during COVID-19 and beyond”, suggests that the CFO is positioned as the rock during this time of crises, a critical arbiter of difficult decisions, and a scout for the future. In doing so, the study further asserts that the word ‘crisis’ has two meanings, one being ‘danger’ and the other being ‘chance’. Today’s CFO must consider both.
In consideration of the above assertions as my framework, below are my modest suggestions to assist business executives to mitigate the effects of this pandemic on their businesses (especially those in the insurance sector).
- Review Forecasts and Budgets
Every serious organization draws up a budget, which provides quantitative expectations of the business, before the commencement of each financial year; and 2020 was no exception. As mentioned in my previous article supra, insurance companies (especially non-life insurers) had big plans ahead of 2020 because of the anticipated reduction in fake motor insurance stickers due to the introduction of Motor Insurance Database (MID), premium rate undercutting coupled with expected growth in government expenditure due to the presidential and parliamentary elections. These expectations were translated into revenue targets and corresponding expenditures in our budgets. Due to the rippling negative effects of this pandemic on businesses, we need go back to the drawing board and adjust our budgets accordingly in line with the realities on the ground.
Budgets serve as a guide especially on how we spend. Insurers would need to do budget simulations (or scenario modeling) having best and or worse case scenarios of the approved budget for 2020. Board of Directors and shareholders would not ‘forgive’ management (especially the CFO), if expenditures ‘skyrocket’ despite a drop in revenues. There may be genuine and convincing reasons for that but this is the time to cancel or suspend some expenditures which are tied to revenue targets (i.e. variable costs). Immediate action must be taken to reduce operating costs through operational effectiveness and efficiency however growth and sales capacity must be protected. This is the time to make sacrifices and management team must fully appreciate the times we are in. This calls for prudent cash flows management.
- Prudent Cash flows management
Irrespective of times and seasons (whether during bustling or downturn), cash flow has always been the lifeblood of a business. Often times the sales force in the company is regarded the ‘heart’ of the organization. This may be true because they bring in the cash which is the lifeblood of the company. In my opinion, the Finance Department and the CFO arguably are the brain of the company. During this pandemic, prudent management of cash flows would is immensely important. Because revenues (Gross Written Premium) would likely decline as renewal of some policies have been rescheduled, claims and benefits pay-outs are increasing especially in the life sub-sector etc. Consequently there would be shortfalls in the ‘blood’ (i.e. cash) which requires proper control and management of our expenses.
Expenditure cuts must be vigorously explored even though regarded as the most unpopular in times like this. This measure may be difficult because a significant part of insurers’ expenses go into claim payments. Per the 2018 NIC annual report, an average of 42% of non-life insurers’ earned premiums go into claims and benefits payments; while total expenses ratio (which is the ratio of operating & commission expenses to net earned premium) averaged 99%. This is higher than internationally acceptable total expense ratio—typically less than 40%. The COVID-19 pandemic presents industry players the opportunity to reduce expenses because aside claims payments, operating expenses are directly under the control of Management.
How do we strike the balance between maximizing liquidity in the near term while keeping an eye on a position towards full recovery? Is this the right time to advertise? Or invest in fixed assets? Or recruit staff? These and many others are critical questions we need to ask during these times. Walk through the prioritization of expenses readily due for payment and what adjustments should be considered to either make those payments, cancel or reschedule. The nuance here should be balancing a crisis-mode optimization of cash and the business position. But always, we need to consider what effect these cash-optimaization measures would have on the safety and satisfaction of our customers (both internal and external).
Other cash flow management measures include converting fixed to variable costs where possible, extending payables intelligently, managing and expediting receivables, auditing payable and receivable transactions (Deloitte, April 2020, Managing Cash flow during a period of crisis).
- Effective Tax Planning
Except death and taxes nothing is said to be certain in this world, Benjamin Franklin (1789). Notwithstanding the current challenges occasioned by this pandemic, companies would still be required to comply with all the tax laws hence the need to ensure effective tax planning. One may ask, is there a need for effective tax planning during a period of profit plunge since businesses would eventually pay lower taxes? My answer is YES! This is the time to arrange the affairs of the company to, as much as possible, legitimately reduce its taxes. In a write-up by Chris Wallis in the American Business Magazine (March 2010), he states that “…tax planning in good times may substantially increase overall profits, but tax planning in tough times is a matter of necessity as it can make the difference between a business surviving or collapsing”. In a presentation by Tax Expert Ali-Nakyea on ‘Tax Planning in the Midst of Profit Downturn’ in May 2020, he indicated that this recession (induced by COVID-19), would usually mean a profit downturn hence businesses should seek ways of reducing their tax liabilities and benefiting under the tax laws. Tax planning is a broad topic in taxation hence I cannot exhaust all the areas here but I will proffer some few suggestions.
Aside direct taxes such as corporate taxes (25% of insurer’s chargeable income) and National Fiscal Stabilization Levy (5% of insurers’ profit before tax), there are other indirect taxes like GETFL, NHIL, Value Added Tax (VAT) etc. that must be considered. Attention should not only be fixed on how to avoid direct taxes but the indirect taxes as well. Therefore, insurers must wholistically understand their tax liabilities in order to strategize appropriately.
For instance, have you revised your company’s self-assessment estimates? This is a good time to do that. In accordance with Section 121 of the Income Tax Act, 2015 (Act 896), companies are required to assess themselves and make quarterly installment payments based on an estimated assessable income. The first quarterly installment payment should have been made by end of March 2020. This is the time to review and subsequently revise the assessment if there are shortfalls in premiums and chargeable income.
Other actions include:
- Taking advantage of the number of tax measures and reliefs announced by the Government in the wake of this pandemic.
- Renegotiating tax payments with your local tax office before the deadline to prevent unnecessary penalties and interest for late payments.
- Taking advantage of the waiver of penalties to taxpayers as a result of COVID-19 Pandemic. As part of the reliefs by the Ghana Revenue Authority (GRA), persons who settle all outstanding tax liabilities on or before 30th June, 2020 shall be eligible for a remission of penalties as part of incentives towards the COVID-19 Pandemic.
- Tax reliefs and refocusing expenditure on allowable deductions. Several companies including those in the insurance industry have made donations to government and allied institutions in the wake of this pandemic. Consider refraining from making donations which would be disallowed by the Commissioner-General (CG) at the end of the year of assessment. As announced by the GRA, donations to a worthwhile cause including those made towards the fight against COVID-19 is allowable for deduction. Remember to get the necessary documents to support the expenditure.
- Currency Exchange Risk Management
Even during the best of times insurance companies face currency exchange risk since they have financial assets and insurance contracts which are denominated in foreign currencies. These assets are exposed to currency translation risk, primarily the US Dollar, Euro and the British Pound. These insurance obligations can be in respect of claims or reinsurance premiums payable. It has become more imperative to properly manage currency exchange risks during this period of the pandemic.
The Ghana Cedi has likewise not been spared during this pandemic. It started the year on a good note as it strengthened against major trading currencies like the US Dollar, British Pound and Euro. The Bank of Ghana (BoG) reported in its March 2020 Monetary Policy Committee (MPC) report that the Ghana Cedi recovered from a downturn position at end of Q4 2019. According to the report, the Cedi cumulatively appreciated by 4.5 percent by end of February 2020, compared with 6.9 percent depreciation during the same period in 2019. Against the British pound and Euro, it cumulatively appreciated by 7.8 percent and 7.0 percent respectively, compared with 2.1 percent and 1.7 percent depreciation over the same periods in 2019. Between April and May 2020, the cedi has depreciated by about 3.27% against the dollar, 2.54% against the British Pound and 4.84% against the Euro. It is uncertain if this downward trend will continue due to the effect of this pandemic.
Most insurers sometimes adopt a ‘head-in-the-sand approach’ with the thinking that exchange rate management is out of their control and they secretly hope that exchange rate fluctuations would favour them when the dust settles. This approach would not help especially during these uncertain times. To mitigate the chances of reporting huge exchange losses coupled with an already bad situation of missed revenue targets, insurers would have to prudently manage commitments and assets indexed in foreign currencies.
- Be careful where to invest
As mentioned in my previous article, it is worthy to reiterate that the COVID-19 pandemic would affect investments and associated income negatively. Investment income would likely dip due to a drop in bank deposit interest rates and reduction in additions to investments. CFOs may be tempted to seek other investment avenues to cushion the drop in interest rates however this is not the time to explore. Indeed, a great deal of caution must be exercised and rather focus on playing it safe. Probing questions such as where, when and what to invest policyholders’ funds in must be dispassionately answered. Remember that there is increased withdrawal of benefits and claims and we cannot tell our claimants/ clients to hold on till we liquidate investments (if need be) before honouring our obligations to them. This is the time insurance companies can prove their worth and improve consumer confidence in the industry. This is the time to invest short term rather than long term due to the uncertainties this pandemic bring. This would enable insurers remain liquid and honour the obligations of clients as and when they fall due.
The writer is a Chartered Accountant (ICAG), Chartered Tax Practitioner (MCITG) and insurance practitioner. He is the Chief Finance Officer of SUNU Assurances Ghana Limited, a Non-Life Insurance Company.
E-mail: [email protected]
Disclaimer: Views expressed in this article are that of the author and do not represent the views of the outfit he works for.
The Writer, Joseph Abenney-Yeboah