‘Tariff’ or ‘no-tariff’ market

A tariff insurance market is where rates are set or allowed by a regulatory body for insurance companies to charge premiums on the risk presented by policyholders. These are normally minimum rates or a range within which the insurer can charge the policyholder premium. De-tariffing then refers to the removal of such tariffs (as instructed by the relevant regulator) to allow for more market-based, competitive pricing.

The Ghana Insurers Association (GIA), the umbrella Trade Association for all Insurance Companies doing business in the country, held its first National General Insurance Conference at the Labadi Beach Hotel in Accra on October 2017.

The Conference was on the theme ‘Transforming the General Insurance Industry in Ghana through Self-Regulation, Financial Capacity and Business Innovation’. Is the Ghana insurance industry ready for self-regulation? What actually do we mean by self-regulation? Is it where the Insurance Association would have the powers to supervise its own members? Does the insurance association need part of the regulatory powers or all the powers? If they need part of the powers, what actually do they need? Is it the freedom in terms of pricing of insurance products by each insurer? What would be its impact on the insuring public?

Mr. Kwame Ofori, Second Vice-President and Chairman of the General Insurance Council/Executive Director, Enterprise Insurance Company, welcoming participants said the maiden conference is the culmination of years of hard work by the General Insurance Council in pursuit of their dream – which is to tell how General Insurance impacts the lives and properties of individuals and the country as a whole.

According to him, this is most appropriate in view of its focus on the three thematic areas which have the potential of improving the General Insurance Industry. “Self-regulation has become one of the most powerful tools for initiating discipline, promoting healthy competition, and avoiding stricter regulations in various industries worldwide.”

Ms. Aretha Duku, President GIA and Managing Director Ghana Union Assurance, emphasised that the industry in the country cannot be an exception to global developments. According to the GIA President, there are people with the mindset that the insurance industry is being over-regulated’. Are insurers over-regulated because regulators check capital adequacy or solvency; or by not allowing insurers their freedom in terms of pricing insurance products by each insurer?

True, self-regulatory measures do not have the power of the law as they are merely voluntary. Most insurers agree with the assertion that various companies should be allowed to charge whatever premium they deem fit based on their strength – but should be held accountable when it comes to claims payment. It is true that some companies have operated for years and are very solvent to meet all their future claims even if they do not charge all policyholders premium for one year. This is because they can pay claims from their investment returns.

Others also think that self-regulation will promote healthy competition in the industry. It is very difficult to say competition on price is healthy when it can lead insurers to at some point charge no premium for risk taken. Some insurers also think they are doing clients a favour when they are paying claims. Insurers have claims guidelines to follow but most often exceed the limits within which claims should be paid. Some insurers also think they are overly regulated and self-regulation can instil some discipline among them.

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The big question is, why do disciplined insurers find it difficult to go by the minimum premium and maximum claims guidelines set by the regulator? Most of the insuring public have lost confidence in the insurers and their only hope now is the regulator – which is independent and can use its powers to force insurers to meet most of their responsibilities, especially claims payment, within an appropriate time to the benefit of policyholders or third parties who suffer injury or property damage.

Insurance Regulation in Asia Pacific

Australia – The Australian Prudential Regulation Authority (APRA) is the prudential regulator.

Cambodia – The Insurance and Pension Division of The General Department of Financial Industry, being a division of the Ministry of Economy and Finance (MEF) is the insurance regulator.

China – the China Insurance Regulatory Commission (CIRC) regulates insurance companies and intermediaries, including agents, brokers, loss adjustors and their business operations.

India – The Insurance Regulatory and Development Authority of India (IRDA) which is constituted under the Insurance Regulatory and Development Authority Act 1999, and which derives its powers from the Insurance Act 1938 (as amended), regulates entities that carry on insurance and intermediary business (such as brokers, insurance surveyors, loss assessors, insurance agents and third-party administrators) in or from India.

Indonesia – The Financial Services Authority (Otoritas Jasa Keuangan ‘OJK’) supervises all financial institutions. Law No. 40 of 2014 on Insurance, which was enacted on October 17, 2014, is the principal legislation relating to insurance business (Insurance Law).

Japan – Under the Insurance Business Act (IBA), the Prime Minister of Japan has overarching authority as the insurance regulator. Except for certain important powers such as granting and cancelling insurance business licences, most have been delegated to the Commissioner of the Financial Services Agency of the Japanese Government (FSA) and to directors of the Local Finance Bureau and Local Finance Branch Bureau of the Ministry of Finance (collectively LFB).

The story in Ghana is not so different from what is happening elsewhere in the world. Liberalisation and globalisation have allowed the entry of foreign players into the Insurance sector. With the entry of more foreign players in the Insurance business, people have got a lot of options to choose from as there are about twenty-nine (29) non-life insurers.

More companies are pursuing the same few clients with the same products, similar promotional activities, and same distribution channels and now the only differentiator they can look at is the price. Price differentiation is the easiest – but the most dangerous. It is the easiest because it is just about knowing what your competitor is charging and then reducing it. The danger is, firstly, because of competition: it could be reducing until it comes to zero premium charge.

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Currently, in the insurance market insurers underprice and also give gifts in terms of fuel-coupons, branded T-shirts and other things all in the name of promotional activities. These go to increase the acquisition cost, which is also not factored in the premium computation – not to even think of the underpriced premium. Secondly, there are a lot of components or elements which go into the premium calculation or the premium rates; and by reducing the rates, provisions made for some components would be left out. Normally, what is left out are the technical provisions to cover claims now and in the future. This has also accounted for part of the reasons why most insurers are not able to pay claims on time.

The premium rates set by the regulator in Ghana are the minimum. This means that most companies can charge above this if they are doing proper underwriting of policies. This minimum rate takes into account provisions made for management expenses, commissions, margin for profit, claims and others: whenever you charge below this minimum premium or rate, provision made for one component is being taken away.

Insurers are still finding it difficult to charge these minimum rates, and most are underpricing and under-cutting because of their desire to win business from a competitor or beat a competitor to win a business. Policyholders have realised this and are constantly pushing insurers to go below this approved minimum premium or rate. Do you think insurers will be capable of charging the right premium when we de-tariff, to grow and sustain their businesses and also protect policyholders’ while maximising shareholders value?

The various costs which go into the premium calculation are constantly on the increase. Management costs are increasing and claims cost is also high – but insurers are constantly looking for ways to reduce their premiums. This has accounted for part of the reasons why insurers are not making underwriting profit.

Does it make business-sense for a trader to buy tomatoes from farmers and sell them in the market and constantly make losses? The only way she makes profit is when the husband injects money every month into her business. This is the performance of most insurers. Most insurers do not make underwriting profit. They make profit only when they add their investment income. So, as an investor why don’t you put your money into Treasury bills, which is less risky, and be assured of constant interest and also free your mind from other business risks?

Perhaps it is time insurers should be assessed and ranked not on gross written premium or market size, but on underwriting profit and time it takes to pay claims. These are the core activities of an insurer. This would actually show companies that are really doing well or performing, and it might give the public confidence to deal with them when their names are published.


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