The insurance sector makes an important contribution to Ghana’s economic welfare and growth. Insurers spread the costs of risk events across time and the population, helping to reduce the impact of major risk events on the wider economy. This enables individuals and firms to take on and manage risk – thereby encouraging investment and innovation, and helping to underpin economic activity. Insurers also provide long-term investment finance to the economy, by channeling into investments the reserves from premiums they receive. Insurance influences production and consumption, internal and international trade, transaction payments as well as the creation of wealth.
Why Oversea Re/insurers
As insurers accept risks and share same with other insurers and reinsurers, a sense of security and peace of mind is established, since some losses could be beyond the reach of individual insurers. In spite of the fact that insurers often base their businesses on calculated predictions, certain occasions require the sharing of risks. A reinsurer, therefore, becomes an eminent partner. Typically, the risk transfer mechanism may be adopted when an insurer wants to venture into new risks; is faced with risks larger than own capacity; and wants to protect its own business portfolios.
To increase underwriting capacity, local insurers turn to foreign insurers and reinsurers who have the capacity to take huge risks. Most multinational companies also insure the majority of their risk items offshore. With this arrangement, part of the premiums in foreign currencies (US dollars, British pounds, euros) are transferred out of the shores of Ghana. All these have impacts on the local cedi’s depreciation. However, the strategy to improve the retention ratio is to improve internal and local capacity.
Another challenge is the poor involvement of local insurance companies in participating in assuming parts of risks intended to be expressed through co-insurance arrangements by these multinational companies, especially in the oil and gas sector.
Recently, Africa Re – founded by members of the then-Organisation of African Unity in 1976, maintained that despite its best efforts, more than 80% of the reinsurance risk in Africa is covered outside the continent.
Issue of Capacity
Historically, the Ghanaian cedi reached an all-time high of 5.1 in February 2019 (BoG rate), and a record low of 0.90 in July 2007. However, in 2018, the National Insurance Commission (NIC) was alarmed at the amounts of money repatriated as reinsurance premiums annually. The regulator then approved far in excess of US$10million dollars to be transferred overseas. This trend has negative impacts on the cedi and on the local economy.
In 2013, out of the non-life premiums of GH¢583million, only GH¢204million was reinsured, and less than that number was reinsured locally. Because the minimum capital requirement is very low, local insurers lack the capacity to cover huge risks. The Oil and Gas industry in Ghana is growing but local insurers are able to take only about 10% risk of the industry. About 90% of insurance cover is transferred to foreign insurers and reinsurers, causing premium flight.
This is one of the areas that is causing the local currency (cedi) to depreciate against major trading currencies. If the minimum capital requirement is increased, local insurers and reinsurers will then have the capacity to cover major risk, and that will make the huge insurance premiums remain in the country. Foreign insurers and reinsurers take advantage to rip-off large premiums from the country every year.
It is identified that low capacity and high sum-insureds are factors that have continued to compel Ghana’s local insurers to seek reinsurance coverage abroad. The situation has provided a major channel for foreign exchange outflows. Even the local insurers themselves know that one of the reasons why they prefer to reinsure some risk-items with foreign companies is because of capacity.
There is no reason for indigenous insurance operators to attempt carrying risks they cannot handle. The local insurance companies reinsure risks with oversea companies so that foreign companies which have the capacity can support them in carrying the risks and paying claims when they occur. However, these activities perpetuate fronting.
After the oil-find in the Western Region of Ghana, the country realised the economic challenge that it was likely to face in the area of insurance placement. However, the country decided to explore the avenues for developing local capacity to accommodate the oil and gas insurance. In view of these, the National Insurance Commission (NIC) in collaboration with the Ghana National Petroleum Commission (GNPC) came out with the Ghana Oil and Gas Insurance Pool (GOGIP), with the aim of pooling resources to underwrite oil and gas risks in Ghana.
The GNPC and the NIC, supported by industry stakeholders, developed this protocol for placing Oil and Gas Insurance in Ghana in line with the Petroleum (Local Content and Local Participation) Regulations 2013, (L.I. 2204) and the Insurance Act 2006, (Act 724). The protocol has created an opportunity for the local insurance companies and intermediaries to actively participate and play a lead role in the oil and gas business in Ghana. Since 2014, the Pool has written gross premium of US$146million and paid net claims of US$9million.
Nevertheless, some multinationals and insurance companies in the country keep buying insurance products, especially Oil and Gas, from overseas. This results in premium flight – that is, revenues leaving the country. All the premiums that fly out of the country put pressure on the cedi, since all of them are exchanged in US dollars, British pounds or euros.
A good example was the Tema LNG Terminal Company and the China Harbour Engineering Company. These companies tapped Heritage Energy for the Tema Port LNG terminal project, diverting revenue from the Ghana Oil and Gas Insurance Pool. The local market capacity could have retained a significant portion of the risk in the country and generated insurance revenue of over US$1million, while Heritage retained less than US$100,000 of the premium. The Ghana Oil and Gas Insurance Pool (GOGIP) was set to lose in excess of US$1million insurance revenue.
The Kwame Nkrumah floating production, storage and offloading vessel (FPSO), operated by Tullow Oil on the Jubilee oil field off Ghana, experienced a fault to a bearing on the turret in March 2016, causing a loss of production of approximately 15% of output per day. As a result, it became one of the largest industrial insurance and reinsurance losses of 2016; but given the ongoing loss of production, the business interruption losses continued to flow.
The industry losses estimated for the impact to insurance and reinsurance markets suggested a total impact of up to US$1.5billion to the market from the Jubilee oil field FPSO loss, including business interruption to mid-2017. Further shutdowns and reduced production meant Tullow Oil was going to claim.
Another US$107.8million of business interruption insurance claims were made in H2 2017. Then a further US$129.3million in H1 2018, and Tullow Oil expects to continue benefitting from this boost while production continues to be affected.
With this situation, how could a local insurer or even reinsurer survive in paying such claims? The local insurer and reinsurers would go bankrupt because they do not have the capacity to manage such risk and losses. Because of that, the multinational companies also turn to foreign insurers and reinsurers, hence premium flight in foreign currencies – and the cedi will continue to depreciate. Recapitalisation for local insurers and reinsurers will improve their underwriting capacity, and reputable insurers and reinsurers in the Ghanaian space will be able to take major risks and retain the huge premiums in dollars, pounds and euros in the country, thereby reducing the pressure on the Ghanaian cedi.
It is true that the Ghanaian economy is import-led, and due to that there is always high demand for foreign currencies by traders and importers. But one area that the government of Ghana can pay close attention to in dealing with cedi-depreciation is the insurance sector and premium flight. Government, together with the regulator, NIC, should support local insurers and reinsurers in terms of capacity to manage big risks. With that, premium flight will reduce and pressure on the cedi will also reduce, since the majority of insurance premiums would be retained in the country while the multinational companies also insure locally.
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The writer works with Tri-Star Insurance Services Gh. Ltd.
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