The contribution of the insurance industry to the Ghanaian economy cannot be overlooked although not noticed by many, whether in the financial space or not. The essence of insurance policy is to bring the insured to the state just before a loss occurred and this is usually appreciated by the insured after a loss has occurred and indemnity has been provided.
Insurance is ideally the backbone of every resilient economy as it provides a hedge to the gains made by the nation. A brief interview with the average Ghanaian would reveal that, had it not been the enforcement of the compulsory insurance directive, he or she would not have purchased an insurance policy. This is the basic explanation to the low insurance penetration rate experienced by the country for decades. The penetration rate is measured as the ratio of total written premium to the Gross Domestic product of the country.
This means as a nation, the insurance industry has a lot of untapped market to explore in order to increase the penetration of insurance to the currently not served and underserved economic units of society. By expanding this penetration, the total premium mobilization efforts of the average insurance company would increase significantly thereby creating wealth for all market participants from customers, agents, brokers and insurance companies to finally the regulator. If penetration is low, then it could mean there is room for all the existing insurers in the market to operate, ceteris paribus.
The threat to this anticipated victory is the new minimum capital requirement (MCR) scheduled for June, 2021 by the regulator. This article seeks to draw attention from the decades old framework which requires all insurance entities to recapitalize. This article will provide new solutions aimed at equitable recapitalization and the focus will be on general business. In times to come, I will throw light to the life business. However, it is important to note, the recapitalization efforts are also inclusive of the life insurance industry with the same expected minimum capital as a general insurer.
According to the National Insurance Commission (NIC), the new capital requirement could be met in three ways. That is, by the injection of fresh cash; the use of retained earnings; other reserves or a combination and this is expected to apply to all existing insurers in the market. New entrants are however expected to meet the new requirement by strictly providing the full minimum capital in the form of cash and not any form of accountable assets.
Insurance is a risk transfer mechanism. The lay man seeks to protect his or her assets by purchasing an insurance policy which means the risk of losing the assets is transferred to the insurer thereby creating a guarantee for the individual. The insurer, particularly the general insurer engages in reinsurance and based on the classes written, reinsurance capacity arrangements are made with reinsurers both domestically or outside the country. What this does it that, the insurer is able to accept all risks defined by the arrangement with the reinsurer respective of size, so far as it falls within the confines of the arrangement.
This is a risk management technique usually employed by insurers to protect their capital and falls outside the domain of the average person seeking to buy an insurance product. Insurance companies strive to make scanty underwriting profits and are usually faced with losses. It will be tough to inject fresh capital every time there is a need to insure a risk bigger than the existing capital and this is where the reinsurance company functions to provide the cushion insurers need to write the business. So what will be noticed from here is that, the insurance company in itself cannot take all businesses because its balance sheets are limited in resource.
So by example, the current minimum capital of GH¢15 million without a reinsurance company would imply the insurer can only take risks to the extent of GH¢15 million and nothing more for the year. One can imagine how limited this would be for any company. Putting this in perspective, it would be clear that, the majority of premiums earned by the insurer are shared with the reinsurer. So the essence of a minimum capital is to ensure the insurance company is sufficiently strong on its balance sheet to handle the risk they underwrite.
Being balance sheet strong implies, the insurance company is less likely to seek the services of the reinsurer on smaller risks in its entirety and when they do engage the services of reinsurers, the insurer is able to keep some of the risks in its books to help sustain the operations of the firm. A lower minimum capital would imply the average insurance company is indirectly working for the reinsurance company in return for a commission. The vice versa is also true, a significant minimum capital creates wealth for the business and contributes to the stabilization of the economy.
Until 2019, the minimum capital required by an insurer in order to engage in the general business was at GHC 15 million as stated and enforced by the National Insurance Commission (NIC). This permits the insurer to write all classes of business including but not limited to Commercial Property, Engineering, Liability, Personal Lines, Accident, Surety Bonds or Guarantees. This implied that, a general insurer could gather expertise across all lines of business, write and generate premium for its business. From the new directives stated by the commission, it is expected that by June, 2021 every general insurer recapitalize to GH¢50 million according to the schedule outlined from June, 2019.
However, it is important to note that, the entire market generated a total gross written premium of GH¢1.5 billion for the period ending 2019 vis a` vis GH¢1.9 billion for 2020 with the majority market leaders still maintaining their dominance in the market. This in perspective, the other smaller premium fractions of the insurers market made little gains to their total gross written premium in comparison to the market leaders and this nevertheless their failure to recapitalize by June 2021, may lead to the withdrawal of their operating license.
The average general insurance company engages about 65 direct employees excluding agents in the daily operation of its underwriting, claims, corporate management, marketing and risk managements activities which are all essential to the business. This translates into about 1,885 direct employees of general insurance companies in Ghana with about a total of 29 general insurers in the country. There are many indirect employees in the form of insurance agents and brokers who earn on commission basis whilst dealing with the insurance companies. This means, quite an amount of livelihoods depends on the successful operation of the general insurance companies. Therefore, the withdrawal of the operational license of a number of these companies is likely to impact homes and knowing very well the extended and cultural nature of African homes, this impact will transcend into families. So the question then remains, why not explore other alternatives to the insurance operating guidelines to the sustenance of the industry and its stakeholders.
I would suggest a three tier minimum capital requirement scheme. That is, Class A License, Class B License and Class C License. The capital requirements would operate in a manner such that, licenses would be granted based on the product lines a general insurer writes vis a` vis the risk transferred to the balance sheet based on its assets. The regulator may then enforce a strict retention level which would be based on the capital each insurer is required to maintain.
Classification of licenses
Class 1 License. A class one license should be the highest general insurance operational license an insurer can acquire. This license is expected to permit the insurer to write all the classes of business possible in the country and should be aligned with the sufficient capital necessary to sustain the business. Classes of business including but not limited to Commercial Property insurance, Liability, Surety Bonds, Accidents and Engineering risks can cause bankruptcy to insurance companies if not properly managed. Therefore, they require sufficiently huge capital and enhanced underwriting capacities in order to make underwriting profits and strong balance sheets are a good step towards this goal. Therefore, the need to be adequately capitalized is in the best interest of a Class 1 license holder in the risk management business.
Class 2 License. A class two license should operate like a medium sized entity writing risks which are proportional to the capital requirement. That is to say, the underwriting capacities required should be aligned with classes such as liability, personal lines, accident and the like only. The capital requirement is ideally expected to be higher than the class three requirements because the risk exposure of their class is higher.
Class 3 License. A class three license should be the least license required to operate an insurance company and should require the least amount of capital. This license should permit the insurer to only write personal lines insurance and nothing more. The personal lines usually require less underwriting capacities and a single independent event is less likely to lead to a collapse of the company. They are easy to manage accounts and will ease the operational activities of the insurance company and make available resources for marketing activities of the firm. This line of business is usually less associated with reinsurance and encourages co-insurance. Insurers with this class of license will be innovative, customer centered, niche market driven and would hold the key to the penetration ambition of the National Insurance Commission.
The proposition is such that, lower tiered insurers may apply to the regulator for a higher status if the firm meets all requirements of that status. This would ensure general insurers would operate by their ability to provide expertise and capital in the market they write and thus avoid a regulatory framework of a one size fits all minimum requirement frameworks. This would make room for smaller insurance companies to operate without the fear of license withdrawal in the nearest future and this has the propensity to welcome new market participants with special technical expertise in certain classes of business currently not written in the country.
This proposed new approach to insurance recapitalization would bring many benefits to the customer, employees, the general insurer, regulator and the economy as a whole. The benefits of such a scheme to the industry would be the attention of insurers to product innovation and product invention. The performance of the regulator which is usually benchmarked to the insurance penetration rate is expected to significantly improve through niche marketing techniques which the smaller premium insurers would be compelled to undertake in order to generate premiums to sustain the business, the customer benefits by enjoying improved services, products and technological enhancements to the industry and finally the creation of jobs in the insurance industry for the many unemployed in the economy.
National Insurance Commission (2019). New Minimum Capital Requirement (MCR) for Entities[online] available at https://nicgh.org/wp-content/uploads/2019/06/Press-Release-New-Minimum-Capital-Requirements-for-Insurance-Entities.pdf [assessed 20 March, 2021]
The writer is an Associate Member of the Chartered Insurance Institute, United Kingdom, a Chartered Insurer and holds a Master of Business Administration in Finance, Bachelor’s Degree in Economics from the University of Ghana, Legon
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