There is a critical role insurance play in the society or the economy of every nation or country. The roles and contributions of insurance expand across social, financial, and economic developments. The activities of insurance companies go beyond national territories. A critical example could be derived from the attack on the world trade center. The effect went beyond the United State of America and most insurance companies in other countries were called upon to make insurance claims payments. Because of this, insurance is one of the most highly regulated industries in the world.
The main reasons why insurance companies should remain financially sound to ensure the smooth running of their activities and also give confidence to policyholders that they are well protected in case of any eventualities. This brings a lot of responsibilities to the regulator or the supervisor and his role is considered critical. “A sound regulatory and supervisory system is necessary for maintaining a fair, safe and stable insurance sector for the benefit and protection of the interest of policyholders, beneficiaries and claimants, as well as contributing to the stability of the financial system” from the International Association of Insurance (IAIS) publication Insurance Core Principles, Standards, Guidance, and Methodology ICPs.
The continuous survival of an insurance company is very key. The failure of an insurance company has a lot of financial, social, emotional, and economic impact on the people and the nation. This is why insurers need to maintain financial soundness. This is the pivot of the insurer’s ability to meet stakeholders’ expectations. This will also help the growth of the insurance company.
Insurance companies carry risks. To effectively assess the financial wellness of an insurance company, you need to look at its capital to its risk profile. This means it is not all about the capital. This is only part of the story. The most important thing in the insurance business is the provisions for claims that are expected to be made. This is what we called insurance liabilities or policy reserves or better still technical provisions.
To make it understandable, there is a distinction between capital wellness or adequacy and solvency. An insurance company is considered solvent when it has sufficient funds to meet its policyholders’ obligations. Solvency is the ability of the insurance company to meet its promises to policyholders when the time is due. Insurance companies take on risk and they might accumulate risks more than their initial or minimum capital. The solvency calculation of insurance companies covers not only capital adequacy but also other aspects such as technical provisions or insurance liabilities and enterprise risk management.
Insurance liabilities or technical provisions represent the funds’ insurers need to meet expected losses. They have to make provisions for these losses. Furthermore, an insurance company should also have sufficient capital resources to cover its regulatory capital requirements. The regulatory capital requirements are intended to cover unexpected losses. In one breath, insurance liabilities or technical provisions and capital adequacy are very much interrelated. For an insurance company to be solvent, it must have sufficient assets to cover its liabilities which include the insurance liabilities or the technical provisions.
Effects of Insolvent Insurer
Let’s consider the collapse of HIH. The collapse of HIH had far-reaching consequences for Australian communities and a negative impact on consumer confidence in the insurance industry. Thousands of employees working at HIH lost their jobs, tens of thousands of HIH shareholders were left holding worthless equity, and HIH policyholders were left unsure whether their insurance contracts would continue to be honoured.
Stories of personal hardship emerged almost immediately. Sick or disabled policyholders claiming on salary continuance policies with HIH stopped receiving ongoing payments (which they often relied on for day-to-day living expenses). In Queensland alone, car accident victims insured with HIH were left waiting for operations and other medical procedures worth $190 million. Without HIH insurance cover, the Australian Rugby Union had to cancel games across the country until replacement cover could be procured. Injured players were left stranded without compensation.
This situation would not be any different if an insurance company become insolvent and collapse in Ghana.
The Role of the Regulator
The simple basic reason why The National Insurance Commission was established by the Insurance Act, 2006 (Act 724), which replaced Insurance Law, 1989 (P.N.D.C.L. 227) was to ensure effective administration, supervision, regulation, monitoring and control of the business of insurance, to protect insurance policyholders and the insurance industry.
For the attainment of its object, the Commission shall perform the following functions:
- license insurers and insurance intermediaries who transact insurance business in Ghana;
- in consultation with relevant bodies approve and set standards for the conduct of insurance business and insurance intermediary business;
- encourage the development of and compliance with the insurance industry’s codes of conduct;
- approve, where appropriate, the rate of insurance premiums and commissions in respect of any class of insurance;
- supervise and approve transactions between insurers and their re-insurers;
- undertake sustained and methodical public education on insurance;
- take action against any person carrying on insurance business or the business of insurance intermediaries without a licence;
- maintain contact and develop relations with foreign insurance regulators and international associations of insurance supervisors and maintain a general review of internationally accepted standards for the supervision of insurers and insurance intermediaries;
- perform other functions that are incidental to the carrying out of its functions under this Act.
- In performing its functions under this Act the Commission shall have regard to the protection of the public against financial loss arising out of the dishonesty, incompetence, malpractice or insolvency of insurers or insurance intermediaries.
Regulatory solvency requirements form an important part of the supervisory oversight of insurers. These solvency requirements:
- establish a standardised benchmark for assessing the financial condition of an insurer
- provide an early warning for supervisory intervention and early corrective action
- reduce the likelihood that an insurer will not be able to meet obligations to policyholders when they fall due
- provide a buffer against the losses policyholders can experience in the event of the failure of an insurer
- provide incentives for good risk management practices
- promote the confidence of the general public in the financial stability of the insurance sector.
The National Insurance Commission has made great initiatives and taken great steps to ensure the sustainability and growth of the insurance industry in Ghana. These major innovative ways include amending the Insurance Act 2006, Act 724 to help improve insurance supervision and regulation, Risk-Based Supervision, Recapitalisation, Motor Insurance Database, and limiting on motor death and injury claims and expansion of the Commission activities in most of the regions.
The National Insurance Commission has announced the increase of minimum capital requirement for players in the insurance space. The recapitalisation would also help insurance companies to be able to retain a lot of businesses locally thereby retaining most of the premium. These would help the industry to grow and also increase insurance penetration. Insurance companies would also have enough funds to meet the claims of policyholders.
The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG.
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