Risk pooling and its management for the purpose of obtaining premium is the purpose for which the insurance company exists. However, when insurers decide to decline risks located in certain parts of the country such as the central business district of Accra, it must be signaling to the market of a deficiency in the risk under consideration.
The outpours of tenants and landlords of such properties, year in and year out after the happenings of fire gutting such properties should tell a story of the likelihood of the absence of insurance on these properties. This article seeks to identify the rationale behind the insurer’s adamancy in accepting such risk, the way forward to improve the risk appetite of these insurers and the total benefit to the nation should such risks be presented to insurers and accepted in future.
As risk managers, a risk under consideration is expected to be of a nature easily segmented and identified. The risk should be less likely to be affected by the happenings of immediate environment and in circumstances where they are affected by happenings in its environments, the impact on the risk under consideration should be moderate. The central business district of Accra is congested with many properties. These properties are in close proximity with each other and the occupation of these tenants vary by every shop.
As insurers, this presents a situation of blurriness in the risk being considered. This not to mention, the likelihood of bad and or illegal connections being made from premises to other premises which inadvertently makes two independent properties assume the same risk as one property. The event of fire in a premises which may not be insured is likely to be spread to other insured premises because of poor illegal electrical connections made to and fro from these premises to adjourning properties.
The presence of stalls between properties and the heterogenous nature of transactions carried out between these pathways found along these properties increases the likelihood of an insured peril. The issue raised here is similar to the issue faced by insurers when residential apartments are occupied by different people. The mistake or negligence of one member is likely to affect all members of the apartments with little they can do to minimize the occurrence.
Age and Nature of Buildings
The properties gutted by fire in recent times have been seen to be relatively old and may be described as being poorly maintained hence may fail structural integrity tests. Majority of properties in the central business district of Accra have been in existence for decades. Everyone may have a story or two to tell about an encounter on the streets of adjourning properties or properties being used as landmarks whilst travelling to the central district. As buildings get older, they have the tendency to be much more susceptible to fire and possibly collapse. As required by law in the insurance Act, commercial buildings are required to purchase insurance.
The cover provided by the insurance purchased includes a collapse cover as an insured peril. Hence in the event of an accidental collapse of the property, the insured may be indemnified. Looking at the cover provided, insurers are less likely to buy into a contract where the property under the insurance consideration is in a poor shape. It’s a fact that, insurance is a financial product for uncertainty and therefore everyone would agree that, when a risk looks certain in occurrence, then it is no more an insurance but a bad business decision.
Also, the purpose for which some of the properties may have been constructed is totally different from the business for which they are being run now. These properties are in a state of stress and possibly the weight they carry may exceed the ideal. These were constructed in times where the general population of Greater Accra was relatively low and demand for economic activity moderate.
Values at Risk
The financial services sector over the years has come to the realization that, the informal sectors of the Ghanian economy hold the key to generating higher revenue for their businesses. Small and Medium scale Enterprises (SME’s) have proven resilient to many of the financial stocks suffered by the markets in recent times and this has surely sent some signals down the spine of industry players. The central business district is a hub of SME’s. One could spend an entire day trying to make count of the total number of firms operating within the zone and they are signals of opportunities.
However, this opportunity is heavily patronized by the life insurance sector of the industry and less patronized by the general insurance sector. As Insurers, we usually look at the values at risk vis a vis the premium contribution to the pool. Most of the businesses in the central district have a high occurrence ratio. Therefore, from a risk perspective, the premium they may provide to the pool may not necessarily excite the general insurer taking a look at their values at risk.
In the event a general insurer decides to accept such risks into the portfolio, when premiums are communicated to some of these SME’s they usually find them expensive. They feel the insurer is getting away with their money in the situation nothing happens in the given year. They usually forget the premium to value at risk ratio which is usually in their favor. There is a strong bargain for premium reduction in this market. Despite the request from willing SMEs for premium reduction, the risks they present is usually higher than the average. Therefore, the general may find the central district as not being attractive.
House Keeping Issues
Good house-keeping is one of the many reasons insurers may decide to provide favorable terms to an insurance contract. Good house-keeping goes beyond what the insurer may communicate as warranties on the policy to place the business. It should be reflected as a way of life for the business. It not only makes it easier and cheaper to buy an insurance product but also creates this self-awareness for the firm’s employees.
It requires a conscious and deliberate effort on the part of the firm to make it part of the culture of the business and this starts with the commitment of top management. It translates into the safety standards of the business which protects the entity in itself as it runs day by day. SME’s are usually notable for having little regards for proper house-keeping and the central business district is not different.
Tenants do not have any knowledge of basic fire-fighting techniques, there are few to none fire extinguishers, tenants do not behave as though they have a mandate to protect the property they occupy and landlords do not comply with fire safety standards whilst partitioning the various parts of the property. There seems to be no duty of care on the part of any party and this is worrying to insurers. Insurers would like to see that landlords are concerned about their properties and tenants are compliant.
The Way Forward
Tapping into the microinsurance market has always been an issue to general insurers. The desire to tap into the market exist but there seems to be too many obstacles making them less desirable and profitable. Despite all the hinderances highlighted here, insurers may decide to create a pool. Although it may seem like a small pool, it will be a step in the right direction in ensuring the burden of the risk does not entirely rest on the shoulders of one insurer who took the risk to insure the market.
It may be the key to opening up many opportunities to the less served SME’s whilst creating room for an all-inclusive insurance market. This is because, it Is quite unfair to have the life insurance sector heavily ensuring these markets whilst we neglect their source of livelihoods for which they may potentially need to finance their life insurance premium payment. I hold the opinion they should be served holistically and priced accordingly by the market insurers.
Also, materials used in the partitioning of these properties should be fire resistant in order to reduce the impact of a fire outbreak on the content of the properties thereby reducing the intensity of the fire. The relevant agencies often complaining of illegal electricity consumption in the capital must enforce the right electricity connections are made in these areas vis a vis the relevant electrical installations are done to ensure the properties are safe for habitation. These aged properties may also need to be recertified at structurally worthy for commercial businesses alongside the installation of fire extinguishers on these properties.
The Benefit as a Nation
If these remedies are put in place and insurers find interest in writing businesses from the central business district, the insurance penetration rate of the country is definitely going to increase and this thus puts the country ahead in the financial inclusion agenda amongst other countries like India, United Kingdom and the like who have significant penetration rates.
Also, anytime a property collapses or fire guts any, the public outpour is to have the government intervene to remedy the situation. The government is usually called upon to help refinance tenants who have lost valuable properties in the cause of the accident. However, should the necessary laws be enforced concerning the compulsory commercial property insurance, the government would not need to intervene since the properties under consideration would be catered for by the insurers. This relieves the government of all financial burden and allows institutions mandated for the very purpose to work effectively. The essence of insurance will be manifested and thus provide its quota to national development.
The central business district is a hub of many opportunities both to the formal and informal market participants. The streamlining of activities is likely to draw growth to the market whilst fostering economic wellbeing.
ABOUT THE WRITER
The writer is an Associate Member of the Chartered Insurance Institute, United Kingdom, a Chartered Insurer and holds a Master’s & Bachelor’s Degree from the University of Ghana, Legon
Email: [email protected]
Mobile No: +233(0)261776904