16 years after the concept of composite insurance companies was replaced with separate life and non-life insurers, the industry has come to recognise life insurance as having the bigger growth and profitability prospects of the two. However, to fulfil those prospects the industry must continue its retreat from universal life back to traditional life cover – but high investment yields are generating customer resistance. ELLIOT WILLIAMS & TOMA IMIRHE examine the structure of Ghana’s life insurance market and what’s shaping it into the future.
Insurance practitioners and industry analysts alike generally agree that life insurance is the future of Ghana’s insurance industry and the markets it serves. It’s just that large swathes of the customer base that will make this happen do not consciously realise it yet.
Sixteen years after the National Insurance Commission took the pivotal regulatory step of insisting that life and non-life (general) insurance activities be handled separately by separate corporate entities, life insurance has come into its own; not only growing faster than general insurance, but also making an increasing contribution to overall industry premiums.
The relative strength of life insurance can be traced back to its long-term nature – traditional life insurance cover is close to having a pension – but Ghana’s industry has grown in a different way; its strong growth over the past two and a half decades ignited by relatively short-term, investment-linked life insurance policies, known in the industry as universal life products.
This was the most likely way to ignite interest in life insurance by a public being offered unusually high interest rates; yields on even risk-free government bonds were offering up to 30% during the second half of the 1990s, and so life insurers had to accept sharing investment yields on premiums with the policyholders themselves.
Since then, short-term investment yields (and those on longer-term bonds which have been introduced over the past decade) have fallen, risen again, then risen and fallen yet again. Since the early months of this year, interest rates have risen – in pursuit of runaway inflation – to their highest levels in close to a decade.
This seemingly makes the perfect setting for universal life insurance policies which in 2021 generated GH¢1,235.910million in premiums, almost half the total gross premiums made by the life insurance industry of GH¢2,513.348million.
But Ghana’s life insurers are reluctant to continue using the double attraction of universal products to attract customer growth. Experience over the past two decades has taught them that net incomes have not grown nearly as fast as gross premiums, and investment setbacks have now and again trimmed already narrow profit margins even further. Consequently, the industry is in broad agreement that life insurers should stick with their overriding traditional role of managing risk, rather than trying to provide competitive investment yields at the same time. The conventional wisdom in insurance company boardrooms nowadays is that in trying to be a Jack of all trades, you will end up being master of none – including risk management, which insurers are meant to be masters of.
This will still take more time to manifest though, and the current surge in interest rates will renew life insurance policyholders’ demands for a share of the investment yields, through patronage of universal life products.
Not only do universal products generate nearly half of the life insurance industry’s gross premiums, but the shortest tenured version of such products which are given a category of their own – term policies – provide cover for just one year, at which point they are refunded: and these accounted for another GH¢161.168million in gross premiums last year.
But traditional life cover, which focuses on risks to the policyholder and potential rewards to policy beneficiaries, is on the rise. Classified as Whole Life and Endowment policies, these generated GH¢715.894million in premiums last year – second only to universal products.
Life insurance patronage is getting a strong lift from business activity, and this should help in getting customers to focus on risk management as the primary use of insurance – leaving their investment activities to specialists in that field and using separate financial allocations from those for insurance cover.
Group life, mostly taken by corporate/institutional employers for their entire workforces or specific key segments of them, accounted for GH¢173.967million in premiums in 2021. Another business-driven class of life insurance – credit life, which insures borrowers against their inability to pay up due to death or disability – generated another GH¢88.659million in gross premiums.
Interestingly, several life insurers made significant premium income from providing cover that none of their counterparts did in 2021. For instance, Glico Life Insurance was the only life insurer that earned premium income from ‘dread disease cover’ in 2021, this being GH¢335,179. Similarly Old Mutual Assurance alone made GH¢597,030 from annuities and another GH¢220,507 from providing cover against total and permanent disability and income protection.
The long-term nature of life insurance is not the only key advantage it offers to companies that underwrite it. Claims are relatively low too, and so life insurers can afford to retain most of the risks underwritten in-house rather than hive-off a huge chunk of them as reinsurance – as general insurers are forced to do by prudence. For instance, the biggest life insurer, Enterprise Life, enjoyed net inflows for 2021 of GH¢598.361million, only slightly shy of its GH¢608.900 in gross premiums. Similarly, the second-largest life insurance premium earner, SIC Life, kept GH¢474.822million out of its GH¢476.033 million in gross premiums as net inflows. At the other end of the spectrum, the smallest life insurance premium earner in 2021, GN Life Assurance, did much the same; keeping GH¢2.216million of the GH¢2.324million it made.
Even without very substantial reinsurance, Ghana’s life insurers are however continuously prepping themselves against the possibility of an upsurge in claims. All the insurance companies have technical provisions, more commonly known outside the industry as Life Funds, which are more or less in consonance with the contingent liabilities they have taken up through the policies they have underwritten.
In line with its industry-leading gross premiums, Enterprise Life has the biggest technical provisions built up, of GH¢904.830million – which is more than three times the gross policyholder benefits it paid out in 2021 of GH¢282.660million. But at the other end of this particular spectrum there are companies similar to Ghana Union, whose technical provisions by the end of 2021 was GH¢1.644million – which is a little than the GH¢1.723million it gave to policyholders as their benefits last year.
There will always be questions over the state of privately-owned life insurers taking premiums from customers over a long-term in exchange for guarantees that it will take on their personal risks – including some that are actually business-driven such as credit life and group life. But at least so far, those questions remain without firm substance and Ghana’s life insurers have met their genuine obligations without major fuss nearly all the time.
The recently concluded recapitalisation exercise imposed by the NIC has forced life insurers to put up much more of their own equity capital and given them even bigger buffers; although actually that was never the regulator’s biggest consideration – rather, it demanded more capital to enable Ghana’s insurers to mobilise more financial capacity for keeping premiums in-country.
The fact that Ghana’s life insurance companies have already been doing this much more than their general (non-life) counterparts is yet another sign – and a clear one indeed – that the country’s insurance industry sees its future in life insurance, even if many of those potential life insurance policyholders have not yet got the memo.