“Please put a hold on the renewal of my car insurance, the car is parked because COVID-19 has caused me to temporarily close my guest house.” These were the words of a client on the phone asking me not to renew his comprehensive car insurance until further notice. I tried to convince him that the car may be parked but other risks of theft, flood, fire etc still persist. He retorted, “Joe, where is the money?” That was when the real impact of the COVID-19 Pandemic dawned on me.
The COVID-19 Pandemic, at the risk of sounding like a broken record, has wreaked havoc on businesses globally. In the US alone, the CNN reports that 3 million people filed initial unemployment claims within the second week in May 2020 bringing the total number of first-time unemployment claimants to 36.5 million since mid-March 2020.
As at May 21, Ghana’s confirmed COVID-19 cases stood at 6,269 with 1,898 recoveries and 31 deaths. A great number of businesses in the country have been severely affected by this pandemic, though some have been hit harder than others. Sectors that have been hardly hit include tourism and hospitality (as most hotels and restaurants have closed down), car rental companies (who depend on tourism, hospitality & aviation sectors), aviation (passenger flights have been grounded across the globe), oil and gas (unprecedented dip in oil prices), financial services (pressure on banks to restructure loans by granting moratorium on repayments etc), Retailers/ wholesalers of consumer products (low patronage due to general reduction in disposable income) and among others.
The spotlight has not been shown on the insurance industry which has also been hit hard due to this pandemic. The next few paragraphs briefly discusses how COVID-19 would operationally and financially affect the insurance industry.
Ghana’s Insurance Industry in Perspective
Ghana’s insurance industry is regulated by the National Insurance Commission (NIC) established by the Insurance Act, 2006 (Act 724) with the primary mandate to ensure effective supervision and regulation of insurance business. The main players in the industry are insurance companies comprising life & non-life insurers with support from reinsurance companies, insurance brokers, loss adjusters and reinsurance brokers. Presently, there are 22 life insurers, 29 non-life insurers, 4 reinsurance companies (one with just a contact office in Ghana), about 91 registered insurance brokers, 3 loss adjusters and 4 reinsurance brokers. Aside these, insurance companies have individual/tied agents who aid in business generation. The industry’s main revenue source is from Gross Written Premium (GWP) augmented by investment income and it employs over 12,000 people.
The industry has come a long way after several conscious efforts by the regulator and other stakeholders to improve the industry’s contribution to Gross Domestic Product (GDP). One key benefit of the industry is to stimulate economic development. This goes without inferring that an increase in insurance penetration is a spur for economic growth. According to the 2018 Annual Report of the NIC, insurance penetration (GWP as a percentage of GDP) in Ghana was 1.14% at end of 2018 despite a 21% growth in the industry’s GWP same year. Our penetration rate is low compared to countries like Kenya with insurance penetration of 2.6% and still lower than the Sub-Saharan Africa (including South Africa) average of 2.8%.
We expect to continue on a growth trajectory in 2019 as insurance companies prepare to file their annual reports with the NIC by May 31, 2020 (deadline revised from April due to the COVID-19 Pandemic). Preliminary figures of GWP of insurance companies, based on unaudited Q4 2019 reports, show a growth of about 16% in 2019.
Impact of COVID 19 on Insurance Industry
Business Outlook Pre COVID-19
The industry has experienced tremendous growth over the years and the outlook, at the start of 2020, was buoyant. The year 2020 is crucial for the industry since it is the year preceding the recapitalization exercise announced by the NIC last year. Therefore, how well an entity performs in 2020 would play a fundamental role in its ability to meet the new Minimum Capital Requirement (MCR).
Non-life businesses expected massive revenue growth in 2020, especially in motor premium, due to the introduction of the Motor Insurance Database (MID) by the NIC earlier this year. MID is a central database that hold information of every insured vehicle. The primary purpose of this new system is to eliminate, if not entirely, the menace of fake motor insurance and reduce the number of uninsured vehicles on the road by providing a central source of information on all vehicles. This is expected to be a game changer as the old days of premium rate undercutting and fake motor insurance stickers, which contributes significantly to loss in motor premium, would be a thing of the past. The Motor class of business contributes about 37% to the total GWP of non-life insurers according to the NIC 2018 Annual Report.
Also ahead of 2020, most insurers had high expectations that the anticipated increase in economic activities due to the 2020 Presidential and Parliamentary elections would improve their 2020 performance. As we have seen historically, election years bring increased fiscal activities despite Government’s assurance that the 2020 budget deficit forecast will remain within the legislated 5%. Can this be achieved after the ravaging effects of COVID-19? We live to see. Planned total expenditure is projected at 85.5 billion Cedis (US$15.5 billion), 21% more than the projected expenditure outturn for 2019. These expectations were heightened as the Government declared this year as ‘the year of roads’. Most road contracts, before they are awarded to a contractor, may require bid security, advance payment guarantee and or performance guarantee from a non-life insurer. I am quite sure that most non-life insurers expected to seize this opportunity to grow its revenue in 2020. But the question is, will this agenda be pursued by government amidst the COVID-19 crises?
Business Outlook Post COVID-19
Till date, the World Health Organization is yet to approve any treatment drug or vaccine to fight the COVID 19 pandemic. This poses a great challenge to businesses on how far-reaching their plans should be amidst these uncertain times. A grim picture of the pandemic’s impact has been painted by experts including the Minister of Finance. In a piece published by the Financial Times on April 16, 2020, he suggested “a two-to three-year trapezoid-shaped recovery” of the economy occasioned by the COVID-19 pandemic and attendant lockdown. The Bank of Ghana in its March 2020 Monetary Policy Committee report also indicated that its initial assessment shows that “GDP growth estimates could halve to about 2.5 percent and decline further in the worse-case scenario because of COVID-19’s impact”. How would the industry be affected by this pandemic? What impact would this Pandemic have on recapitalization of insurance companies? These are questions on the minds of managers of insurance companies now. The following paragraphs briefly discusses these questions.
The pandemic has had significant impact on:
Most insurers looked forward to a prosperous year in terms of growing its revenues towards the recapitalization of their retained earnings. I call this year the ‘year of recovery’ as most insurance companies impaired some investments, in line with relevant International Financial Reporting Standards, occasioned by the financial sector clean-up.
Unfortunately, due to this Pandemic, the hopes of most companies have been dashed as they may not rake in the projected revenues. For instance, revenue targets from travel insurance (a policy underwritten by most non-life insurers) may not be achieved in 2020 due to this Pandemic. Travel bans have been announced by most countries, passenger planes have been grounded for more than 2 months and we are not quite sure when travel bans would be eased especially on international travel. Though there may be a rush after the ban is lifted for those who got stuck before these travel restrictions, we do not immediately expect a buoyant sector as it existed before COVID 19 reared its ugly head.
Despite the fact that the lock down imposed on Greater Accra and Kumasi areas was lifted some weeks ago, some precautionary measures are still in place including physical and social distancing. Insurance agents, who generate about 64% of GWP for life and 30% for non-life insurers through direct sales, cannot have the usual face-to-face meetings with clients. It is said that insurance in our part of the world is sold, not bought; so most clients would want to physically meet sales agents before completing an insurance transaction. Also, clients are not renewing policies while others with life insurance policies have put a hold on monthly standing orders/ contributions. This presents a big challenge to insurers in respect of revenue generation.
To strengthen the ‘spine’ of industry players, the NIC in June 2019 announced an increased MCR of entities in the industry with June 30, 2021 as the deadline. The new MCR for insurance companies (Life & Non-Life) is GH¢50 million from GH¢15 million; reinsurance companies from GH¢40 million to GH¢125 million; and from GH¢300,000 to GH¢500,000 for brokers and loss adjusters.
Options for meeting the new MCR are through injection of ‘fresh’ cash and/ or capitalization of retained earnings. As earlier mentioned, 2020 is crucial to the industry because how a company performs this year would affect its retained earnings to be capitalized in June 2021. A drop in revenue projections and consequently, net profits would affect the company’s recapitalization drive as shareholders would have to supplement its eligible net assets through injection of ‘fresh’ cash.
A number of insurance companies in the industry have foreign ownership. This pandemic has greatly affected a lot of countries particularly US, China and in Europe (Italy, France, Germany, UK etc). Insurance companies with shareholders in these worst hit countries may be affected as plans and projections have been thrown off balance. This would likely affect the recapitalization plans of affected insurance companies.
Current Insurance Policies
The life sub-sector is the worst hit in this crises. Though the industry is yet to put numbers out, COVID-19 would increase the probability of policyholders to redeem their policies. Policyholders would fall on policies such as funeral for the dead, education, loss of job and other investment policies to assuage the difficulties faced.
In the non-life sub-sector, some clients have put a hold on renewals while others have suspended their insurance cover. Businesses have parked their vehicles as some have halted operations or reduced business activities hence insuring life and property have been put on the back burner. Policyholders are requesting for credit arrangements, which cannot be done under the ‘no premium, no cover’ era. These are indeed difficult times.
Investments & Associated Income
A significant part of insurance companies’ assets is investment. The NIC requires an insurer’s total investments to be at least 55% of total assets. COVID-19 would impact insurers’ investments on two fronts—additions to investments and investment income.
Premiums received from policyholders are invested against future claims and other expenses. With the anticipated dip in GWP, additions to investments would also be affected negatively.
Also, expected investment income may be adversely affected. The bottom-line of insurers is supported by income from investments. Premium received from insureds are either invested on the capital and or money markets but unfortunately both markets have not been spared by the rippling effects of the COVID-19 pandemic. On the capital market, trading activities remained in the negative territory as the GSE Composite Index contracted by 10.8 percent year-on-year at end of Q1 2020 despite a marginal recovery. On the money market front, interest rates on fixed deposits issued by banks have fallen after the Bank of Ghana announced a cut in the monetary policy rate by 150 basis points to 14.5%. Presently, average interest rate offered by banks is between 8%-12% compared to 12%-14.5% pre COVID-19.
Expected changes in the insurance industry in the face of COVID-19
This is probably the first time I have seen the impact of a pandemic causing most economies to partially shut down. The question on my mind is, how would the insurance industry change in the face of this pandemic?
Most insurance companies have triggered parts of their Business Continuity Plan (BCP) to ensure that there is a balance between protection of lives of staff and clients as well as continuity of business. As mentioned earlier, the use of agents is the main channel of distribution of insurance in Ghana which often requires face-to-face interaction with clients. Unfortunately, this cannot be done anymore. This challenge calls for massive investment in technology. Other players in the financial sector like banks are making appropriate use of technology which comes in handy during these times. It is about time insurers embraced technology in underwriting businesses. Some insurers are doing well but the others must follow suit.
Also, insurance companies, especially non-life businesses should review their products and revise policy coverage to possibly include pandemics like COVID-19 in their Business Interruption (Consequential Loss) Policies. This policy covers loss of income which is usually an appendage to a fire policy. Aside revising policy terms and conditions, insurers in Ghana can develop innovative products to cover pandemics like COVID-19. It has widely been reported that this year’s Wimbledon tennis tournament, which was cancelled due to COVID-19, is set to receive insurance claim of about US$142 million from its pandemic insurance.
As Government rolls out stimulus packages for businesses, the insurance industry should also be considered. Most companies have not laid off staff despite the reduction in productivity and revenue but continuously incur fixed costs such as wages and salaries to staff. Government should consider suspending some taxes on the insurance sector such as the Fiscal Stabilization Levy for this year. A waiver of the levy, which is 5 percent of profit before tax, would be fair so as to cushion the effect of COVID-19 on the bottom-line of insurers ahead of the recapitalization.
As an industry, we are always ready to support the economy and help mitigate the effect of this COVID-19 pandemic of our cherished clients. It is better to pursue a communal approach in salvaging our collective economic furtunes. Let us all do our part by observing the necessary precautionary protocols in order to lessen the duration of this pandemic. As the President of the Republic said, “we know how to bring the economy back to life; but what we do not know is how to bring people back to life”. This too shall pass!
The writer is a Chartered Accountant (ICAG), Chartered Tax Practitioner (MCITG) and insurance practitioner. He is the Chief Finance Officer of SUNU Assurances Ghana Limited, a Non-Life Insurance Company.
E-mail: [email protected]
Disclaimer: Views expressed in this article are that of the author and do not represent the views of the outfit he works