Democratic political transition refers to a process that establishes a democratic political regime that is based on the rule of the party or parties that get most votes in contested elections. Democratic Political Power Transitions have a profound effect on various sectors of the Ghanaian economy of which the insurance industry cannot be left out. Ghana, a country with a history of democratic elections, experiences these transitions periodically. With the approaching election year in 2024, political parties are gearing up to campaign and seek for political power.
The potential or expectation of change in democratic political power by citizens raises questions about how it might affect the operations of the insurance industry. The fierce nature and never-ending electioneering campaign in the country is often dominated by two major political parties namely New Patriotic Party (NPP) and National Democratic Congress (NDC).
Political succession through elections can be considered as a form of a game that can also be conceptualized as an investment project. In such a game, there are winners and losers whose payoffs cover a time horizon of several years thus necessitating an analysis from an investment perspective. Voters choose a group of people or party to manage their affairs over a four-year period.
The choice confers on the winning party or group the management of the government policies. Democratic elections create winners and losers. In Ghana’s winner-take-all electoral system, winners take all the spoils of the electoral contest leaving losers with personal debt, the pain of loss and other intangible costs.
The Electoral Commission of Ghana (EC) is the official body in Ghana responsible for all public elections. Made up of seven members, its independence is guaranteed by the 1992 Ghana constitution. The current commission was established by the Electoral Commission Act (Act 451) of 1993. Kwadwo Afari-Gyan was the first substantive chairman of the commission, from 1993 to 2015. He was succeeded by Charlotte Osei as the first female chairman of the commission from 2015 to June 2018. Jean Adukwei Mensah succeeded Charlotte Osei in July 2018.
This article examines some challenges and opportunities that the Ghanaian insurance industry is likely to experience during electoral seasons (2024 elections).
Challenges likely to be faced by the Ghanaian insurance industry in election seasons
The insurance sector in Ghana is anticipated to face certain challenges in the midst of any election season. This section outlines some of the challenges that the industry can expect to encounter.
- Changes in insurance regulation
Changes in insurance regulations can potentially occur during election cycles or years, and these changes can have a significant impact on the insurance industry in Ghana. If the current government loses an election, the incoming government may aim to revise insurance regulations to align them with their political agenda.
Consequently, insurance companies may need to swiftly adapt to the new governmental rules and regulations to remain compliant and avoid potential penalties. This adjustment process can result in increased operational costs, including expenses related to training existing staff on new compliance matters or hiring new compliance officers. Additionally, insurance companies may need to modify their operational procedures which will come with a higher cost.
2. Economic uncertainties
Economic uncertainties, which can manifest both before, during and after elections, has the potential of creating an atmosphere of unpredictability in the financial landscape. These uncertainties can result in both local and foreign investors adopting a more cautious approach when conducting business within the country. Some key economic uncertainties are changes in taxation policy, trade policy, changes in regulation, interest rate fluctuations, exchange rate and many more.
The repercussions of this cautious approach are far-reaching and extend to the insurance industry and its overall financial stability. The fluctuations in investment portfolios of insurers can introduce financial instability affecting their financial health. This can undermine the insurers’ ability to manage their risks and meet their financial obligations, potentially putting policyholders and the broader financial system at risk.
3. Consumer trust and confidence
Political events can impact public trust and confidence in the insurance industry. The Ghanaian insurance industry is already battling with the challenge of lower insurance penetration and awareness. The current insurance penetration rate hovers below 2percent. This rate is measured as a ratio of insurance premium to Gross Domestic Product (GDP). Political uncertainties will worsen the penetration rate of the industry if not properly managed.
Maintaining a positive industry image and building trust with customers can be particularly challenging during election periods, where political discourse and public sentiment may be polarized. When existing consumers are uncertain about the future of the economy, they may reduce their investment into their business which will have a direct negative impact on insurance spending which affect insurers profitability. This will also prevent future consumers from purchasing the insurance products of insurers. Effective communication and public relations strategies are essential to mitigate the erosion of trust.
4. Currency and exchange rate risks
Uncertainties that arise before, during, and after elections can trigger fluctuations in a country’s currency compared to the currencies of its trading partners. These currency swings can pose a significant challenge for insurance companies that either do business internationally or invest in foreign countries.
The impact of these currency movements can be felt directly in an insurance company’s financial performance and the way they assess the value of their assets. For instance, if the currency they hold loses its value, the worth of their foreign investments may decline, potentially resulting in financial losses. Furthermore, currency fluctuations can also lead to increased reinsurance cost for insurance companies involved in international reinsurance transactions.
To address these challenges, insurance companies can employ financial tools such as hedging to shield themselves from abrupt shifts in currency values. By using strategies like hedging, they aim to minimize the potential negative impacts of currency volatility on their operations and financial health.
- Weakened fiscal position
Ghana is anticipated to undergo a period of weakened fiscal policy in election seasons. The expected surge in government spending, particularly on projects aimed at winning public support, raises concerns about the potential emergence of a national budget deficit. This heightened focus on expenditure may result in delays in implementing income-generating policies, leading to revenue shortfalls.
Consequently, there is a likelihood of increased inflationary pressures and foreign exchange fluctuations, which can adversely affect businesses operating within the country, including the insurance industry. As a consequence of the economic instability, the insurance sector is poised to encounter uncertainties in investment returns and other key performance indicators.
6. High default rate by contractors in charge of the various government infrastructural projects
There is a high possibility of default by government contractors especially during elections and government transitions. In such instances, the new government is likely to invoke insurance bonds issued by insurers covering the defaulted contractors. This is to enable the new government to re assign the projects to different contractors to ensure completion. Advance payment bonds issued by insurers serve the purpose of guaranteeing that any advance payments made by the government to contractors are dedicated to project completion. In the event of a contractor default, the insurer becomes liable to compensate the government. The potential recurrence of such circumstances could have a significant adverse effect on the financial stability of insurers.
Opportunities for insurance industry during election seasons
Despite the challenges posed by political power transitions, opportunities also emerge for the insurance industry in Ghana:
- Innovation and Adaptation
Insurers during the midst of economic uncertainties in an election season can take opportunity to be innovative in order to stay relevant. Insurers are in business to insure risks and provide peace of mind to the populace. They can take advantage of the situation to develop innovative insurance products that aligns to the needs of the population at that particular point in time. They can decide to expand the coverage for political risks insurance, crisis management coverage, cyber security insurance and many other important policies.
- Public Awareness and Education:
Election seasons often lead to increase in media coverage and public attention. Insurance companies can take advantage of this to advertise, promote and expand its market presence with potential customers. They can take advantage of this to educate the populace on the importance of insurance and risk management. This has the potential of increasing insurance awareness which will in the long run lead to increase in insurance penetration.
- Expectation of high premium income from insuring government projects during election seasons:
During election seasons, governments often allocate substantial budgets towards various infrastructure projects as part of their efforts to showcase development and win public support. This heightened spending translates into more insurance opportunities for companies specializing in project coverage. The larger budgets allocated to these projects often result in higher insurance premiums.
As governments invest more in infrastructure development to demonstrate progress and satisfy public demands, insurers can charge higher premiums for the increased risk coverage associated with larger and more complex projects. While insuring government projects during election years presents lucrative opportunities, prudent risk assessment and management are crucial to ensure long-term success and financial stability for insurers.
- Opportunities for reinsurance companies
Reinsurance companies are insurance companies’ insurers. They provide capacity to insurance companies to enable them insure risks. Reinsurance companies can also find opportunities to provide coverage to primary insurers dealing with election-related risks or political risks. Such risks require higher capacity and special technical knowledge and skills to underwrite which might not be available within the insurance companies. Reinsurers can provide support to the primary insurers in managing their portfolios effectively. This will lead to increase in premium income for reinsurance companies residing in Ghana and abroad.
- Growth in political risk insurance
As political uncertainty increases, demand for political risk insurance may rise. Insurance companies can expand their offerings in this niche to serve businesses and individuals concerned about such risks. The first insurance company that take this initiative will enjoy the first mover advantage.
The purported distribution of money by political parties and other individual politicians to citizens, presumably to influence their votes during election season, holds the promise of creating opportunities for insurance companies. The influx of money can serve as an opportunity for insurers to generate higher premiums. The alleged unrestricted flow of money has the potential to stimulate increased economic activities within the country.
This increase in economic engagement is likely to increase the demand for insurance across various sectors of the economy. For instance, individuals receiving financial assistance may opt to invest in properties, vehicles and other assets resulting in an increase in the demand for insurance coverage. However, insurers must exercise vigilance and conduct thorough risk assessments before accepting these risks to mitigate the potential for future fraudulent claims, which could adversely impact their profitability.
Conclusion
The insurance industry in Ghana is expected to faces a mix of challenges and opportunities during political power transitions. Success lies in the ability of insurance companies to strategically position themselves to navigate these challenges and capitalize on the opportunities presented during election seasons. A collaborative effort by all stakeholders can play a vital role in sustaining the industry in the wake of any political unrest.
Reference
- https://www.researchgate.net/publication/303019469_Impact_of_Democratic_Political_Transition_on_the_Economy_of_Ghana
- https://en.wikipedia.org/wiki/Electoral_Commission_of_Ghana
- https://nicgh.org/
- https://publication.codesria.org/index.php/pub/catalog/download/41/167/376?inline=1
>>>The writer is a chartered insurance Practitioner (CII, UK) and holds a professional qualification in Risk Management (ARM) from the American Insurance Institute. He has over nine years experience in insurance, reinsurance and risk management. He is also a manager at Star Assurance Company Limited. He can be reached via +233249236939 and or [email protected] / [email protected]
