Insurance: Life or general, matters to everyone, and the regulator is manoeuvring to get people interested in insurance products, writes Evans Boah-Mensah.
Insurance is one product many people in Ghana are hesitant to take. Currently, there are 43 insurance companies in both the life and non-life insurance sectors, who are all competing in a market where uptake of insurance is low, hovering around 1.5 per cent of the estimated 26 million population.
Over the years, efforts to increase the penetration rate have often been hit and miss or misguided. For many people, insurance just offers one a piece of mind as claims payment challenges have left many in pain, affecting confidence and trust in insurance companies.
The regulator, National Insurance Commission (NIC), is not oblivious to the public perception in the industry, and has initiated a number of policies and legislations to address challenges in the insurance industry to enhance public confidence.
It is a widely held view that, prompt claims payment and premium debtors are some of the principal challenges that threaten the survival of the insurance sector.
“Claims payment has been a major challenge in the Ghana insurance market. Insurance companies are in the business to pay claims and therefore companies should mobilise funds to pay claims even before payment of salaries to their employees.
“Another challenge that needs to be addressed as early as possible is premium debtors. We need to work together as an industry to deal with the challenge of premium debtors. I am therefore looking forward to the support of all players for the adoption of a ‘no premium, no cover’ policy, to ensure the survival and stability of the Ghana insurance industry,†noted the Commissioner of Insurance, Lydia Bawa.
Ms. Bawa, who has had an extensive career in the insurance industry starting off as an underwriter, is convinced that reducing the debt portfolio in insurers’ books will put the industry on the right footing for growth and stability.
The NIC is worried some insurance companies have resorted to unconventional practices of reporting huge amounts of outstanding premiums, while at the same time making equally large amounts of provision for bad debts without significant subsequent recoveries, putting the entire industry at risk.
Figures from the operations of insurance companies last year are not available. However, available data indicate that insurance companies were owed a little over GHC130 million in premium debts at the end of December 2012, a situation that makes it difficult for insurers to honour claims when they fall due.
The debt, which is 0.35% less than what was recorded in 2011, was incurred as a result of people who took various insurance covers without paying the required premium.
At the same time, claims paid by insurance companies increased by 35.8% from the previous year to GHC99.8 million at the end of 2012.
The NIC says it is concerned the outstanding premium profile could hurt the industry, necessitating the formulation of the ‘No premium, no cover’ policy to protect the interest of all stakeholders in the insurance industry - as the present practice exposes the industry to liquidity risks.
The “No premium, no cover†policy, which is expected to come into effect beginning next month, will therefore require insurance firms to collect premiums upfront before providing insurance cover.
“The huge outstanding premiums have had a significant knock-on effect on reinsurers. Firstly, insurance companies are unable to pay their reinsurance premiums while the premiums remain unpaid by the policyholders. Subsequently, the reinsurers are unable to pay their retrocessionaires. This creates serious credit risk exposures for both the insurers and reinsurers.
“Secondly, when the premium debts are eventually declared bad or doubtful and have been written off, it creates complications for reinsurers as they would have already placed the business with their retrocessionaires,†the commission said.
Some insurance practitioners have explained that the practice of some insurers issuing out policy covers without collecting the appropriate premium has arisen in the face of growing competition in the industry.
Industry players believe the difficulties in accessing claims when they fall due have dampened public confidence in the industry.
Ms Bawa said the Commission has recognised that absolute confidence in the insurance industry is the only way forward for the survival and the stability of the industry.
“On our part, we will continue to work to build a credible image for the industry. There are a lot of areas that we need to work on to improve the image of our industry thereby ensuring growth and a substantial contribution to the economic development of our country.
“The NIC with the support of the sector Minster has agreed to the need to enhance the capital base of the finance industry. There is also the need to introduce the new solvency requirements in order to protect the interest of policyholders,†she said.
Currently, insurance companies are required to have a minimum capital of GHC5 million to operate and the NIC is hoping to increase this to GHC10 million.
As a result, the Commission is now reviewing its legislative cover to ensure that it has the legal wherewithal to undertake its regulatory functions and also empower insurers to underwrite unconventional businesses.
At the heart of the review of the Insurance Act, 724, which has been in existence since 2006, is to give insurers the power to develop agric and micro insurance products.
As of now, there is no legal backing to guide insurers in the development of micro and agric insurance products, which has made it difficult for people engaged in agriculture and micro businesses to insure their activities against uncertainties.
Ironically, the agriculture and micro businesses control about two-thirds of the Ghanaian economy, which suggests that if insurers are able to penetrate that sectors’, insurance uptake will surge significantly.
Micro and agric insurance is projected as the new prospect for the insurance industry as a result of the critical importance of agric and micro enterprises to the economy.
The agricultural sector has lost its position as the biggest contributor to the country’s GDP, yet it still offers more jobs to people than any other sector. Therefore, the new push for it to receive insurance coverage options can further boost food output.
The Deputy Commissioner of the NIC, Simon Nerro Kodjo Davor, has explained that the insurance bill is aimed at addressing some of the challenges insurers face in developing products for some critical sectors of the economy.
“The new insurance bill will address some of the limitations in the present insurance laws. Micro insurance and agric insurance, which are not covered in the current Act, will now be covered when the insurance bill is passed so that products can be developed for agric and micro businesses,†he said.
The insurance bill being put together by the NIC in Ghana will basically ensure the creation of a viable crop insurance scheme to cover farmers against crop failure and financial losses caused by extreme weather conditions.
It is understood that after the passage of the insurance bill, the NIC will give priority to licensing insurance companies with specialisation in micro-insurance and agricultural insurance.
The NIC believes micro-insurance holds the key to the future growth of the insurance industry, having proven in some African countries to be one of the best models for insurance penetration in developing markets.
Through micro-insurance, insurers in South Africa, Namibia, Kenya and Uganda have succeeded in extending their services to small-scale businesses in commerce as well as in agriculture.
As Ghana’s penetration rate stands at 1.5%, in Africa, outside of South Africa, only seven countries have insurance penetration above 2%.
The general consensus is that if insurers in Ghana stepped out of their comfort zone and dared to cover risks associated with doing business in non-traditional sectors, it could mark the beginning of massive insurance penetration in the country.
Additionally, passage of the new insurance bill is expected to make it easier for banks to expand credit to the agriculture sector, in particular, and the informal sector in general.
Over the years, the low volume of credit to the agriculture sector has been attributed to the perceived risks linked to the sector’s over-dependence on rain for crop production and improper use of fertiliser, a situation which has led banks to charge high interest rates on loans and advances to the agriculture sector.
The NIC sees the “No premium, No policy†and review of the insurance Act as critical to developing the insurance industry. But without enforcement of some of the policies of the regulator, efforts to encourage people and insurers to move into new areas will come to not.
For instance, the enforcement of the compulsory fire insurance policy, which could have opened a new window of opportunity for insurers at a time the incidence of fire outbreaks is on the rise is not encouraging.
“This policy will push people to insure their properties against fire. However, this will depend on how we are able to enforce it. Practitioners must also educate the insured about the benefits of taking fire insurance,†noted Kwame Ofori, Executive Director of Enterprise Insurance Company.
But as the industry take steps to encourage people to take insurance policies, government is making it harder for them to do so by making social protection policies expensive to buy.
The Ghana government recently amended the country’s VAT law to among other things increase the rate from 15% to 17.5% and to also rope in other sectors that have been overlooked by taxmen. This puts Ghana among only a few countries in the world that charge a consumption tax on insurance at a time the industry is struggling to expand.
Now, insurance companies are howling about the inclusion of their products in the new VAT net, which they fear could further inflate premiums paid on insurance policies and erode efforts to encourage people to insure against uncertainties.
The insurance industry has over the years been exempted from VAT. However, the coming into force of the new VAT law at the start of this year requires insurance companies to charge 17.5% on non-life insurance products.
According to insurers, VAT on insurance premiums is a setback, which will come back and haunt the government unnecessarily.
Kwame Gazo Agbenyadzie, the President of the Ghana Insurers Association (GIA) - the association of insurance and reinsurance companies- has warned that hikes will only increase the strain on individuals and businesses trying to comply with the laws that mandate them to buy or provide insurance.
“The likely effect that we see is that if the VAT is implemented and charged on the premium, we will pass it on to the final consumer. Motor insurance, for instance, is compulsory and that is where a lot of people will be affected because if motor insurance goes up, it is likely that the transport unions will adjust transport fares accordingly to reflect the increment and that will impact on the cost of transportation and food as well as other fast-moving goods.
“Two years ago, we tried to increase motor premiums moderately and the government intervened. Now we will just have to pass it on the consumer,†he said.
So as the regulator strives to stabilise the financial standings of insurance companies and encourage people to recognise the importance of insurance in their lives, government’s posture shows an economy where there is lack of harmony and coordination in policy direction.
The likely effect of is that people will not take or buy insurance. When they are in distress, they will run to government for bailout, as seen with the fire outbreaks in recent times.
But for government, the time is ripe for Ghanaians to make hard choices and pay more for products that are even unpopular with them.
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