Ghana’s insurance industry is in a new era; cash-strapped insurers are now being made solvent with the coming into effect of a new policy that forbids insurers from selling products on credit.
Early signs of the policy, dubbed ‘No premium, No cover’, illustrate an industry that is ready to chart a new path and restore public confidence.
Over the years, many people in Ghana have perceived insurance as one of the sophisticated products that just promises one peace of mind, as claims payment challenges have left many in pain, affecting confidence and trust in insurance companies. 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.
On appointment, the Commissioner of the National Insurance Commission (NIC) of Ghana Lydia Bawa pledged to sanitise the country’s insurance industry for the benefit of all stakeholders.
The pledge culminated in formulation and implementation of the “No premium, No cover†policy, which has since April this year taken effect with the hope of positioning insurers well to respond appropriately to claims when they fall due.
By this Policy, insurers now have no choice but to collect premiums upfront before providing insurance policy cover to clients.
So far, figures have shown that earlier reluctance of the insured public -- particularly hefty insurance buyers -- to the policy has seen improvement, signalling public acceptance and cooperation for a policy that is set to change the face of insurance business in the country.
According to the NIC, most insurance companies met just about half of their monthly premium budget in April -- when the policy came into effect. A month later in May, most of the companies reported an about-80% outturn in their premium budget; bringing with it a wave of excitement across the industry.
For many insurers, the ‘No premium, No cover’ policy has helped to improve their liquidity situation as they are now armed with resources to pay claims when they fall due.
The NIC is also developing guidelines for insurers on claim payments in a bid to boost transparency in insurance transactions.
“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,†noted the Commissioner of Insurance, Lydia Bawa.
In the past, debt hangover have tied the hands of insurers in paying claims even when they are genuine claim demands -- soiling the image of insurers and uptake of the insurance policies -- due to liquidity issues, as many hefty insured properties were on credit.
As at the end of last year, the solvency margin of the insurance industry, which measures an insurers’ ability to pay out claims when unforeseen events occur, averaged 169%.
Meanwhile, audited figures from the operations of insurance companies in 2013 show premium debts increased from about GH₵130million in 2012 to GH₵143million, a situation that makes it difficult for insurers to honour claims when they fall due.
At the same time, total claims incurred by the insurance companies in 2013 were about GH₵123.8million, which is 23.8% more than what was incurred the previous year.
The NIC says it is concerned the outstanding premium debt profile could hurt the industry, hence the “No premium, No cover†policy to protect the interests of all stakeholders in the insurance industry -- as the present practice exposes the industry to liquidity risks.
“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.
In the meantime, the NIC has directed insurance companies to clear their books of all debts by the end of this year.
Ghana’s chief insurer has warned that insurance companies that fail to collect their outstanding premium debts incurred since 2012 will be compelled to write them off, since the regulator wants to ensure that insurers begin the next financial year on a clean slate to protect the industry’s stability.
“Insurance companies are to collect their outstanding premiums from policyholders or write them off as bad-debt before December 31, 2014,†she said.
Some insurance practitioners have explained that the practice of some insurers issuing policy covers without collecting the appropriate premium has arisen in the face of growing competition within the industry.
Currently, the total number of non-life insurance companies stands at 25 -- which are all competing in a market where the insurance penetration rate is estimated at 1.5% in a population of about 26 million.
In 2013, the general insurance industry grossed GH₵571million in premium income, which was a 17% growth over the previous year’s figure of GH₵487million.
Total assets for the industry reached about GH₵746million in 2013 from GH₵599million in 2012, which represents a 24.4% rise over the period.
The NIC is worried some insurance companies have resorted to unconventional practices by 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.
The NIC has said that its efforts aimed at encouraging people to take up insurance policy cover will be hampered if insurers continue to undertake practices that put them in a difficult position to honour claims when they fall due.
“The current state of affairs has not only increased the credit risk of insurers, but also introduced uncertainty in the market as to the capacity of many insurers to meet their obligations to insurance policyholders and other stakeholders.
“It has contributed significantly to the inability of insurance companies to pay claims promptly and adequately,†it added.
Ms Bawa said the Commission has recognised that absolute confidence in the insurance industry is the only way forward for 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 our industry’s image, thereby ensuring growth and a substantial contribution to the economic development of our country,†she 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, the time is ripe for Ghanaians to make hard choices and pay more for products that are not even popular with them.
At the very least, they will help set the insurance industry on a new path that will help it find a way to come to the aid of the insured when they are in need.
By Evans Boah-Mensah | B&FT Online | Ghana
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