Steady expansion: Reforms and new product offerings help to develop the sector

With a penetration rate of 2-3%, Ghana’s insurance sector is tiny when compared on a global scale. When considered in a regional context, however, it looks more impressive – the penetration rate elsewhere in West Africa is around 1%. Legislative changes are ongoing, which is helping to foster growth, as is the slow but steady adoption of international standards. As of spring 2012 regulators and executives seemed to agree that microinsurance could be the key to developing the retail market, which remains small – accounting for roughly 10% of the sector, according the National Insurance Commission (NIC), the market regulator. A draft version of a new insurance law, expected to be passed after the December 2012 elections, contains several provisions to encourage microinsurance, while donor-funded initiatives are already bearing fruit.

PROGRESS & CHALLENGES: Though the vision is clear, Ghanaian authorities are still putting into place the essential institutions, rules and safeguards that are typically found wherever insurance markets thrive. Some of them, however, are undercapitalised to the extent that there are long delays in the payment of claims and even unpaid claims. Collection is also an issue as some companies are willing to sell policies with only a portion of the cost paid up front and the rest on credit. This has created a scenario whereby demand is being artificially inflated by customers who are not committed to the concept. Furthermore, insurers do not share information with each other or have a central database of consumer history to refer to, which creates opportunities for fraud and makes risk management more difficult. Even with such a tool, risk-based underwriting would remain a challenge due to a lack of capacity. However, that is a common issue in almost every developing country, as well as in some developed ones.

HISTORY: Insurance as an economic activity came to Ghana long before it gained its independence in 1957. In the early 20th century, when the country was a British colony known as the Gold Coast, UK-based insurers set up shop. There were no domestic insurers until 1955, when life underwriter Gold Coast Insurance opened. The next major reform came in 1962 with the creation of the State Insurance Company (SIC), a government-owned firm offering both life and non-life policies. Until 1995, the firm was the only insurer of risks for state-owned enterprises and parastatals. The company has since been privatised. It was then split into SIC Insurance, underwriting non-life policies, and SIC Life, which sells life insurance policies, under the 2006 insurance law, which required composite insures to separate into life and non-life insurance companies. Whilst SIC’s monopoly over the market no longer exists, it is usually relied on by the public sector, in a de facto arrangement (see analysis).

Several laws have been passed to support the domestic market over the years that have come at a cost to foreign companies. In 1976 Ghana required all foreign firms to give 20% of their businesses to SIC. This resulted in many of the UK-based insurers gradually leaving the country. The law was revoked in 1993. In 1984 a similar law required insurers to reinsure at least 20% of their non-life business with the Ghana Reinsurance Company (Ghana Re), the biggest local underwriter, founded in 1972. The government repealed this law in 2008, but it was overruled in 2010, when it was decided that when seeking reinsurance, insurers must exhaust local capacity before looking at other options abroad.

OVERSIGHT: Established in 1989, the NIC is charged with overseeing the sector. Its responsibilities include licensing, setting standards, and approving insurance premium and commission rates. The sector has two trade associations, the Ghana Insurance Association (GIA) and the Ghana Insurance Brokers Association, which are both tasked with lobbying, raising awareness and ensuring high standards of practice.

The health insurance segment, which is separate from the rest of the sector, is regulated by the National Health Insurance Authority (NHIA), which oversees the National Health Insurance Scheme (NHIS). The NHIA is funded by taxes, receiving a portion of Ghana’s 15% value-added tax, as well as by formal sector employees’ contributions, which are deducted at a 2.5% rate. There are about 1.2m Ghanaians in the formal sector that contribute in this way, according OB Acheampong, the NHIA’s director of research and development.

MARKET STRUCTURE: The sector is made up of 41 insurers, of which 23 are non-life and 18 are life insurance firms. The biggest players on the market are the State Insurance Company (SIC), Star Assurance, Enterprise Insurance and Glico Life (see analysis).

According to a study by Irish market research firm FinMark Trust, just 5% of the country’s 24m population have bought an insurance policy. This looks set to change, however, as Ghana’s economy grows, and household incomes and appetites increase. “There is now an emerging middle class that will change the market,” said Michael Andoh, the head of supervision for the NIC. “At present, less than 10% of Ghanaians can afford insurance. We expect that number to grow to 11% in a year or two, and continue from there.”

NON-LIFE: The non-life insurance market is driven primarily by motor policies for third-party liability as this is the only type of insurance policy mandated by law for the retail sector. Motor insurance is also the main source of profit for both the government and corporations. It accounted for GHS123.9m ($73.46m) of premium income, 45.6% of the total in 2010, according to the NIC’s 2010 annual report. However, the retail sector accounts for just 10% of the market overall, which means insurers are essentially chasing after the same public sector and commercial opportunities. As these are large-scale accounts, the market can be prone to high fluctuations if a customer switches providers. Players in the market which rely heavily on multinational corporations are likely to suffer from these wide variations in premium income, according to Solomon Lartey, the chief operating officer at Activa Insurance. To avoid the risk of swings in market share, Activa’s strategy is targeting new customers and regions. “We are trying to focus on retail and small to medium-sized enterprises,” Lartey said. The company has opened offices in Kumasi, Ghana’s second-biggest city; Takoradi, near the country’s offshore oil deposits; and Tema, an industrial zone outside Accra. This approach, he believes would create a good balance of portfolios and forestall any over-reliance on a few big accounts. Companies like Activa also believe this model would ensure that insurance covers and packages that hitherto were only available to privileged multinationals and expatriates would now become accessible to the ordinary Ghanaian.

For corporations, an additional form of insurance – property coverage for commercial buildings – is mandated. Buildings are required to have coverage against collapse, fire, liability and other risks. Enforcement has historically been minimal, but the Ghana National Fire Service (GNFS) has recently been conducting inventories on buildings and their coverage status, and with their work more policies are expected to be purchased. As part of property insurance, 1% of total premiums paid by insurers go to a fire service maintenance fund. Annual damages from fires have generally ranged between GHS6m ($3.56m) and GHS8m ($4.74m) in recent years, according to GNFS statistics.

LIFE: The life segment has seen increased expansion in recent years and life premiums are expected to exceed non-life premiums within five years. “There is momentum in the general life segment of the market. Companies have been aggressively promoting those products, and so you can expect to see more and more growth in that area,” James Wood, the managing director at Edward Mensah, Wood and Associates, told OBG. According to the NIC’s annual report for 2010, non-life premium income jumped 23% on the year, reaching GHS272m ($161.27m), up from GHS221m ($131.03m) in 2009. Meanwhile, premium income from life insurance surged 52% to GHS187m ($110.87m) from GHS122m ($72.33m) over the same period. This marks the second consecutive year in which life insurance income exceeded that of motor policies.

DISTRIBUTION CHANNELS: Brokers account for roughly two-thirds of the non-life market, and although non-Ghanaian companies have a presence throughout the insurance sector, it is in the non-life segment where they are most visible. The majority of the country’s major players have a relationship with a foreign broker. KEK Insurance Brokers, the biggest in the market, is an affiliate of US-based AON Risks Services. Edward Mensah, Wood and Associates, the second-largest, has a tie-in with Marsh, also based in the US. Gras Savoye, France’s biggest broker, opened an office under its own name in 2008 and is now among the largest as well. Some foreign companies have permeated beyond broking, with full-scale insurers, including Germany’s Allianz and Morocco’s Colina Insurance, having set up local branches in recent years.

Given the fact that companies must get insurance locally, brokers have an important role to play, particularly for foreign firms. “In our market, brokers have a lot of power,” said Richard Adu-Marfo, the head of research and reinsurance at Star Assurance, the second-largest general insurer as of June 2012. “They command all the big projects. Due to the fact you are required to insure locally, you must rely on a broker.”

BANCASSURANCE: An option since 2007, bancassurance, although not fully developed, has much potential, especially in the microinsurance segment. “There is lots of potential for bancassurance, which would increase competition in the brokerage industry, but it is not particularly developed at the moment,” said Mel Constant Kebe, the managing director of Colina Insurance. As of the end of 2010 there were seven bancassurance tie-ups between Ghanaian insurers and lenders.

Ghana’s banks, savings-and-loan institutions, micro-creditors and even the managers of informal savings-and-loan schemes, known as “susu”, are expected to be enlisted in the effort to promote microinsurance. Susu operators have been linking up with formal institutions, combining their knowledge of local markets and communities with the greater capital and product offerings of formal lending institutions.

Mobile telecommunications, meanwhile, have offered an alternative distribution channel for selling insurance. There are currently two telecoms operators, MTN and Tigo, that offer mobile insurance products. The pilot schemes have been so successful that their operators are starting up similar systems elsewhere on the continent (see analysis). Microinsurance providers and conventional insurers have also been looking into other ways of attracting customers such as group policies sold to market traders, or church congregations, with religious leaders enlisted to help.

BUILDING AWARENESS: The GIA has also been making an effort to tackle the low penetration rate and increase awareness – the outcome of which is expected to be realised over the long term. Ghanaians are indeed learning about insurance and its advantages, but coming to an accurate understanding has been difficult, according to a 2012 study by the German Institute for Economic Research (DIW Berlin) on insurance holders in rural areas. The study showed that many of the policyholders surveyed did not fully understand the product they had purchased, with some thinking they were getting a bank loan as well, for example.

Moreover, surprise floods that hit Ghana in October 2011, outside the normal rainy season, served as a recent measure of the sector’s low penetration. Nine died and property damage was widespread, but claims resulting from the disaster amounted to just over GHS40m ($23.7m) in estimates, with Activa alone paying more than GHS7m ($4.2m), according to Lartey. “People just do not understand the importance of insurance,” he told OBG. “The GIA has a lot of educating to do, and we all must help.”

REINSURANCE: As part of efforts to boost economic development, Ghana’s approach has always been to seek to keep as much of the profits from insurance as possible within its borders. Ghana Re has a market share of over 80%, but the legal environment that has compelled it to take business from local insurers has not required it to develop a sales force or heed competitive concerns. This arrangement has come with costs, among which are that some insurers fail to pay what is owed. Premiums from outstanding debtors represented 57% of the total in 2010.

Despite Ghana Re’s hold over the market, there are other options for insurers. Mainstream Reinsurance (Mainstream Re), launched in 1995, has seen steady expansion in the past decade and a half. In 2009 it earned gross premiums of GHS6.6m ($4.4m), up from GHS4.2m ($2.8m) in 2008. Moreover, two non-Ghanaian companies are also considered local by the NIC, on account of their supranational status and origin: Nigeria-based Africa RE, established by the African Union, and the West-Africa Insurance Companies Association Reinsurance (WAICA RE), founded in 2009 by WAICA.

NEW GROWTH DRIVERS: Laws supporting local capacity have also resulted in the creation of a pooled group by the insurers to provide coverage for the fledgling oil and gas industry. None of Ghana’s insurers have the capacity to provide policies on their own, but together they do, and have already experienced some success (see analysis). According to Charles Oduro, the managing director of KEK Insurance Brokers, this is one of the sectors that will help fuel growth. “The insurance business will be driven by sectors such as mining, the oil and gas sector, and financial services,” he said.

HEALTH INSURANCE: The NHIS was introduced in 2003 and it provides coverage to around one-third of the population. The NHIS aims to reach universal coverage, which may involve reducing the role of privately managed schemes in the long term. However, this is a slow transition, and serving Ghanaians who want supplementary coverage will be a part of the market for the foreseeable future. A mid-term goal is to have 60% of the population covered by the NHIS by 2014.

The NHIA accredits both public and private hospitals to take part in the system (2647 were accredited as of the end of 2010), and also acts as a regulator for private health schemes, of which currently 11 are licensed, Acheampong said. Claims processing and member registration takes place at district-level branches, which are somewhat autonomous and retain decision-making powers within their coverage areas.

The NHIS was operational in 145 districts as of the end of 2010, according to the NHIA’s 2010 annual report, the most recent data available. Approximately 8m people are members, 47.5% are younger than 18, and 5.4% above 70. Membership is free for these two demographic groups. Roughly 31.8% of members come from the informal sector and must pay fees to receive medical services, unlike formal sector workers, who pay through automatic salary contributions.

Pregnant women and mothers of infants of up to three months old also receive free health care under the NHIS. Enrolment fees are charged at a rate according to income, and ranging from GHS7.20 ($4.27) to GHS48 ($28.46). Ghanaian law requires all citizens to sign up, but implementation of that law is happening over time, and there are as of now no penalties for ignoring it. Claims payments have surged from GHS7.6m ($4.51m) in 2005 to GHS394.27m ($233.76m) in 2010, accounting for 76.2% of expenditure on the year, according to the NHIA’s 2010 report.

Although there has been a jump in claims and employers have been dropping health care from their benefit packages as a result of the national system, the private sector will still have a role to play, said Acheampong. “Before the NHIA, people had their own arrangements, and they are used to a certain level of care, which they still want to have,” he said.

LEGAL REFORM: Though the size of the country’s insurance market is limited by the small amount of discretionary income, the government and regulatory bodies are still in the process of strengthening institutional capacity and establishing a clear legal regime. This is expected to act as a catalyst for sector expansion alongside growing purchasing power. At the top of the reforms list is a new insurance law, which will update the 2006 legislation that governs the sector.

The bill, which is likely to be voted on after the elections in December 2012, is notable in large part for its provisions on microinsurance. Ghanaian officials believe that microinsurance is key to spreading insurance in the retail market. One strategic approach that has already been settled on is the application of a light regulatory burden on microinsurance. New products will not require approval from the regulator, according to the draft legislation, while sellers in this segment will not require licences. The regulations aim to ensure simple policies with few exclusions and a maximum waiting period of 10 days for a claim to be paid. “Microinsurance is very big on our agenda because our penetration is quite low and the majority of the population remains in the informal sector,” said the NIC’s Andoh. “But we cannot use every method to regulate this because that would be a heavy burden” (see analysis).

Other features of the proposed new law include mandating in-house actuarial capacities and an increase in risk-based supervision. “Companies are going to have to spend quite a bit on their systems,” Andoh told OBG. “But it will be unrealistic to expect everybody to comply from day one. The process will probably take one or two years.” Investment guidelines and allocations will also be risk-based under the proposed regulations. Currently, insurers can use their investment accounts for securities, real estate, bank deposits and in-money markets, but there are no specific allocations or caps.

IFRS ADOPTION: As part of the efforts to enhance risk management, Ghana adopted the international financial reporting standards (IFRS) in 2007, a set of accounting rules provided by the International Accounting Standards Board, a London-based organisation funded by its member states to promote global convergence in accounting methods. Officials in Ghana hope that book keeping to international standards, which will be mandatory as of the fourth quarter of 2012, will help Ghanaian firms to attract foreign investment partners and improve their risk-management capabilities.

Only a handful countries have yet to fully commit to the IFRS standards, including the US, Japan and India. The latter two have announced a schedule for IFRS adoption, but the US was still considering whether to adopt the rules as of June 2012. One common criticism of the set of reporting rules is that they were created in developed countries and that they are not suitable for some developing countries. One solution to this problem has been for local regulators to adapt the rules to meet the conditions in their respective countries.

Ghana, however, has implemented the rules as they are, which does carry some risks. Using mark-to-market accounting, for example, could lead to unpredictable balance sheets, according to Andoh, as the value of assets can fluctuate in a fast-growing developing country more than in the developed economies, where IFRS standards were first applied.

CAPITALISATION: The country is also looking to boost capitalisation requirements, and insurers had been told that they had until the end of 2012 to boost their paid-up capital from $1m to $5m. However, this widely expected move requires parliamentary approval, which was not expected to happen in 2012 due to the government wanting to address legislative matters via the elections. The deadline for reaching the new threshold will likely be moved back to 2013, Andoh said. The jump, however, should not be a difficult one for most insurers to make and is unlikely to result in a wave of mergers, acquisitions or other forms of consolidation. Executive culture in Ghana frowns upon such combinations in favour of retaining individual control, and therefore companies that have trouble reaching the new target are likely to seek an outside investor instead.

The move to IFRS accounting standards also poses challenges, said Star’s Adu-Marfo, in that it could make it more difficult to value assets and determine values for different kinds of assets. “I don’t think it is a big challenge to get to $5m, but if IFRS interpretations mean that some things are not viewed as assets, that could be an issue,” he told OBG.

On the regulatory front, new rules introduced aim to cut down on competition, particularly in the non-life segment. An estimated half of premium income is never collected by insurers, according to NIC data. This is in part because insurers and brokers are targeting new customers with rock-bottom prices, and in some cases those customers’ commitment to the arrangement is questionable. In many instances policies are sold on credit. “Brokers say, ‘Don’t worry because we’ll find a way for you to pay later,’” Adu-Marfo said. The NIC’s guidelines now limit the amount of credit that can be extended by insurers to policyholders. Commenting on the issue of non-performing premiums, Kofi Duffuor, the CEO of Star Assurance, told OBG, “The new financial requirements will push companies into being savvier, choosing their customers more wisely, and ensuring they pay premiums promptly.” Policies worth GHS500 ($296) or less cannot be sold on credit, according to Adu-Marfo; an up-front payment must be provided for more expensive ones.

OUTLOOK: Ghana’s insurance market is still in its early stages, but neither the government nor industry players appear to be content to wait for incomes to increase to address the insurance sector’s low penetration rate. Reforms have come on a regular basis in recent years and look continue to do so. As of mid-2012, microinsurance, the coming capitalisation boost and the new reporting standards could have the country’s insurers looking for foreign partners in order to boost expertise and capital in order to compete now and to be ready for the next round of reforms on the horizon.