Securing the market from unnecessary risk

Since the Insurance Act of 2006 was passed, regulators have been looking at solvency, capital and inclusiveness, and issuing frameworks and guidelines to compel insurers to strengthen their balance sheets and reserve against unforeseen claims. This has encouraged them to write more micro-insurance policies.

No Premium, No Cover (NPNC)

The regulators have been working especially hard towards making sure insurance companies and brokers do not undertake practices that could endanger the stability of their operations and of the system overall. The main push has been to end the issuing of coverage to clients who have not yet paid their premiums. By advancing credit to clients, insurance companies were able to sign more business, but at the same time, the practice created debts that have a low chance of being repaid.

By the end of 2012, the problem had become critical. Insurance companies were owed about GHS130m ($50m) and the regulators felt that these questionable debts were leading to delays in payments and the repudiation of valid claims. The failure to honour obligations was damaging the already weak reputation of insurance companies in Ghana. While extending credit had in a way led to growth in the sector, by allowing people and businesses short on cash to sign up, it may have ultimately slowed development by reducing reliability.

The National Insurance Commission (NIC) has also been concerned about whether the insurers have been able to pay their reinsurance premiums if they are owed money by the policy holders, putting the reinsurers and the entire system in danger. As a result, a new policy was initiated on April 1, 2014. Insurance companies could only extend cover to those who had actually paid premiums. The NPNC policy has created some challenges for a sector where in an environment of low penetration and limited customer bases, competition had necessitated aggressive marketing strategies and in some cases put balance sheets under strain. “The NPNC policy could benefit from a more gradual implementation, with larger premiums warranting longer payment schedules. Furthermore, the insurance systems are not yet designed to satisfy the new policy,” Charles Odoro, managing director of KEK Insurance told OBG.

As a result of the new policy, some customers are switching providers, or reducing or bailing on their coverage. “We lose some clients because they cannot pay,” said Martin Amoah, deputy managing director, of Allianz Insurance Ghana. “Or they go from comprehensive to third party motor insurance.” Despite the challenges, the reform has been viewed as essential. “No Premium, No Cover is crucial for reinsurers as well as insurers,” Gustav Siale, managing director of Ghana Re, told OBG. “Insurance firms generally get 50% collection, whereas reinsurers get under 50%. With NPNC, investment income and cash flow will both improve.”

New Law

All the measures taken thus far – the solvency requirements, the micro-insurance framework and the NPNC policy – are intermediary steps ahead of the passing of a new insurance law. A draft bill has been circulated and a number of key provisions have been emphasised. It will, for example, create a legal underpinning for agricultural and micro-insurance, two sub-sectors which are not adequately covered in the current law. Capital is also an important area that will be addressed in the new law. The number being sought is GHS10m ($3.81m), but the NIC is looking for flexibility. Rather than having the actual level written into the legislation, it would like to be able to adjust the capital requirement without returning to parliament.

The new bill is being written with an eye to meeting the Insurance Core Principles that the International Association of Insurer Supervisors, a global regulator association, set in 2011. These principals emphasise a risk-based approach to solvency and call for risk management to be extended throughout an organisation, so company-wide goals are established and met. The bill has been delayed several times. The NIC at first said that it would become law in 2012, but repeated revisions and reviews by market participants have delayed the bill and forced the NIC to use guideline measures.