A period of expansion is encouraging sector reforms

The insurance sector is growing rapidly as result of reforms, improved regulation and a better understanding of the relevant products on the part of Ghana’s consumers, and the market has been a star performer. Total premiums rose 23% in 2013 over 2012, and the five-year average growth for the sector was 32%, according to the insurance commissioner as quoted in the local press.

Business has not only expanded along with the economy, but also outperformed it. However, the sector also faces challenges common to many of Africa’s frontier markets. Penetration rates and awareness remain low and the sector is fragmented at a time when the regulatory framework is robust, but compliance and risk management are still being refined. The sector has tremendous growth potential, but the regulators and companies need to make a greater effort to ensure growth is healthy and sustainable, and happens without undue risk.

History

Insurance in Ghana traces its roots back to 1924, when Royal Exchange Assurance, a UK company, began operations in the country. In 1952, the firm went from an agency to an insurance company. With the passing of the Insurance Act of 1965, Royal Exchange’s life business was transferred to a domestic firm, Crusader Insurance Company. Royal Exchange retained its non-life operation, but merged in the UK to become Guardian Royal Exchange Assurance, which later localised again. The Insurance Decree NRCD 95, 1972, required the firm to sell 40% of its equity to local shareholders. Decree SMCD 31, 1976, required insurers to sell another 20% to the government. As a result, Guardian Royal Exchange Assurance became majority Ghanaian controlled and changed its name to Enterprise Insurance.

Similarly, Ghana Union Insurance began as an agency, in this case for Northern Assurance Company, then was slowly transferred to local ownership. In 1990 the foreign shareholders sold down their remaining stakes. SIC Insurance Company, meanwhile, was founded as Gold Coast Insurance in 1955 and became Ghana Insurance in 1957 upon independence. The firm was taken over by the government in 1963, becoming State Insurance Company, and then became a corporation again in 1995. In 2006 the life and non-life businesses were separated and in 2007 the SIC brand was adopted.

Reform & Control

The insurance sector in Ghana has undergone a good deal of reform over the years and is historically well developed in comparison to its neighbours. In 1958 the country passed the Motor Vehicles (Third Party Insurance) Act, and the 1965 Insurance Act was superseded by the Insurance Law of 1989. The 1989 law, which also repealed NRCD 95, created the National Insurance Commission (NIC) as regulator, and set capital and solvency requirements, reserve levels, dividend policies and investment parameters: for life insurance firms, 50% in government securities; and for non-life firms, 25%.

A number of local content regulations were briefly introduced and subsequently scrapped. The 1989 law was amended in 1993 to require at least 40% of the capital of insurance companies to be owned by Ghanaians. It also required government entities and government-related companies to buy insurance from SIC, all imports to be insured in Ghana and local capacity to be exhausted before insurers place risk overseas. The Ghana Reinsurance Organisation Law, 1984, and the Ghana Reinsurance Organisation (Amendment) Law, 1987, gave the Ghana Reinsurance Company a monopoly, in an attempt to expand domestic capacity. Until 2008 the government reinsurer still received a mandatory 20% of all reinsurance business despite the ending of the monopoly.

The 1989 law was replaced by the Insurance Act of 2006. The act greatly changed the regulatory environment, ending mandatory local ownership and the SIC monopoly for government-related business. More broadly, the act brings the sector up to date and requires insurance firms to separate life and non-life businesses, and sets out strict and detailed solvency requirements. According to implementation notes issued in 2008, insurance firms need to maintain margins beyond customary levels (assets equalling liabilities for life insurance companies and assets greater than liabilities for non-life).

Solvency

The NIC has stated that insurers must have a solvency margin of 50% (with assets equal to 150% of liabilities) to act as a buffer against unexpected impairment and off-balance sheet exposure. It also set out a schedule of actions to be taken for those failing to meet the minimums. Insurers under 125% would face enforcement action and be forced to increase capital; those under 100% could lose their licenses. The guidelines discussed the investment mix as well: government securities need to comprise at least 35% of the investment portfolio for insurers, listed stocks no more than 35%, unlisted shares no more than 20% for non-life and 10% for life firms, and mutual funds are capped at 20%.

As in the rest of the financial sector, capital has become a major issue. Law 1989 set the capital for life insurance companies at the equivalent of $74,000 at the time, and $148,000 for non-life firms. Composite companies and reinsurers had to have $222,000 following the passage of the law.

In the 2006 law, the minimum capital required for insurance firms was $1m, $2.5m for reinsurance companies and $50,000 for brokers. In 2010 that was raised to $5m, with a December 2012 deadline. In line with current practice, the concept of capital was made more flexible; the figure is the minimum and capital requirements would be adjusted depending on the insurers’ risk, according to the NIC. The NIC would also like the freedom to make changes to capital floor without parliamentary approval.

Lydia Lariba Bawa, the commissioner of the NIC, noted that consultations with the industry on the new capital adequacy framework were completed in mid-2014 and the organisation was planning to issue the final framework by the end of the year, to take effect from the second quarter of 2015.

Actors

By the end of Q3 2014 the country had 26 non-life firms, 19 life companies, three reinsurers and 63 brokers. Total premiums for the sector in 2013 were GHS1.05bn ($400m), with life reaching GHS458.8m ($175m) and non-life GHS582.5m ($222m). The liberalisation that has been undertaken over the past few years since the 2006 law has changed the competitive landscape. The number of foreign insurers increased from two in 2006 to 16 in 2012. “The arrival of foreign players is significant. If an outsider comes to your home country, then you should be aware of its potential,” Richard AduMarfo, CEO of ESICH Life Assurance, told OBG.

Still, insurance is concentrated and crowded. As of 2012, five life insurance firms controlled 80% of the sector: SIC, 28%; Enterprise Life Assurance Company, 25%; Starlife, 11%; Glico, 10%; and Metropolitan, 6%. The non-life sector was much the same, with the top five controlling 61%: SIC 22%; Star, 12%; Metropolitan, 9%; Enterprise Insurance, 9%; and Vanguard, 9%. This has raised some concerns. Steve Kyerematen, managing director of Activa Insurance, told OBG, “When there are too many firms in a local insurance market, the firms compete on price rather than service, which leads to less spending on key back office infrastructure like IT and human resources. Claims payment can also suffer in these scenarios.”

Foreign Insurers

At the same time, the sector is characterised by minimal barriers to entry, with capital requirements lower than neighbours (Nigeria, for example, requires $18.8m in capital for non-life firms) and 100% foreign ownership is allowed. This has led to a flood of foreign insurers that has left the sector with many players targeting limited business.

Nigerian insurers have been particularly active in the sector. Regency Alliance, which traces its roots back to the 1979 founding of Inter-Life & General Insurance, was acquired by Regency Alliance Insurance of Nigeria in 2006. Industrial and General Insurance (IGI) entered Ghana’s life and non-life sectors in 2007 when it acquired Network Assurance. International Energy Assurance, a subsidiary of a Nigerian company founded in 2003 from a firm that was under the management of the regulator, entered the market in 2008. Equity Insurance of Nigeria acquired a licence that same year, while Wapic Insurance, a Nigerian company, acquired a licence in 2009. NEM Ghana, a subsidiary of Nigeria NEM, was incorporated in Ghana in January 2009.

Players from elsewhere in the region have also entered the market. In 2009 Cameroon's Activa International Insurance acquired Global Alliance Company, while the following year NSIA, an Ivorian insurer, acquired CDH Insurance, a non-life insurer (In 2010 UT Bank acquired CDH Life, which was formed in 2005 and began writing insurance in 2007). Allianz received a licence to operate as a property and casualty and health insurer in 2009.

In late 2013 Old Mutual of South Africa acquired a majority stake in Provident Life Assurance. Old Mutual is a financial group that traces its roots bank to a mutual insurance firm founded in Cape Town in 1845. It is now listed in South Africa, London, Namibia, Zimbabwe and Malawi; owns banks, stock brokers and pension administrators; and is active in 20 countries. Provident Life Assurance was founded in 2006 and is one of the largest life insurance companies in the country. Prudential, the UK company, bought Ghana’s Express Life in late 2013.

Too Much Competition

The fact that Ghana has a large number of players battling it out in a market that remains small, with penetration only around 1.1% according to the NIC at the end of 2013, below the African average of 3.5%, makes competition difficult. At the same time, and because of the open environment, there are concerns over capitalisation levels for smaller insurers. In 2013 IGI Ghana was liquidated after its parent firm decided to withdraw from the market due to the difficult operating environment. According to Felicity Acquahn, chairperson of SIC Insurance, while growth in the sector and the high number of players may increase awareness and improve firms’ business in the sector, at the same time she noted that the competitive structure was leading to unhealthy and potentially dangerous practices. Nyamikeh Kyiamah, former commissioner of the NIC, also said previously in comments to the local press that some insurers are engaging in unethical practices, such as overaggressive marketing and underwriting and weak accounting.

“The industry seems to be on self-destruction mode through undercutting and through the granting of credit all in the name of competition,” Acquahn wrote in the 2013 annual report for SIC.

Undercutting is seen as a serious problem and one that is difficult to regulate and manage, as companies in search of business quote rates that are too low to cover the potential risk. Practices of this sort can lead to insolvencies and also have the potential to weaken the business of other insurers, as they have to match the prices of the more aggressive players.

“Undercutting is a big issue,” said Martin Amoah, deputy managing director, Allianz Insurance Ghana.

Other unscrupulous practices include use of offshore reinsurers even when domestic capacity is available, according to Kyiamah. Simon Nerro Davor, deputy commissioner of the NIC, said that this is especially a problem with insurers with parent or sister companies overseas. In public comments in 2014, he noted that some foreign insurers were transferring premiums back to their home countries without first getting approval from the NIC.

According to Davor, these transfers contravened commission rules and reduced premium income for Ghana. However, he added that the transfers of risk are done because the domestic market lacks capacity and that the transfers are not technically against the law, but rather highlighted the need for closer examination of the subject.

Some Success

The regulator has also been seeking to improve premium payments and reduce the extension of coverage on credit – something that has resulted from the high levels of competition and aggressive solicitation of clients. The practice, unsurprisingly, resulted in a considerable overhang of doubtful receivables on the balance sheets of local insurers. In early 2014 the NIC instituted a policy which requires payments to be made before coverage is effective (see analysis). It did so because the bad debts on the books of insurers was making it difficult for them to pay claims.

Despite the high level of competition, insurance penetration remains low in the country. In 2006 penetration was 0.88%, but it has risen. According to public comments by the NIC, the rate was 1.1% at the end of 2013, down slightly from 1.13% in 2012, though significantly lower than the African average of 3.5% (and South Africa's 15.4%). The numbers have improved over the long term. Penetration is low for a number of reasons, many of which are common to the region. Awareness in the country about the product remains low, with most Ghanaians lacking an appreciation for the benefits of transferring their risks to another party. Insurance density was GHS7.50 ($2.85) in 2006, a number which at the end of 2013 had hit GHS39.24 ($15).

In a recent survey conducted in cooperation with the German Federal Enterprise for International Cooperation (GIZ), it was found that 43.1% of insurance clients thought they would get premiums back if no claim was made. It was also found that many insured do not read or understand the terms and conditions of their policies and have an inaccurate view of what the policy would do should a claim be lodged.

Poverty is also an issue. With incomes so low in Ghana and the macroeconomic picture so poor, people are not willing to spend money on something that does not offer something immediate and tangible in return. “There is some education needed. Some people see it as a way to make money,” said Allianz's Amoah, who adds: “Ghanaians are not keen on insuring their homes. They leave it to God.”

Trust Lacking

But the real problem, the survey indicates, is a lack of trust in insurance firms. In the GIZ survey, the vast majority of people had a positive attitude toward the concept of insurance (94.9%), however, almost half had a negative view of insurance providers. Some 46.8% of respondents said that the companies would make it difficult to get paid when claims are owed. While this may result from a general lack of understanding on the part of consumers, the sector is also to blame given its history and the fact that some of the firms in it are poorly capitalised and may be facing solvency issues. “In the past, some companies would find ways to repudiate a claim or take their time in paying. The perception is there,” said Joseph Sefah Duah, head of the business development unit, KEK Insurance Brokers.

To help improve not only oversight but reduce the tendency towards riskier practices, including aggressive marketing, the NIC is beginning to more forcefully encourage consolidation. Mel Constant Kebe, the managing director of Saham Insurance, told OBG, “We won’t see any moves towards industry consolidation until the NIC communicates a definitive timeline for industry recapitalisation.” The regulators also say that they will try to keep a limit on the number of players by ending the issuing of new licenses. “There are a lot of applications for licenses,” said Kojo Ghunney, public relations officer at the NIC. “But we are slowing down the issuing of licenses.”

While companies that intend to undertake micro-insurance or agricultural insurance – segments that tend to be under represented – might get permission to operate, other life or non-life candidates probably will not. In addition, a new insurance bill, which is expected to become law in late 2014 or early 2015, will likely bring the minimum capital to GHS10m ($3.81m). “There is a possibility for mergers,” said KEK's Duah. “But it is not happening; everyone wants to be the CEO.”

James Wood, managing director of Edward Mensah Wood & Associates, echoed this view: “Consolidation among Ghana’s brokers will not come about via mergers or acquisitions. The current business culture favours full ownership. There is a reluctance among most to forfeit any share of ownership.”

Others cited the size of the market as the factor that would decide. “At $400m in annual premiums, the current insurance market is too small for the existing number of players in general insurance. Once a deadline is set for recapitalisation, we will expect consolidation to follow,” Kwame-Gazo Agbenyadzie, CEO of Metropolitan Insurance, told OBG.

“Even though consolidation is on the horizon, it might not be as imminent as we think. Companies that want to participate fully in the growth of African economies, and for that matter Ghana’s, would have to carve out niches for themselves through the development of products and services that cater to the needs of the informal sector of their various economies,” Solomon Lartey, deputy managing director of Activa, told OBG.

Health

Health insurance has been a major factor in the development of the sector, particularly given the interest from households. In the GIZ survey, illness was the risk that people most wanted to cover, the next being property. Ghana has historically had health care paid for by the government, but as the country began facing economic difficulties in the 1980s it transitioned to “cash and carry”, whereby user fees were paid for services received.

A number of unsuccessful NGO programmes were launched in the 1990s. Finally, in 2003, the National Health Insurance Scheme (NHIS) was initiated. The programme is a mixture of publicly financed, private and mutual health insurance policies. The NHIS currently has 22m members, 9m of whom are active. Industry professionals say that the programme has been significant not only for what is has done directly but because it has helped to increase awareness of insurance in general. “Until national health insurance was introduced, no one understood health insurance,” said Allianz's Amoah. “It was a bit abstract.”

The NHIS is funded through a 2.5% tax on some goods and services, a portion of the social security contributions of formal sector workers, premiums and other sources (such as from donors). The programme covers most diseases, with some notable exclusions, and a number of classes of people are exempt from premiums, including the aged, the indigent and pregnant women. While widely regarded as a success, the NHIS does face obstacles. Health facilities are in need of significant investment and claims payments have been delayed. Meanwhile, extending coverage has been equally challenging. Only approximately 35% of the population is covered and many of these are the easy-to-convince, premium-exempt participants. As a result, the government is working to get more of the lower-income segments and the informal sector to sign up. As a result, much of the population remains on the cash and carry system.

Pensions

Another relevant development is the reform of the pension sector. The country is creating a second tier privately managed pension programme that will receive 5% of the wages from the formally employed. Since 1972 the Ghanaian people have been covered by the Social Security and National Insurance Trust (SSNIT) (which took over the responsibilities of a social security fund created in 1965). It was transformed from a provident fund to a full pension scheme in 1991. Work on reform began in 2004 and by 2010, the law was in effect.

Under the programme, workers contribute 5.5% of their salaries into the fund while the employer contributes 13%. Of the 18.5% total, 2.5% goes to the National Health Insurance Fund, 5% goes to the new, privately managed second tier and the rest stays with SSNIT. The minimum contribution period is 180 months, and the payout is designed to be between 37.5% and 60% of the best three years of salary. Contributions to the second tier and some contributions to a voluntary third tier can be put away tax free. Simon Ayivi, COO of Axis Pension Trust, told OBG, “Personal pension schemes are experiencing significant uptake. These schemes make more sense for employees working in the formal sector, as they are seeking a disciplined savings tool and view the mandatory schemes as inadequate.”

Outlook

The Ghanaian insurance sector is in a period of transition. While the industry has yet to begin consolidating, following a round of intense foreign investment mergers and acquisitions are not far off. Commercial pressures are significant, and with increased capital requirements and more stringent supervision, as well as a limitation on new licenses, the near- to medium-term outlook points to a reduction in the number of operators.

There is certainly plenty of scope for further growth, even with the high levels of competition in the existing market. For those insurers that are able to expand the client base outside of the corporate, upper and middle-income segments, the likelihood for strong returns is significant. At the same time, initiatives to promote micro-insurance and the introduction of technologies that will help in the distribution of insurance products may help the sector expand even before or without consolidation.