New regulatory framework and higher minimum capital requirements bring Ghana's insurance sector in line with global best practices

After successfully weathering a period of financial instability stemming from the banking sector, Ghana’s insurance industry is growing in size and sophistication. The coming year, however, will bring a fresh set of challenges as the authorities look to roll out a new legislative framework for the industry in 2020, and as companies seek to meet the 2021 deadline for revised capital requirements. Increasing competition and lower investment returns also mean that underwriting performance is under greater scrutiny than in recent years, especially as consumer complaints against the industry rise. Insurers are responding to less favourable conditions by diversifying their distribution channels and taking advantage of mobile technology to reach out to previously underserved demographics.

Rapid Development

The 1924 establishment of the Royal Exchange Assurance Corporation, now Enterprise Insurance Company, marked the beginning of an era in which foreign institutions established offices in the region and dominated the market. The first domestic player, Gold Cost Insurance Company, opened in 1955, and two years later was rebranded as the Ghana Insurance Company (GIC). In 1962 the government became an industry player with the creation of the State Insurance Corporation, now known as the SIC Insurance Company. In 1972 a decree by what was then the ruling party, the National Redemption Council, established the first comprehensive regulatory framework for the industry. The new rules included a requirement that all insurers operating in Ghana have their head offices in the country, and that 40% of their shares must be owned by Ghanaians. The decree also led to the creation of the Ghana Reinsurance Organisation – representing the government’s first attempt to retain premium in the country. The foundation of the Ghana Insurers Association in 1988 gave market participants an industry body and a unified voice in their dealings with the authorities. One year later, a new industry regulator, the National Insurance Commission (NIC), formulated a set of capital and solvency requirements, as well as dividend policies and rules on investment activity.

The regulatory framework has since seen a number of major changes. In 2006 a new Insurance Act introduced guidelines for local content requirements, obliging companies to secure policies from domestic insurers wherever possible. The implementation of the new law resulted in a phase of rapid growth for the industry. In 2013 the NIC formalised the micro-insurance market with the rollout of its Micro-insurance Market Conduct rules. In 2014 the introduction of the No Premium, No Cover policy stabilised the sector by requiring insurance companies to collect premium before providing coverage. As the industry turns to face a new decade, it is preparing itself for another era of regulatory reform in the form of a new Insurance Bill, which the NIC has been working on for some years.

Structure

The domestic insurance market is populated by domestic and international providers. As of November 2019 a total of 51 companies – 20 life and 31 non-life – were licensed by the NIC to transact business in Ghana. The life segment is more concentrated than non-life, with 10 companies accounting for around 91% of total assets. This is primarily due to the absence of any compulsory life insurance cover in Ghana, which means that customers buy policies with a higher expectation of a payment of a benefit, and therefore have a tendency to opt for known, trustworthy brands.

The biggest life insurance company in Ghana by assets is Enterprise Life Assurance, which as of the third quarter of 2019 held assets of GHS780.4m ($151.2m). This was followed by SIC Life Insurance (GHS706.6m, $135.9m), StarLife Assurance (GHS624.4m, $120.9m), Glico Life Insurance (GHS354.7m, $68.7m) and Old Mutual Assurance Ghana (GHS250.8m, $48.5m). Products offered by the life insurance segment include individual and group life assurance, annuities, pensions, group credit, permanent health, and investment policies. The non-life segment, meanwhile, provides coverage across a broad range of lines, including aviation, engineering, fire, liability, marine, motor, personal accident, theft, employee compensation, medical and micro-insurance. As with the life arena, premium distribution among the non-life players is top-heavy, with the 10 largest companies comprising around 70% of total assets. The biggest non-life player in the market by assets is SIC Insurance Company, which in September 2019 held GHS496m ($96.1m) in assets. This was followed by Star Assurance Company (GHS350m, $67.8m), Enterprise Insurance Company (GHS252.4m, $48.8m), Hollard Insurance Ghana (GHS167.6m, $32.5m) and Ghana Union Assurance (GHS132.9m, $25.7m).

Ghana is also home to three reinsurance companies: Ghana Reinsurance Company (Ghana Re), Mainstream Reinsurance and GN Reinsurance Company, as well as an array of ancillary service providers. These include around 90 brokerages, four reinsurance brokers and some 7000 insurance agents. The structure of Ghana’s insurance sector has remained relatively static over recent years, with the 2017 merger of Regency Alliance Insurance and NEM Insurance marking the only significant merger. This may change, however, as the nation’s insurers move to meet a set of new minimum capital requirements imposed by the regulator. The deadline for compliance is June 2021, although some stakeholders remain divided as to the impending capital requirement changes. “Consolidation in insurance is unlikely even if the proposed capital requirements readjustment is executed,” Daniel Addo, managing director of Hollard Insurance Ghana, told OBG. “New requirements would not be prohibitive, and there is a strong tendency to resist consolidation in the industry.”

Performance

The Bank of Ghana’s revocation of a number of banking licences in 2017 and 2018 (see Banking chapter) caused liquidity challenges for insurance companies that held deposits and investments with the affected institutions. As a result, the NIC placed two insurers under administration to protect policyholders. Nevertheless, the insurance industry as a whole followed a steady growth trajectory over the year.

The most recent full-year statistics from the NIC show industry assets expanding by 15% in 2018, to reach GHS6.2bn ($1.2bn). Assets in the life segment grew by 8% to GHS3.1bn ($600m), while non-life assets expanded by 28% to GHS2.4bn ($465m). That same year, assets among reinsurers were up 6% at GHS730m ($141.4m), and total gross premium taken by the industry expanded by 21%, to reach GHS2.9bn ($561.7m).

While the insurance penetration rate declined from 1.12% to 1% of GDP in 2018, insurance penetration data can be misleading in a fast-growing economy such as Ghana’s, as the penetration rate decreases as certain economic sectors rapidly expand. In 2018 this effect was exacerbated by a rebasing of the economy, and Ghana’s published penetration rate is also likely to be lower than the actual figure because the NIC’s calculations exclude pensions and health insurance which are overseen by different bodies. The NIC estimates that, were pensions and health figures taken into account, the nation’s insurance penetration rate would stand at roughly 3%. “The insurance sector remains underdeveloped and the penetration rate keeps dwindling,” Charles Oduro, managing director at KEK Insurance Brokers, told OBG. “However, a number of compulsory insurance products are being introduced by the NIC that are expected to boost penetration, including workers’ compensation, group life, professional indemnity, and marine cargo and hull coverage.” Total sector profits in 2018 stood at GHS202m ($39.1m). Of the non-life players, SIC Insurance Company led in profits with GHS67m ($13m), while Enterprise Life Assurance topped the life segment with GHS73m ($14.1m). The regulator flagged its concern regarding the poor underwriting performance of some companies, which have historically offset underwriting losses with gains from their investments. A reduction in investment returns as a result of turbulence in the banking sector has exposed this practice as an industry vulnerability.

Reinsurance

Ghana’s insurers transfer approximately two-thirds of the risk implicit in their underwriting to reinsurance companies. While this has been advantageous from a prudential standpoint, such a high cession rate has resulted in an inordinate outflow of foreign exchange in the form of insurance premium. The large-scale transfer of risk to foreign reinsurers also exposes the domestic sector to global exchange rate volatility. The NIC has moved to boost the level or risk retained in country by requiring insurers to exhaust local reinsurance capacity, of which nearly 80% is supplied by the state-owned Ghana Re, before engaging with foreign firms. This approach replaces a regulatory requirement, removed in 2006, by which local players had to cede 20% of their premium to Ghana Re.

In 2018 the regulator adopted a firmer stance regarding its reinsurance guidelines, the result of which was a decrease in overseas premium transfers. The Ghana Oil and Gas Insurance Pool is also working to ensure more risks in the energy sector are retained locally. The efforts by the regulator to recapitalise the industry can also be seen as a response to the high level of risk transfer in the domestic industry, and when fully implemented is expected to boost insurers’ capacity to retain risk – and thus premium – locally. By some estimates, Ghana’s insurers will be able to retain around 40% of their business domestically, up from the current level of approximately 30%.

Business Lines

As the insurance industry evolves, the variety of cover provided to retail and corporate customers continues to expand. There are six main classes of life business: universal life, funeral, whole life, term insurance, endowment and group life. The principal non-life insurance classes are: fire, burglary and property damage; accident; marine and aviation; motor; and general liability. Life insurance has grown in importance in recent years, to account for around 45% of total premium, or GHS1.3bn ($251.8m). Universal life and investment products account for the largest share of segment premium, at 50%. This is followed by whole life and endowments, at 27%. A number of factors need to be addressed to boost expansion, however, including the limited disposable income of the population, a lack of awareness regarding the benefits of life insurance, a lack of distribution channels and delayed payments on claims. Responding to these challenges, life insurers are developing and marketing new products and services to broaden their customer bases (see analysis). In the pension sphere, Ghana differs from many countries in the region in that its public and private sector pension systems are integrated. A three-pillar structure is overseen at the National Pensions Regulatory Authority (NPRA) and managed by the Social Security and National Insurance Trust. The first pillar is a compulsory pay-as-you-go scheme contributed to by formal sector workers. The second pillar is also employment- and earnings-related, but is contributed to by both employers and employees, either through monthly payments or a lump sum. Unlike the first pillar, the second and third pillar programmes are administered by private retirement schemes. Participation at the third level is entirely voluntary, and is based on tax-deductible, individual contributions. Any benefits received are fully funded and based on a determined contribution. As of January 2020 some 50 pension fund managers were registered by the NPRA.

Auto

As all drivers are required to purchase thirdparty coverage, motor insurance is the largest non-life segment, accounting for 37% of total non-life premium income in 2018. The third-party premium rate is established by the General Insurance Council and the NIC, and since January 1, 2019 has been fixed at a flat rate equivalent to 90% of the basic premium of all other classes of vehicles. The new policy also removed the no claim discount from third-party motor cover.

The increasing cost of damages arising from road accidents continues to undermine the segment’s profitability. According to the NIC, around two-thirds of licensed vehicles in Ghana are uninsured. In an attempt to increase compliance, the regulator is in the process of establishing a database that will collate data on insured vehicles, which will allow members of the public to check a vehicle’s coverage status before they purchase it. The digital system will also link insurance companies directly with the Driver and Vehicle Licensing Authority, making it possible for law enforcement personnel to instantly establish the insurance status of a vehicle, with the likely outcome of increased compliance and a premium boost for insurers.

Theft & Property

Theft and property insurance is the non-life segment’s second-largest business line, accounting for 19% of segment premium. In 2018 theft and property premium expanded by 13% to GHS308m ($59.7m). Contributing to the segment’s growth, all private commercial buildings are required to take out fire insurance, and in recent years the NIC has moved to enforce compliance in this area. Throughout the country, it has conducted inspections and instigated legal proceedings against building managers that failed to secure appropriate cover.

Non-Compulsory Lines

Engineering insurance and liability cover each account for around 6% of total non-life premium. This is followed by personal accident, health and medical (5%), marine/aviation (4%), and financial guarantees/bonds (4%). Private health insurance has been offered to low-income households since the early 1990s, with much of the segment’s early momentum coming from community-based health insurance schemes, many of which were integrated into the National Health Insurance Scheme (NHIS) from 2004. Insurers today compete with the NHIS, which is eventually expected to provide universal health care coverage. According to the Ministry of Health, however, only around 40% of Ghanaians are covered by the NHIS, meaning that there is a significant amount of space in the market for private health providers.

According to Dan Vincent Armooh, CEO of Acacia Health Insurance, growth prospects for the health segment remain robust. “The biggest growth areas for private health care insurers is in state institutions – which are showing significant interest in private insurance – along with the rapidly growing individual and family health insurance market” he told OBG. With 14 insurance providers offering health coverage in the country, the segment is considered crowded. It is also one of the areas most affected by the financial sector’s recent overhaul (see Banking chapter), as banks and financial companies account for a sizeable amount of the group policies that dominate the segment.

Regulation & Reform

While the NIC continues to govern the sector according to the Insurance Act of 2006, a new regulatory framework is expected to be introduced over the coming year. The commission has been working on a new Insurance Bill since 2013. According to the regulator, the reforms will contain provisions to improve weak segments of the insurance industry, such as agricultural and marine coverage, as well as a requirement for new compulsory lines, such as group life and public liability. The new legislation is a central component of the NIC’s four-year strategic plan for the sector, which was finalised and approved in August 2018. Other initiatives under way as part of this development strategy include the construction and implementation of the motor insurance database, the establishment of an insurance awareness and confidence index, the training of insurance agents in conjunction with the Ghana Insurance College, and an improvement in the efficiency and effectiveness of the commission’s own operations.

These steps, and others, go a long way in directly addressing some of the long-term challenges facing the insurance sector, which include rate undercutting and slow payouts, both of which have diminished trust in the industry, as well as poor compliance with insurance regulations. The latter has seen some entities – including government-run bodies – failing to secure the mandatory required coverage.

Capital Boost

The NIC is also attempting to increase the industry’s financial stability and capacity to take on risk by raising the capital requirements for market participants. The commission will increase the minimum capital requirement for insurance companies from GHS15m ($2.9m) to GHS50m ($9.7m). Reinsurers, meanwhile, are required to boost their capital from GHS40m ($7.8m) to GHS125m ($24.2m). Insurance intermediaries are also facing a new capital demand, with brokers being asked to hold GHS500,000 ($96,900), up from GHS300,000 ($58,100). The companies have been given a deadline of June 30, 2021 to meet the new levels.

The new minimum requirements, however, only form part of the regulator’s revised capital framework. Insurers will also be required to implement a risk-based capital system, meaning that the minimum capital levels for some companies may be higher than the announced figures. In August 2019 the NIC’s deputy commissioner of insurance told local media that, although some insurers had voiced their concerns regarding the new requirements, the industry was cooperating and on-track to meet the new levels. The adoption of a risk-based approach is being driven globally by the introduction of Solvency II requirements in the EU, the Solvency Assessment and Management framework in South Africa and the China Risk-Oriented Solvency System in China. Introducing risk-based solvency requirements in Ghana would therefore place the industry more in line with international best practices.

Distribution

Much of the NIC’s reform effort is aimed at raising the insurance penetration rate. The way in which insurers interact with their client bases is a key front of this campaign. As with many emerging insurance sectors, in 2018 some 64% of premium in the life segment came from insurance agents tied to one company, followed by direct business (14%), bancassurance (11%) and insurance brokers (6%). “Opportunities for differentiation in life insurance include experimenting with distribution methods,” Nashiru Iddrisu, managing director at Hollard Life Assurance, told OBG. “A more entrepreneurial franchise model would have big potential as it saves a lot on overhead.”

In the non-life segment, brokers play a larger role, accounting for 40% of annual premium. Agents and direct business contributed 30% and 23% respectively, while bancassurance and other corporate agents made up the rest of non-life premium income. Although around 90 brokerage firms operate in the market, the segment is top-heavy: in 2018 the top-10 brokers contributed GHS80m ($15.5m), or 63% of total brokerage assets. The largest brokerage by commission income is KEK Insurance Brokers, which posted GHS23m ($4.5m) in commissions in 2018. This was followed by Edward Mensah, Wood & Associates (GHS10m, $1.9m) and Willis Towers Watson (GHS8m, $1.5m). While traditional distribution channels continue to dominate the market, the industry is turning to digital channels to broaden its customer base. This is particularly the case in the micro-insurance segment, which has seen a rapid increase in activity since the regulator established a specialised framework in 2013 (see analysis).

Outlook

While the prospect of new compulsory lines remains the most promising route to premium growth, Ghana’s insurers also stand to benefit from improving trade relationships, with the recent establishment of the African Continental Free Trade Area (see Economy chapter) expected to boost trade in the continent by 15-20% in the medium term, providing new opportunities in trade insurance and related cover. State plans to boost industrial capacity also represent a potential dividend for providers. The One District, One Factory policy (see Economy chapter) is likely to support engineering and property lines, while marine policies should also rise on the back of increased materials shipments.

Some of Ghana’s insurance companies may face difficulties in meeting the NIC’s new capital requirements by 2021. The regulator has made it clear that it will recognise the reclassification of profits by companies seeking to raise their capital level, but it will not allow them to reclassify their assets as part of their capital-raising effort. It also remains to be seen whether reforms will change the sector by prompting merger and acquisition activity. Looking forwards, technology is likely to be a key battleground in the struggle for market share. The growing momentum in product innovation and insurance delivery suggests that the industry trend towards greater depth and diversity will continue.