Ghana's insurance sector expands as reforms boost liquidity and reduce credit risk

Given the open regulatory framework, continued interest from foreign investors and current low penetration rate, there is strong potential for growth in the Ghanaian insurance sector. The industry is working to design and market products for uninsured populations, including the emerging middle class and those in the informal sector. For its part, the regulator is making efforts to increase capacity among the more than 50 insurance providers, which would allow underwriters to take on larger, riskier policies.

According to the regulator, National Insurance Commission (NIC), the sector’s current contribution to GDP is just over 1%, compared to around 0.7% in Nigeria and 3.1% in Kenya. However, the industry is poised to make a bigger impact in the future. A survey of insurance opportunities in sub-Saharan Africa published by EY in January 2016 ranked Ghana among the countries with highest potential for growth in insurance premiums and least country risk. EY expects the industry to reach $600m in value by 2018, which represents an 8.5% annual growth rate over the $400m industry (life and non-life combined) in 2014.

MARKET STRUCTURE: According to the NIC, there are 26 non-life insurance companies, 23 life insurers and three reinsurers operating in Ghana. With a population of around 28m people, according to the Ghana Statistical Service, there are signs the market may be saturated given the large number of companies operating in the country.

Previously, underwriters were able to offer both life and non-life insurance products, but the 2006 Insurance Act stipulated that companies were no longer allowed to operate in both segments of the industry and mandated that these composite companies separate by December 2007. The regulator advocated this change, so that companies could specialise in one area, gaining the expertise necessary for the industry to expand. The primary segments of non-life insurance include property, accident, motor vehicle and general liability insurances. Fire insurance for commercial buildings, both complete and those still under construction, and third-party motor insurance are the only compulsory lines. Individual companies have made efforts to add other types of insurance to the list of mandatory policies in order to boost the market, but no such additions were expected in 2016.

Agents & Brokers

The industry is organised around agents, who sell products on behalf of a single company, and brokers, who offer products from multiple companies. According to UK-based research firm Timetric, as of February 2016 Ghana had a total of 72 brokers. The large number of insurance brokers has contributed to the fierce competition seen in the industry, and as a result, rates began to fall below levels the NIC considered sustainable and in the best interest of the industry. In response to this situation, in 2014 the sector regulator began introducing a series of measures to prop up premiums and support development of the industry.

Growth Drivers

Although the industry grew at a compound annual growth rate of 28.2% in the 2010-14 period, according to Timetric, insurance penetration remains low and there is vast potential for growth. While the expansion of the overall economy has slowed considerably in recent years, it remains positive and is expected to accelerate by 2020. As Ghana’s middle class grows along with the economy, the demand for insurance is expected to increase. Additionally, population is growing steadily, recording an annual intercensal growth rate of 2.5% in 2010, according to the Ghana Statistical Service.

Life insurance is expected to be the greatest beneficiary of these trends, as more Ghanaians gain the financial means to obtain coverage for themselves and their families. Timetric estimates that the size of the life insurance industry alone will more than double by 2020, from GHS584.5m ($150.8m) in 014 to approximately GHS1.6bn ($413m) in 2019.

Sector Performance

The NIC released its annual report on the insurance sector in July 2016, which captured data through the end of 2014. It showed that the industry as a whole was financially sound by most measures, but there remained persistent issues yet to be addressed. Although both life and non-life gross written premiums (GWP) rose, growth in 2014 was materially weaker than it had been in previous years. Since this period, the regulator has taken steps to address many of the concerns revealed in this report. Most notably, ongoing efforts to boost liquidity have already begun to bear fruit.

Income from GWPs increased to GHS1.2bn ($310m) in 2015, up 17.1% over 2014. This compares to growth of 23.6% in 2013 and 35.3% in 2012. Growth in both the life and non-life segments slowed, but life fared better than non-life. Non-life GWPs grew 13.1% in 2014, down from 17.6% in 2013. Life insurance gross premium income, however, fell to 23% from 31.9% over the same period. Nevertheless, non-life retained its slight edge over life, grossing GHS659m ($170m) in 2014, compared to GHS580m ($149.6m) worth of gross life premiums. Surpassing the 2% penetration hurdle, meanwhile, proved even more challenging. According to the NIC, insurance penetration fell to 1.18% in 2014 from 1.42% the previous year.

Margins

The report showed that while weak spots remain in the life insurance business, the growing industry is nevertheless moving in the right direction. One of the primary challenges faced by life insurance companies is the growth in expenses. Although GWPs have steadily risen over the years, firms have so far failed to convert growth in premium revenue into higher net margins, which represent the portion of gross premiums that is retained as profit.

From a high 17.4% in 2012, net margins fell to 9.9% in 2013. In 2014 as gross premiums grew by 23.5%, net margins fell to 9.4%. While net margins are still roughly in line with the average for mature insurance sectors globally (10-11%), they are considered low for a growing industry such as Ghana’s. This can be mainly attributed to high expenses. The industry’s expense ratio, which represents the expenses associated with acquiring and servicing policies divided by the net premiums, rose from 57% in 2013 to 61% in 2014. This far outpaces the international benchmark of less than 40% and significantly lowered profitability in the sector. The cost of reinsurance, which increased from 1.3% of GWPs in 2013 to 1.5% in 2014, also played a role in the decline of net margins.

The situation was similar in the non-life sector. On the back of lower premium growth, net margins fell from 3.6% in 2012 to 3.3% in 2014, amid higher reinsurance costs and expenses. Reinsurance took a much larger bite out of GWPs in the non-life sector than in life. From 2012 to 2014, the proportion of GWPs ceded to reinsurers grew from 35.2% to 39.9%. The expense ratio, meanwhile, rose from 78% to 92% of net premiums over the same period.

It is notable that the two industry leaders on the life side, SIC Life and Enterprise Life, reported expense ratios of 23% and 38%, respectively, which were well below the industry average and much closer in line with global standards. However, none of the insurers on the non-life side achieved rates at this level.

Debt & Equity

Turning to debt and equity, the industry’s position is mixed. The debt-to-equity (D/E) ratio is a measure of the level of risk a company takes on to finance operations and growth. The median D/E ratio for life insurance industries globally is approximately 60%. In line with the majority of emerging and frontier market companies, the Ghanaian life insurance sector posted a D/E ratio of 33.2% in 2013 and 20.5% in 2014, well below the industry benchmark. By this measure, the sector could be well positioned to assume more debt to finance expansion.

The picture is a little more standardised for non-life insurance companies. When technical provisions are excluded from total liabilities, the D/E ratio for the segment came in at 47.5% in 2014, compared to 58.5% the previous year. This is just beyond the approximately 40% median for general insurance companies globally, suggesting that the sector’s debt burden may be sustainable at these levels.

Assets

The life insurance industry’s cash position is additionally short of averages seen in advanced economies. The cash-asset ratio – a measure of liquidity – improved slightly from 6.1% in 2013 to 6.7% in 2014, but fell short of the 20-25% recorded in mature industries. The non-life sector fared slightly better in this regard. The cash-asset ratio dipped in 2013 to 7.8% from 8.7% the previous year, but rebounded again to 10.6% in 2014.

However, these figures are likely to grow significantly in the coming years. The 2014 introduction of No Premium, No Cover (NPNC) policy and the implementation of more recent minimum premiums by the NIC were a response to low levels of liquidity seen across the sector. Given these measures, liquidity conditions are expected to gradually improve.

Investment

The investment yield, meanwhile, had been growing steadily since 2011, but fell slightly in 2014 for life insurers and remained flat for non-life firms. While the proportion of total assets invested in the life side remained flat at 70% from 2011 to 2013, the investment yield during that period – measuring investment income as a percentage of total investments – grew from 9% in 2011 to 12% in 2012 and reached 19% in 2013. Investment expanded by 37.7%, or GHS300m ($77.4m), in 2014, increasing the investment-to-asset ratio from 70% to 78%. Investment yield, however, softened slightly to 18% that year.

In the non-life segment, on the other hand, investments as a proportion of assets grew steadily from 45% in 2011 to 72% in 2014, and investment yields grew from 9% to 16% over the same period. These levels far outstrip the 4-6% investment yields in the insurance industry globally.

In 2014, 67.1% of life insurance investments were held in government securities or bank fixed deposits. The comparable number for non-life investments was 60.7%. These investments allowed the sector to take advantage of rising interest rates: the benchmark monetary policy rate increased from 12.5% in 2011 to 21% by the close of 2014.

Looking at assets more broadly, return on assets (ROA) deteriorated significantly in 2014 for life insurers, from 5% in 2013 to 0.34% in 2014, bringing the ratio below industry standards of 0.5-1%. While lower profit levels in 2014 contributed to the reduced ROA, the difference was primarily attributable to the 38.5% build up in assets over 2014. As the new assets begin to contribute to growth, investors can expect improvements in this metric. Beyond investments, growth in assets included cash (+50.2%); property, plant and equipment (+53.5%); and receivables, the majority of which came in the form of premium debtors (+499%). The jump in premium debtors led to significant increase in credit risk in the sector and was the impetus for the institution of NPNC in April 2014. This category of receivables is likely to approach zero in the next few years. Non-life insurers also saw a dip in ROA in 2014, but at a much smaller magnitude. ROA fell from 5% in 2013 to 4% in 2014, but remained much better than industry standards. Asset accumulation in 2014 was much less aggressive compared to life insurers, with total assets growing by 17.6%. By the end of 2014 non-life insurers had already zeroed out their balance of premium debtors, which stood at GHS145m ($37.4m) in 2013. The change in assets was mainly due to the increase in investments, which grew by GHS200.5m ($51.7m) in 2014.

Foreign Interest

Evidence of the industry’s growth potential can be seen in the increasing interest among foreign investors seeking to gain entry to the market. Notably, following an acquisition in Kenya, Barclays Africa, in which UK-based Barclays Bank holds a majority stake, announced its intentions in May 2016 to acquire a Ghanaian insurance firm.

Meanwhile, IVM Intersurer, the Dutch parent company of South Africa-based Hollard, in October 2015 took a majority stake (51%) in Metropolitan Insurance Company, which at the time was Ghana’s fourth-largest general insurer. The company also operates a separate subsidiary in Ghana under the Hollard brand, suggesting that some consolidation could be imminent. James Wood, CEO and managing director of brokerage Edward Mensah, Wood & Associates, told OBG, “Consolidation is necessary and should happen as soon as possible because there is a large number of small insurance companies in the country.”

US-based Prudential, which acquired a majority holding in Ghana’s Express Life Insurance in 2013, has committed to an additional $350m investment in sub-Saharan Africa through its Prudential Financial arm. While the commitment was to the region, given Ghana’s growth prospects, investors expect a portion of those funds to find their way to Ghana. Also spurring foreign investment in the industry is a maturation of the market in these insurers’ home countries. “Opportunities in advanced economies have virtually been exhausted, so insurance firms are looking for places to invest their money,” Patrick Dughan, assistant general manager of KEK Insurance Brokers, told OBG. Foreign investors are in most cases able to fully own and operate businesses in Ghana. The insurance sector is one the three exceptions to that rule. Although foreigners are permitted to hold a majority stake in insurance firms, the stake is limited to 60%, with the remaining 40% to be held by a Ghanaian citizen. Likewise, insurance is one of five economic sectors that does not allow for accelerated depreciation of assets for financial accounting purposes.

Major Players

According to the NIC’s 2014 report, market share is highly concentrated in the hands of leading insurers, with SIC – a public limited liability company, of which the government owns 40% – and SIC Life topping both sides of the insurance market. In the non-life segment, SIC was responsible for GHS111.9m ($28.9m) in gross revenues, or 17.2% of the non-life market in 2014. The top life company, SIC Life, brought in GHS158m ($40.8m) in gross life premiums, or 27.3% of the total life market.

In second place were Enterprise Life Assurance Company for life and Enterprise Insurance Company for non-life. Combined, the top-two insurers accounted for 54.2% of gross life premiums and 27.8% of gross non-life premiums, translating into 40.2% of gross premiums for the Ghanaian insurance industry as a whole.

Sector Regulation

In recent years the regulator has announced a series of reforms that aim to accelerate the development of the sector, and bring the insurance industry in line with international standards. In an effort to boost liquidity, in April 2014 the sector regulator introduced the NPNC policy, which stipulates that the full premium must be paid prior to the initiation of coverage.

More recently, the NIC has instituted a policy of minimum rates for each type of policy on the market (see analysis). After two years of implementation, NPNC has proven beneficial for the industry. It has increased liquidity and reduced credit risk, in addition to bolstering consumer confidence due to better claim settlement (see analysis). Joseph Kusi-Tieku, CEO of GN Reinsurance, told OBG, “The regulator, the NIC, has added a lot of value over the last two years by pushing through the NPNC regime.”

However, there is still a question regarding the efficacy of the minimum rates. “The minimum rates will help the industry, but enforcement will be a challenge,” Michael Agbleke, head of operations at RegencyNem Insurance Ghana, told OBG. In an intensely competitive industry composed of more than 50 individual firms, significant monitoring efforts will be required to ensure that companies resist the urge to undercut their rivals by breeching the price floors.

The NIC is on track to fully implement risk-based supervision, which allocates supervisory resources based on risk, and increase minimum capital requirements by the end of 2016, based on the level of risk present in a firm’s portfolio rather than one blanket minimum for all firms. All insurers are required to have a capital adequacy ratio in excess of 150% as of the end of December 2016 (see analysis). “It is good for an insurance company to have a large capital base, as this would lead to higher retentions of risk, hence the need to further increase minimum capital requirements for non-life insurance companies from the GHS15m ($3.9m) levels of 2016 to much higher levels over time,” Solomon Lartey, managing director and CEO of Activa International Insurance, told OBG. “Insurance companies can, however, purchase higher reinsurance protection to enable them to increase their capacity to take on more risk.”

In July 2016 the NIC signed a memorandum of understanding with the Kenyan insurance regulator – which is also shifting to risk-based supervision – to institutionalise collaboration and information-sharing between the two countries. This agreement, which follows similar agreements with English-speaking West African countries – more specifically Nigeria, Sierra Leone, The Gambia and Liberia – intends to reduce overall risk by expanding regulatory oversight of firms operating in both countries.

Takaful

Further boosting the range of products available on the market, the NIC announced in April 2016 its intentions to license takaful (Islamic insurance). Aimed in part at Ghana’s Muslim community, which accounts for about 18% of the population and is based primarily in the northern regions of the country, takaful has the potential to boost the adoption of insurance outside of the larger urban centres. Efforts in this regard are just getting under way, and there is no clear policy or timeline for introduction as of yet.

Awareness

The NIC and the Ghana Insurers Association (GIA), an industry trade group, are working together on a series of educational campaigns to raise awareness of the potential benefits of insurance products among the public. The anchor of the campaign is an annual insurance week organised throughout the country, which highlights the types of insurance products available on the market and provides a forum for individuals and companies to obtain information and ask questions.

The GIA also recently launched an effort aimed at school-aged children. By establishing insurance clubs and incorporating insurance-focused curricula into schools, the GIA hopes to create “insurance ambassadors” who can explain the virtues of insurance to their parents. The GIA also hopes that this programme can instil the value of insurance in the minds of the young to provide support for the next generation of the insurance market. Charles Oduro, managing director of KEK Insurance Brokers, told OBG, “Insurance companies have asked the Ministry of Education to provide information on the importance of insurance at an earlier age, which will ensure that future policyholders are aware of the sector’s benefits.”

The initiatives are in part designed to raise awareness, but also to improve the perception of insurance firms, which suffered from a legacy of non-payment for claims during the 1990s. While the regulator has helped strengthen the market over the past decade, the non-payment reputation still lingers. “We believe that the key issues for the low penetration for insurance has to do with the poverty level, the lack of education with regards to insurance and the negative image of insurance companies,” Dughan told OBG.

In light of that, private insurers have also taken on the responsibility of educating consumers. For example, life insurance giant SIC Life airs a weekly, one-hour television programme designed to inform farmers, labourers and the informal sector on the micro-insurance products available to them.

Bancassurance

The 2007 introduction of bancassurance – a partnership between banks and insurance firms in which banks sell insurance products to customers alongside their traditional banking products – has provided increased visibility of insurance for the banked population, which primarily comprises middle- and upper-income segments of the populace. However, bancassurance has failed to make an appreciable difference in penetration rates mainly due to the low margins and the fact that NIC regulations only allow banks to sell general insurance products to individuals – a limitation the banks cite as a disincentive to their full involvement in the business.

Currently, banks offering bancassurance products include Agricultural Development Bank, Barclays Ghana, Ecobank Ghana, Fidelity Bank, GCB Bank, Stanbic Bank Ghana, Standard Chartered and uniBank. Zenith Bank Ghana also announced plans in late 2015 to introduce insurance services.

Micro-Insurance

A major contributor to growth in the industry is the development of micro-insurance, a growing product range marketed to low-income households and micro-enterprises (see analysis). Capturing this segment of the market has not yet resulted in substantial top-line growth for the industry, but take-up of micro-insurance is expanding, with GWPs almost tripling in size from GHS4.7m ($1.2m) in 2012 to GHS13.3m ($3.4m) in 2014.

The leading micro-insurance products include life, credit life (a form of life insurance in which the policyholder’s debts are paid off in the event of death), and insurance to cover hospitalisation costs. Together, these classes of insurance accounted for 96% of the micro-insurance premiums collected on the market in 2014, with non-credit life capturing 48% of the total market. Other products include personal accident, property and niche agricultural insurance.

January 2016 saw the launch of the pilot for a new micro-insurance project, which focused directly on Ghanaian fishermen. The Fishermen Life Insurance Scheme, a partnership between the Ministry of Fisheries and Aquaculture Development and Star Micro-insurance Services, provides life insurance and coverage for equipment and tools. In an effort to expand insurance to this segment of the economy, the government provided the initial premiums on behalf of the fishermen.

Customer Base

Lower income, self-employed persons operating mainly in the informal sector in urban areas, are the largest consumers of micro-insurance products. Self-employed persons without employees consumed 51.6% of micro-insurance in 2014, and the mean personal income for all micro-insurance customers was GHS699 ($180) per month.

Micro-insurance is a key component of the government’s financial inclusion and penetration campaign. “For people at the bottom of the pyramid, mobile microfinance is their first step into inclusion in the financial system,” Joe Jackson, director of business operations at Dalex Finance, told OBG. “We can then start giving them real services, such as micro-insurance and lending services.”

The data supports this assertion. NIC reported that 10 of the 27 leading micro-insurance products that it surveyed prominently featured a savings or investment component. Much like the bancassurance programme, the bundling of micro-savings – investment and insurance services – can lead to greater growth in all financial products, benefitting banks and insurers alike. Micro-insurance products are offered in Ghana by both multinational insurance companies and smaller firms specialising in micro-insurance products. However, the majority of providers are small and not very well capitalised, although they have avoided the lapses in governance that microfinance lenders have suffered in the banking sector.

Mobile Insurance

Micro-insurance services are sometimes marketed in partnership with the telecoms providers, which has been enormously beneficial for expanding coverage. According to a study released by EY, competition among mobile telecommunications providers has at times resulted in the provision of free micro-insurance as an incentive to attract and retain customers. Mobile insurance, or simply m-insurance, has grown in popularity. As of June 2015, there were a total of 2.5m m-insurance policyholders spread across six different products. The six m-insurance offerings, which were first introduced in 2010, are all life insurance products and are sold by the three mobile network operators: MTN, Tigo and Airtel. Together, m-insurance contributed GHS5m ($1.3m) in gross premiums in 2014.

Product Innovation

Several common products that are not available on the Ghanaian market could be additional areas for growth in the future. Medical malpractice insurance, for example, which is mandatory in many parts of the world, is not available for Ghanaian medical professionals. Likewise, professional liability or indemnity insurance products are not widely in use. Furthermore, while Ghana has not suffered from any major terrorist incidents in recent years, terrorist insurance could be of growing interest to firms holding high value assets in the country.

Brian Kapito, managing director of Saham Insurance, told OBG, “The creation of deliberate Afro-centric insurance covers that relate more to Ghana, innovation in distribution capacity and monitoring mechanisms for statutory covers will increase insurance penetration. Tax relief for some insurance coverage may also spur consumer interest.”

Recruitment Issues

As with many segments of the financial industry, finding qualified local talent can be a concern for operators. “The challenge is that we don’t have many loss adjusters or assessors,” Daniel Addo, head of operations for Hollard Insurance Ghana, told OBG. “In 2015 there were major floods in this country, and we had to bring loss adjusters from all over the world. We didn’t have the right capacity. We hadn’t seen that size of loss before.”

Outlook

Thanks to the low insurance penetration rate, reforms recently introduced by the NIC and the interest shown in the market by an increasing number of foreign insurers, the Ghanaian insurance sector looks likely to continue to grow and develop. Increasing minimum capital requirements are expected to lead to stronger underwriting capacity across the industry, while the development of micro-insurance and m-insurance products for citizens on lower incomes will drive further industry growth.

With strong sector-specific indicators, macroeconomic headwinds will be the biggest obstacle to growth, although the regulator and industry at large are working to strengthen the sector and build awareness to help improve the long-term outlook.