Insurance companies in capital bubble

Business News of Thursday, 6 March 2014

Source: Graphic Online

Ghana's financial market is undergoing some dramatic capital increases following the country's entry into the league of oil producers. Ghana has also attained the status of a lower middle income country.

This has pushed regulators of the financial sector to compel industry players to increase their capital base to conform to the country's desired status as the financial hub of the sub-region.

But just when the insurance companies had come out of a bout of recapitalisation of one million dollars in 2010, another round of recaptalisation drive stares them this year.

The National Insurance Commission (NIC) had, based on 2006 legislation, directed every life and general insurance company to have a minimum of US$1 million in core capital, a stipulation which all the 45 licensed insurance companies in Ghana had complied with.

The NIC this time is raising the minimum capital for general insurance firms that wish to engage in underwriting policies in the oil and gas industry to recapitalise further to a minimum of US$5 million.

The National Insurance Commission insists that any general insurance firm that wishes to engage in underwriting policies in the oil and gas industry has to recapitalise further to a minimum of US$5 million in core capital by December 2014.

While this means that the new minimum capital is not altogether compulsory – any general insurer could choose not to recapitalise, and not underwrite oil and gas industry risks, but none of them is prepared to let the obvious opportunities in that 'new' industry pass them by.

Indeed, it is instructive that all of Ghana's general insurers have signed up to be part of the newly formed consortium to underwrite oil and gas sector risk, which tend to be so big that Ghana's insurers must necessarily pool their resources to handle a fraction of the multi-million dollar deal.

Already, under the consortium, all of Ghana's general insurers hav e jointly underwritten the insurance of the Floating Production and Storage (FPSO) Kwame Nkrumah that was acquired for commercial production of oil from the Jubilee oilfield off Cape Three Points in the Western Region, which has an insured value of close to US$900 million.

GIA views

The President of the Ghana Insurance Association (GIA), Mr Kwame-Gazo Agbenyadzie, backed the recaptalisation directive from the (NLC), saying it was necessary in the light of the emerging challenges in the oil and gas sector.

In an interview with the Graphic Business, Mr Agbenyadzie expressed optimism that the increase in stated capital would consolidate the insurance companies and make them stronger.

"At the moment, we have about 45 licensed insurance companies, which are just too many for a small country like Ghana," he said.

Currently, the total premium income for the entire general insurance industry is about US$400 million which is largely controll ed by five insurance companies.

The insurance industry in Ghana is quite small but it has been growing steadily. Over the past five years, it has been growing at an average annual rate of about 30 per cent.

Industry players say the difficulties in accessing claims when they fall due has dampened public confidence in the industry.

"For our part, we will continue to work to build a credible image for the industry," Mr Gazo said.

"There are a lot of areas that we need to work on to improve the image of our industry, thereby ensuring growth and a substantial contribution to the economic development of our country," he added.

There are opportunities for more growth as efforts to deepen the insurance penetration begin to gather momentum. These efforts have mainly been in the form of the up-scaling of micro insurance, the development of agriculture insurance products and the adoption of innovative and effective distribution channels.

Merg ers in insurance sector?

It is expected that the imminent increase in the capitalisation requirement will force some insurers into mergers and acquisitions as the regulator seeks to ensure stability in the industry and the strengthening of the financial muscle of insurance companies to underwriting large businesses.

Though there are 45 licensed insurance companies operating in the country, yet Ghana's current insurance penetration rate is estimated at 1.5 per cent in a population of about 26 million.

A World Bank report in 2012 titled "De-Fragmenting Africa: Deepening Regional Trade Integration in Goods and Services", mentioned that insurance companies in Ghana and other countries within the West African Monetary Zone (WAMZ) were too small and needed to recapitalise to underwrite major business.

It added that in the WAMZ region, the regional financial market remained fragmented by the lack of an official cross-border payments system; by differe nces in the regulatory framework for financial institutions between countries in the region; and the absence of sharing credit information across borders.

It said regulations and supervisory practices for the insurance sector were far from uniform across the region, which increases the cost of operating regionally and undermines the ability of the supervisory bodies to assess the risks posed by cross-border activities of the institutions they supervise.