The recent financial stability review report released by the Bank of Ghana shows that the total assets of the insurance industry as at the end of December 2019 stands at GH¢6.54 billion, an annual growth of 19 percent.
The Central bank attributed the improved growth in the insurance sector to improvement in the operational environment of the insurance sector and policy reforms.
“Growth in premium income increased from 18 percent at End-December 2018 to 22 percent at End-December 2019. Total assets of the insurance industry also grew at an annual rate of 19 percent to GH¢6.54 billion at End-December 2019”.
The Bank of Ghana (BOG) stated that “in the year under review, National Insurance Commission (NIC) continued to work closely with industry players to address issues on under-pricing, underwriting capacity, enforcement of compulsory insurance, market conduct practices and claims management”.
The Bank of Ghana expressed optimism about the insurance sector in the coming years and stated that risks associated with premium income growth is expected to remain subdued given favourable economic prospects, the broad-based introduction of innovative insurance products (micro-insurance etc), the recapitalisation exercise, implementation of the Motor Insurance Database (MID), and the expected passage of the draft insurance bill, among others.
However, the Bank of Ghana has expressed worry about the fact that even though premium income has increased, the insurance penetration remains unchanged.
“From December 2014 to December 2019, the insurance penetration, which is defined as premium income to GDP has remained relatively stable at about 1 percent. The low level of insurance penetration suggests that the insurance industry has significant room to grow”.
The report also pointed out that overseas reinsurance premium transfers generally increased in 2019. The NIC, the report indicated, has granted approval for the transfer of reinsurance premiums amounting to approximately GH¢ 222.5 million in the year under review.
This, BOG stated was an increase from the GH¢79.74 million recorded in 2018.
“The government’s objective of driving private sector growth and industrialization is expected to increase overseas reinsurance premium transfers in the short-term. In the medium term, however, the recapitalization effort of insurers and reinsurers is likely to significantly drive the overseas reinsurance premium transfers downward”.
The Bank of Ghana further highlighted in the report that the retention ratio continues to remain high in the industry. BOG opined that an average of 79 percent of the premium received by insurers was retained in 2019. A further breakdown shows that, non-life insurers retained 68 percent of their premium while life insurers retained 98 percent.
“The low retention ratio of premium by non-life insurers is partly due to the nature of risks underwritten and high gross premium to capital ratio. On the other hand, the high retention ratio among life insurers is mainly due to the increased purchasing of savings-linked insurance products and the long-term nature of their actuarial liabilities. The implementation of the recapitalization exercise by the NIC is expected to drive risk retention in the non-life insurance segments and also drive the underwriting of pure risks insurance products for Life insurers”.
The high retention ratio, according to the Bank of Ghana, is broadly supported by a strong capital base, dampening solvency risk.
The central bank further explained that “the improvement in capital is underpinned by the entry of new firms and recent regulatory reforms introduced by the NIC to strengthen the financial position of insurers through the introduction of a risk-based solvency regime implementation of sound corporate governance practices, risk management frameworks and the ongoing recapitalization exercise.
“The capital base of the insurance sector grew at an annual rate of 22 percent to settle at GH¢2.53 billion at End-December 2019, improving the CAR position of insurers. At End-December 2019, the CAR of the life and non-life insurance segment of the insurance sector respectively stood at 535 percent and 330 percent, well above the regulatory minimum CAR of 150 percent”.
Also captured in the recent report is the fact that underwriting losses and declining investment yields are risks to the profitability within the insurance industry. The report indicates that for both life insurance and non-life insurance companies, the combination of weak underwriting performance and declining investment income has led to a reduction in Return on Equity.
According to the report, insurers as a way of optimizing returns on investment and maintaining profit margins in response to investment losses are gradually readjusting their investment portfolio in favour of investment properties.
“A rapid change in the prices of investment properties can therefore impact the profitability of the insurance sector”.
Additionally, BOG recommended that in order to preserve investment income, there is the need for Government to enhance policy to expand the bond market as an alternative investment option to investors, including insurers.