New rules to strengthen insurance sector
Capital requirements for domestic insurers have been increased over a number of years. Minimum levels were set in the Insurance Law of 1989, and since then a series of adjustments have been made to strengthen balance sheets and account for changes in global standards.
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Capital requirements have also been hiked to encourage the merger of smaller insurances firms and support the overall consolidation of the sector. Over time, the changes instituted have in part had the desired effect, with higher capital levels making institutions more stable and better able to withstand shocks. However, the adjustments have not quite resulted in the hoped-for changes to the sector’s structure.
The Insurance Law of 1989 established a minimum capital requirement of GH¢20m (GH¢200 in redenominated cedis, or $48) for life companies. Non-life companies were required to have GH¢40m (GH¢400 in redenominated cedis, or $96). Under the Insurance Law of 2006, minimum capital was raised to the cedi equivalent of $1m. It was then increased to GH¢5m ($1.4m) in 2012 and the cedi equivalent of $5m for insurers seeking to cover risk in the oil and gas sector. The regulator again raised the minimum at the end of 2013 to GH¢10m ($2.8m). The goal is now to lift the requirement to GH¢15m ($4.2m) by the end of 2015. In terms of the absolute level, Ghana’s insurance companies should be well capitalised.
Codifying Change
However, the regulators are not just satisfied with the headline number. They also want to have more control over that figure in the future, in case quick adjustments need to be made.
Capital levels have historically been inflexible as they are written into the law and can, in theory, only be changed by parliament. In the past, this has resulted in lower than ideal capital levels as circumstances change, especially when the currency falls.
The new insurance law, when passed, is expected to allow the level to be modified by the regulator. In the meantime, before the law is actually passed, the National Insurance Commission (NIC) seems to be updating its requirements in anticipation of having the legal authority to manage the level.
Solvency
The regulators are going beyond just adjusting capital and are starting to look at more sophisticated ways of approaching stability and soundness. Solvency has long been regulated in the country, but the requirements have been relatively simple and straightforward. Under the Insurance Act of 2006, non-life companies were required to have assets that exceeded liabilities by 10 per cent, while it was necessary for life companies to have assets equalling liabilities.
These requirements were rudimentary and did not go far in ensuring a buffer on balance sheets.
However, in notes published by the NIC following the passing of the 2006 law, solvency margins were stricter. Under the rules, assets had to equal 150 per cent of liabilities. Depending on how low assets fall, the NIC can take the following actions: restructure investments for assets that are between 125 per cent and 150 per cent; call for enforcement action or an injection of capital for assets at least equal to liabilities but below 125 per cent; and suspend the insurer’s licence, with the possibility of permanent withdrawal and liquidation, if liabilities are greater than assets.
The NIC’s memo also mandated a certain investment mix within an insurer’s portfolio, which includes: government securities, including cash and deposits, of at least 35 per cent; listed stocks capped at 30 per cent; no more than 20 per cent of unlisted stocks, or 10 per cent for life companies; mutual funds cannot exceed 20 per cent; investment properties must be 10-30 per cent for life companies and under 20 per cent for non-life; and any other approved asset class, including statutory deposits, are capped at 10 per cent.
The memo further stipulated that at least 55 per cent of assets must be in investments that generate a return, either in the form of income or capital appreciation.
It added that valuations must be done according to International Financial Reporting Standards. Insurance companies were required to meet or exceed these thresholds for solvency margins in stages: 30 per cent of minimal capital by the end of 2008; 40 per cent by the end of 2009; and 50 per cent by the end of 2010.
The memo also forced insurers to build in margins of safety and provided the NIC with the tools and power to intervene should an insurer fail to meet certain basic thresholds.
Updates
In 2011 the country started to pursue the passing of a new solvency law. At the time, the NIC told local press that the goal of the framework was to prevent smaller insurance companies from writing policies for which they lacked the financial strength.
The regulators said that minimum capital requirements were insufficient and allowed companies to take on policies that were beyond their means. New regulations were also intended to prevent insurance companies from granting policies on credit. S.N.K Davo, deputy commissioner of the NIC, told local press, “We want to use this new solvency framework to address the debt problem in the industry.
The framework will not recognise premiums written to people on credit as assets to those insurance companies; it will treat them as liabilities and in turn make the company insolvent. We want to use this new regulation to make the insurance industry sound and liquid.”
The solvency regime was finally put into place in 2014, effective January 1, 2015. According to the NIC, the new requirements match international standards and best practices. In a circular dated December 19, 2014, Lydia Lariba Bawa, the insurance commissioner, said insurers in Ghana need to take a risk-adjusted approach to the capital adequacy ratio (CAR).
Under the regime, insurers are required to raise their minimum capital to GH¢15m ($4.2m) by year-end 2015. In addition to the minimum capital requirements, the NIC has also established brand new CAR levels of 130 per cent to also be achieved by the end of 2015, 140 per cent by the end of June 2016 and 150 per cent by year-end 2016. — Oxford Business Group/GB
Health Care Coverage
Similar rules are being set out for private health insurance plans. In February 2015 the National Health Insurance Authority (NHIA) issued circular outlining guidelines for the sector. In the circular, capital, solvency and a wide range of other topics are discussed.
Minimum capital for private mutual health insurance schemes is set out at GH¢1m ($277,500), which must be a paid-up initial subscription. A reserve fund equal to 20 per cent of capital must also be established. In the case of private commercial health insurance schemes, they must have paid-up capital of GH¢5.5m ($1.5m). Of that, 10 per cent must be placed with the Bank of Ghana (BoG) as a security deposit. A reserve fund must also be set up that is equal to five per cent of the surplus or net profit.
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The circular also sets out the solvency requirements for private health insurance schemes. It goes into great detail as to how available capital is calculated. Inadmissible capital includes: intangible assets, capitalised research and development costs, deferred acquisition costs, deferred tax assets, the value of investments in a connected party, reinsurance receivables more than six months and amounts owned by a connected party.
A schedule of discounts is also included. Government securities and BoG securities are not discounted. Cash at banks, money market funds and corporate debt are discounted at five per cent. Other discount rates are as follows: Ghana Stock Exchange securities at 15 per cent; land and property held as investments at 30 per cent; property occupied by the insurer is rated at 50 per cent; and motor vehicles are also discounted at 50 per cent. A solvency equation has also been provided. The CAR is calculated as available capital divided by solvency capital times 100 and must be more than 150 per cent, below which action will be taken.
The document also outlines corporate governance, risk management and internal controls. An insurer’s board is expected to have a minimum of five members and at least one-third of the board should be independent. Moreover, the chairman or the CEO of the board must be a Ghanaian citizen. Insurers are required to issue a financial condition report, in which the auditor must make an assessment of the legal compliance of the insurer. — Oxford Business Group/GB