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Keynote Address by Acting Commissioner - Chief Executives Meeting

Keynote Address by Acting Commissioner of Insurance at a Meeting
With the Chief Executives of the Insurance Industry at the NIC Auditorium on Tuesday 19 January 2010

1.0 Introduction
The new leadership of the National Insurance Commission (NIC) wishes to make clear to the insurance industry and to the general public the policies and programmes which it has for the next few years, and the matters of concern which it wishes to tackle immediately.

The purpose of this meeting is to indicate these and to invite the support and contribution of our companies for the implementation of these programmes.

Let me first deal with the matters of concern.

2.0 Matters of Concern

• Premium Undercutting

• Huge Outstanding Premium Debts

• Aftermath of the Relicensing Exercise

• Utilization of local capacity

• Low Capitalisation

2.1 Premium Undercutting
This is something that has bedeviled the industry for a long time, and we are all aware of the effect of this practice on our balance sheets, and our ability to pay claims.  It is now time to do something about it as an industry. 

From the NIC, we will be conducting a Special audit exercise to identify those companies involved in these practices.  Those found wanting will be appropriately sanctioned to serve as a deterrent to others.

We want to urge the GIA to get its technical committee to conduct a survey of all the rates charged by the companies for the various classes of business except motor, and come out with ranges of acceptable premium rates that can be monitored by the NIC.  Further discussions will be held with the GIA on this matter.

2.2 Huge Outstanding Premium Debts
Once again we are all aware of the huge outstanding premium debtors' balances that are on our books.

The ratio of outstanding premiums to gross premiums is high and is still rising, from 34% in 2007 to 43% in 2008.  This is a serious matter!
The result is that our ability to invest is hindered since the money will not be available to invest and additionally this also affects the solvency position negatively.

As a first step in dealing with this matter, the NIC has accepted the recommendations of the Premium Credit Committee, and will enforce the Premium Credit Guidelines when they have been finalized.

The industry is, however, being encouraged to promote a Premium Finance Company that will greatly assist policyholders in paying their premiums promptly.  This will allow the insurance companies to receive all their premiums on time and therefore improve the liquidity and solvency of the companies.

2.3 Aftermath of the Relicensing Exercise
The relicensing exercise has increased the number of insurance companies tremendously from a previous figure of 23 to now 42 (23 Non-Life, 17 Life, 2 Reinsurance).  The number of foreign participants on the market has also increased significantly.   This is quite a considerable number of companies for our economy, but we expect all to operate within the Law, and contribute effectively and add value to the industry.

But unfortunately, this is not the case.  We rather have fierce competition that has led to some unhealthy marketing practices; lack of respect for the rules and regulations of the insurance business; and doubtful commitment to the development of our market.  The NIC will not accept such practices on our market and any company found breaching our laws will be dealt with appropriately.

Apart from our inspection and enforcement activities, we intend to work closely with approved auditors to ensure that the internal practices of our insurance companies not only comply with the law, but show a commitment to the development of our industry.
We are at the moment evaluating the implementation of the Insurance Act, 2006.

2.4 Utilization of Local Capacity
In recent times we have seen the emergence of Group treaties especially by our companies with foreign ownership.  Most often than not the nature of such arrangements are such that they breach Sections 53 and 54 of Insurance Act, 2006 (Act 724).  We want to emphasize here that these companies are separate subsidiaries incorporated in Ghana and must therefore comply with all statutory requirements in Ghana.  For the avoidance of doubt, S.53 requires all reinsurance arrangements of an insurer to be approved by the Commission and insurers and reinsurers are required to utilize fully the local capacity before recourse to any overseas reinsurance.  Of course any insurer that has a reason to do otherwise must first seek approval from the Commission before doing so. 

In order to ensure the growth and development of our market, the NIC will enforce the law.  We implore all to comply for our mutual benefit.

2.5 Low Capitalisation
By now all of you must be aware that the minimum capital of $1million is quite low.  Some of the new companies have already started feeling the heat, as they are now operating below the minimum capital after barely one year of operation.  This is not acceptable.

Also the emergence of oil and gas and subsequently its insurances, has brought to the fore the need to have a bigger capital than the minimum of $1m.  There is therefore the need to increase the minimum capital, to increase the capital base of each company in particular, and the whole industry in general.
This will ultimately allow the industry to retain more business on our market and help grow the industry. 

The NIC Management has already received the go ahead from our Board to increase the minimum capital from $1m to $5m. We will soon initiate discussions with you on the new levels and the modalities for implementation.

3.0 Broking Business
The NIC appreciates the contribution of our Broking firms to the development of the industry in terms of their advisory and intermediary roles.  We, however, expect them to be more actively involved in finding solutions to the problems that we face as an industry.

All our broking companies must make it a point to comply with the Credit Guidelines to help improve the liquidity and solvency of the industry.  Brokers must also desist from using threats to move businesses as a tool for reducing premiums to ridiculous levels.

If the industry prospers, it will be for our mutual benefit.  All stakeholders must therefore do their part of the hard work.

4.0 New Programmes
As we are dealing with issues of concern, we will also be looking at:
New ways of strengthening and enhancing our supervisory work and also to bring our processes in line with international best practice; and

Some programmes to develop and grow the industry further.


4.1 Strengthening and Enhancing our Supervisory Work

4.1.1 Risk Based Supervision
Risk Based Supervision (RBS) has emerged as the international best practice in terms of regulatory methodology. The rate at which emerging market economies like Brazil, Mauritius and South Africa and have adopted RBS has been hastened by the global credit crunch and the need to have a more proactive and participatory approach to ensuring financial stability.

The main advantage of RBS over rule based supervision is that compliance with existing rules does not necessarily mean that there are no problems. Risk based supervision enables regulated entities to assess their own operational risks and take appropriate measures to manage such risks.

To achieve financial stability and ensure that insurance companies will be able to honour their obligations now and in the future, the NIC will start work on the design and the implementation of a suitable Risk Based Supervision model for the Ghanaian insurance industry. As a means of creating the necessary preconditions for the implementation, a consultant has already started work on the formulation of a Corporate Governance and Risk Management code for the industry. The whole process (from the design to the full implementation of the model) is expected to take between three to five years.

This will significantly change the mode of regulation from what it has been in the past twenty or so years. Insurance companies will now have to significantly improve their corporate governance and take active steps in identifying the main risks they face as insurers. Capital adequacy will also be based on the risk profile of each and every company. In other words, each company will be required to have capital that is adequate for the nature and level of its business instead of the current "one size fits all".

4.1.2 International Financial Reporting Standards (IFRS)
In order to ensure comparability and consistency in financial reporting all over the world, efforts are being made to converge Accounting Standards. The International Accounting Standards Board (IASB) has been set up to formulate common international accounting standards.

So far a number of standards have been issued by the IASB the most relevant among them for insurance business being IFRS 4 which is on Insurance Contracts. Apparently this is the first ever standard on insurance accounting.

In Ghana, the Institute of Chartered Accountants directed that all public interest companies, which include all insurance companies, must comply with IFRS by 31st December, 2008. Although some insurance companies have been able to convert to IFRS, a good number of them are yet to do so due to obvious constraints.

In a bid to promote a consistent application of IFRS, the NIC has appointed consultants to develop an Accounting Manual (that is IFRS compliant) to guide all insurance entities in their records keeping and financial reporting.

This manual is expected to be completed by the end of the second quarter of 2010. The manual will also provide formats for the submission of the quarterly and annual returns to the NIC.

4.1.3 Anti-Money Laundering and Countering the Financing of Terrorism (AML-CFT)
The Anti-Money Laundering Act, 2007 (Act 749) has been passed by Parliament and the Financial Intelligence Unit has been set up. The Regulations to the Money Laundering Act will be passed by Parliament any time soon. It is pertinent to note that under the Act, all insurance companies and insurance broking companies are reporting agencies

In addition to the above, even though the Insurance Act requires the Commission to satisfy itself that insurance companies and intermediaries have adequate procedures in place to prevent them from being used for the purposes of money laundering or for terrorist funding, the Act does not however give any details or indications as to how exactly this should be done. Comprehensive provisions on AML/CFT are therefore being made in the Regulations to the Act.

It is therefore important that we prepare as an industry to implement both the Anti Money Laundering Act and the AML provisions in the Regulations.

In view of the above, the NIC is also procuring technical assistance to develop and issue comprehensive AML/CFT guidelines to help the insurance companies and the intermediaries comply with both the Insurance Act and the Money Laundering Act.

The NIC will also organise training and awareness creation programmes in the course of the year for the staff of both the NIC and the insurance companies and intermediaries. This will cover such areas as the need for AML/CFT Rules, the FATF Recommendations, the provisions of the Anti-Money Laundering Act, their duties and responsibilities under the Act and how to effectively implement the AML/CFT Guidelines.

4.1.4 Actuarial Unit.
The Life sector is growing at a very fast pace. This has resulted from the recent innovations in product development and distribution channels. Needless to say, the growth in the Life sector has resulted in a significant growth of the Actuarial Liabilities on the Balance Sheets of the Life companies. Since these represent the policyholders' funds it is necessary to develop actuarial expertise to effectively regulate the Life companies to ensure that when the policies mature, there will be adequate funds to honour them.

The NIC has therefore set up and staffed an Actuarial Unit. A consultant has also been appointed to develop guidelines for issues such as product development, actuarial valuations and financial reporting.

4.2 Programmes to Develop and Grow the Industry
The NIC has had several programmes and policies whose implementation is now clearly backed by the law.  These are intended to develop substantially our industry and also to make a significant contribution to the general economy.  We intend to work on these as a matter of urgency in the next few years.    I will deal with a few of the main ones:

4.2.1 Offshore Insurances
Generally, S.37 requires that Ghanaian risks should be insured through Ghanaian companies and that contracts with offshore companies should be approved by the Commission.

The NIC believes that enforcement of the rules can result in the doubling of the size of our industry within 3-4 years.  This of course will make a significant contribution to the growth of the national economy.

The enforcement of the rules has become more urgent as a result of the expected rapid growth in our oil and gas industry. The provision of insurance services to this, sector should develop very quickly. 

We should expect very strong opposition from international insurers because they are already doing the business which by law and as a matter of international practice should be done by Ghanaian companies.

We will need support and cooperation from the Government and from you, to ensure full compliance with the law and to enable the industry thrive. 

4.2.2 Compulsory Fire Insurance
As you are aware, the Law now makes it compulsory for owners of commercial buildings, both completed and under construction, to insure them(ss.183 & 184).  A full implementation of these provisions will immediately increase substantially the level of our fire insurance business.  We are already as an industry doing work in this area and in the next few months we intend to progress quickly with the work.

Once again, our achievements in developing this part of our business will impact positively on other sectors of our economy.

The work of the Fire Service in the provision of fire prevention services will benefit significantly from our work through the Fire Service Maintenance Fund.

4.2.3 New Pensions Act
The National Pensions Act, 2008 (Act 766) when fully implemented will establish a significant Pensions sector in our economy.  Traditionally, insurance companies have been solely concerned with the provision of life insurance.  But they have also been players in the provision of annuities and the management of pension funds.  This is so because the actuarial expertise that is required to set up and manage life insurance policies can be extended to the establishment and management of annuities and pension funds. 

The Act creates opportunities for life companies.  The NIC is in close consultation with the NPRA on the role of our life insurance companies in the Pensions Sector.

The Life Offices Association should therefore look closely at the Act and consider how we can expand our role in the development of the new Pensions sector.

4.2.4 Expansion and Training of Personnel
If our industry is to be able to pursue these programmes, then it must obviously increase its intake of qualified personnel and the training of such personnel.  We should have a deliberate programme under which for example companies benefitting from these programmes undertake to employ a number of graduates per year and to give them specific training.  For example the enforcement of the compulsory fire insurance provisions will require expansion and training of companies fire departments.
In this way we will be contributing directly to the level of employment in the economy and general economic development.

THANK YOU

Posted: Feb-18-10

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