Several weeks ago the government of John Dramani Mahama issued an order directing all ministries, departments and agencies to purchase insurance coverage from only state-owned entities.
Just why the government believes this to be a sensible decision escapes me. It is a puzzling directive for many reasons, and it hasn’t helped much that the government has made very little effort, if any, to explain its motivation.
Disingenuously, the management of the State Insurance Co. and Ghana-Re, the government-owned entities and supposed beneficiaries of the edicts, have come out in support of the measure and to make light of the legitimate concerns raised by trade groups representing the private insurance industry.
This is not rocket science. Ghana’s private insurers have the right to be concerned because the directive essentially orders the public sector not to do business with the private insurance market. It is nearly as ridiculous as an order requiring government ministries’ employees to only eat lunch at state-owned in-house canteens and not patronize outside chop bars. Imagine that.
At a time when the government is anticipating significant public infrastructure development across the country, Ghana’s private insurers stand to lose significant premium as a result of this directive. They have a right to be mad.
But let’s assume our government is right to not care about what happens to private insurers in Ghana, and whether they survive or not. The directive is bad for many other reasons.
The whole concept of insurance -- especially business insurance -- is to allow policyholders to spread risk. That explains why large corporations and governments, at least those that are well-managed, tend to buy insurance from multiple insurance companies and not just one entity. Insurance is the engine of commerce and any business that cares about continuity worries about risk concentration. You need to think about things like this: What happens if SIC fails? What happens if they are overrun by catastrophic claims in a given year and find their entire surplus wiped out?
In other words any manager of a state agency that has significant operational risks ought to be concerned about following this directive because it forces them to place all their insurance risks in one basket. That’s simply not a sensible way to manage a business.
For example, it is only wise for an agency such as the Ghana National Petroleum Authority, which owns some sizable assets within the energy and oil industry, to buy insurance from multiple insurance companies, and not be forced to do business with a single insurer. In fact, it makes even more sense for an agency, public or private – assuming they are run by prudent-minded individuals -- to insure its risks with a mix of domestic and foreign insurance companies. In that case, should something happen that cripples the domestic insurance market in Ghana, they are guaranteed that there would be foreign insurers available to pay critical claims.
The two entities that are supposed to benefit from Mahama’s directive – the SIC and Ghana Re – must also be weary of this directive. On the surface the decision means they going to see an increase in premium volume from MDAs, but conversely it also means an increase in public sector risk exposure. Like the commercial policyholder that needs to spread its risk, a well-run insurance company must never be too eager to be overly concentrated in any given sector.
By assuming to write all of the public sector business in Ghana the SIC is also agreeing to be 100% responsible of all the losses and claims generated by the public sector in Ghana. Why would they want to do that? A decline in the economic fundamentals of Ghana could put significant pressure on that public sector book.
Frankly, it would be more prudent for the SIC to want to share this risk with other insurance companies – other private insurance carriers. That’s the way insurance ought to work. In sophisticated insurance markets, such as the kind we find in America and Europe, large insurance companies prefer risk sharing with other carriers to cushion their losses in the event of a significant claim. Should everything come crushing down, the SIC would not want to be the only company shouldering the entire burden. It would wish then that it had another company helping to carry the load.
Lastly, the SIC currently doesn’t have the healthiest balance sheet – which makes one wonder why the government would want to send the company more premiums and more risks to manage. In 2012, the SIC –on a consolidated group basis -- posted a loss of 1.9 million cedis, according its annual report.
This loss was largely due to the SIC’s inability to collect on its debt or premiums. Last year, according to the report, the insurer wrote off nearly 20 million cedis worth of debt. The same payment issues have plagued Ghana Re – an insurer of insurance companies – although they seem to be in a better financial position.
Still, at the very least the directive amounts to government interference in a free market, which is never a good idea. Ghana’s insurance industry has made considerable gains since 2008 when it ended compulsory legal cessions and opened up the market to private insurance, increasing competition. Now, it seems, with a stroke of a pen, the same government has decided to send the industry back into the dark ages.
David Dankwa is long-time financial journalist with significant experiencing covering the global insurance industry. He is editor-in-chief of The Africonomist newsletter and also an editor of Insurance Finance & Investment at Thomson Reuters.
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