All activities pursued by a company are inherently risky, although to varying degrees. Decisions made at present will show their full consequences only in the future and are affected not only by the behaviour of competitors, customers, suppliers or regulators, but also by the state of nature. Even the best-evaluated decisions can lead to losses in unforeseen circumstances (Alfon and Andrews, 1999).
Risk is at the core of corporate activities, and that is why insurance companies have to ensure that they can bear the risks they are facing. With capital, a company is only forced into financial bankruptcy if the losses exceed the capital held. As losses are related to the risk of a company, it becomes apparent that capital and risks are closely related with each other.
In 2016, the Bank of Ghana announced a new capital requirement of 400 million cedis for banks in Ghana. That represented an increase of 233.3 percent from the previous 120 million cedis. The new capital requirement is expected to protect depositors from unforeseen circumstances that may result in a loss of funds for banks.
With the same idea of protecting depositors of banks, policyholders of insurance should also be protected. Since 1989, a series of adjustments have been made to strengthen balance sheets of insurance companies. The idea is to make the insurance companies go beyond just adjusting capital, and also look for more sophisticated ways of approaching stability and soundness in order to withstand heavy shocks. Upward revision of capital requirement will have a sound influence on the economy and also help insurance companies to absorb industry risks.
The most important questions we have to consider are: How much capital does an insurance company need for a given risk or, equivalent? How much risk can it take with a given capital? Why the need to increase capital requirement? This is why capital adequacy has become increasingly important, primarily in the regulation of financial activities of insurers.
Insurance companies are required to exhaust all available local capacity before recourse to overseas reinsurance. Nevertheless, insurance businesses still end up overseas due to the lack of capital. The capital inadequacy in the insurance industry has resulted in low premium retentions and high demand for overseas reinsurance, leading to excessive premium flight which runs into millions of Ghana cedis every year.
In 2013, out of total non-life premiums of GH¢583million, only GH¢204 million was reinsured, and less than that number was reinsured locally. With revision of capital requirement, insurance companies will have the capacity to cover major risks. Local insurance companies can co-insure major risks without recourse to overseas reinsurance.
The more capital insurance companies have, the stronger they will be. And that will make international companies do businesses with them. The more overseas reinsurance is reduced, the more money will be retained in the country. The more capital a company has, the stronger the company is – and the more willing international companies are ready to do business with it. An insurance company cannot be effective or go international when it has small capacity to insure higher risks.
Risk adequate premiums
Insurance companies need to sustain higher revenue than expenses in order to stay viable. Insurers make money from the premiums customers pay, but also lose money when they fulfil their obligation to pay for their customer’s losses and damages. They also have a host of operating expenses to pay, including agents and brokers’ commissions.
Unfortunately, many insurance companies undercut premiums. There are standard calculations that insurers are to follow to arrive at the right premiums and quotations for the various insurance policies. Because of competition and the struggle for business, some companies undercharge premiums so they can win business to underwrite.
Revising the capital requirement will compel insurers to uphold best practices and charge risk-adequate premiums. Companies will not undercut quotations and premiums in order to underwrite high risks with low premiums. Revised capital requirement for insurers will help bring sanity into the insurance industry, and also create healthy competition wherein risk-adequate premiums will be charged by insurers in order to sustain their capital and meet financial obligations.
A very effective way to increase insurance penetration is through inclusive insurance promotions. There is a need for the insurance to commit time and money to research and create useful, affordable insurance products aimed at other markets in the economy where insurance coverage is very low. Insurers can provide insurance to the agricultural sector and promote access to insurance for the under-served and low-income earners. Increasing capital requirement for insurers will make them discontented with the few businesses they are underwriting, and rather delve into other markets where insurance is under-served. The contribution of insurance to the country’s GDP is still below 2%.
As part of the measures to boost confidence in the insurance sector, adequate capital will strengthen insurance companies in the area of claim payment. The major reason many Ghanaians are not motivated to purchase insurance products is the failure to honour claims by insurers. Delays and non-payment of claims have been a major problem between insurers and policyholders.
However, adequate capital for insurers will give companies the financial strength to pay valid claims promptly. This will even give the regulator enhanced tools so that it is better placed to protect policyholders and ensure insurance companies are also safe.
In the latter part of 2017, Regency Alliance and NEM insurance merged to become RegencyNem Insurance. This was because one company was struggling with the current minimum capital requirement, which is GH¢15million. With upward revision, more insurance companies will be expected to merge. It is time for some insurance companies to merge, since there are even too many insurance companies with low capacity in the country. Nigeria’s GDP is US$405.10billion, but it has twenty-eight licenced general insurance companies. Ghana’s GDP is US$47.81billion, with twenty-seven general insurance companies. On the other side, when two or more companies merge their resources are increased and they are able to compete effectively.
The Insurance industry plays a significant role in the economy, in terms of providing indemnification of risks faced by both individuals and companies – in addition to being an institutional investor. Recapitalisation will ensure that insurance companies have sufficient capacity to undertake the intermediation function necessary for the economy’s development. Also, well-capitalised insurance companies are able to undertake greater business expansion and allocate resources in order to develop capacity to compete more effectively in this more liberalised environment in the country.
The writer is with Tri-Star Insurance Services Gh. Ltd.
Source : thebftonline.com
South Africa’s headline consumer inflation slowed to 3.8 percent year-on-year in March from 4.0 percent in February, the lowest figure since January 2011, data from Statistics South Africa showed on Tuesday.
Economists polled by Reuters had expected prices to quicken to 4.1 percent on a year-on-year basis.
On a month-on-month basis inflation slowed to 0.4 percent in March from 0.8 percent in February.
Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, was flat at 4.1 percent year-on-year, while on a month-on-month basis it slowed to 0.7 percent from 1.1 percent previously.
Reporting by Mfuneko Toyana; Editing by Joe Brock (Reuters)
Africa is often imagined to be a place in which presidents can do whatever they want, unencumbered by constitutional or democratic constraints. A large body of literature has developed around the idea that the law can be flouted at will, leading to a situation in which what really matters is the personality of the president, not the rules of the game.
The implications of this way of understanding the continent are profound not just for how we think about Africa, but also for how we study it. If democratic institutions don’t constrain leaders, there is no point in researching them. Instead we should spend all of our time looking at informal processes such as ethnicity and patrimonialism.
But, although this image is often repeated within policy circles and the media, it is wrong. A new book I edited, Democracy and Institutions in Africa, argues that approaching the continent in this way creates a deeply misleading picture of politics that underestimates the potential for democratisation.
In other words, if we want to understand democracy in Africa, we need to take the official rules of the game more seriously.
The book covers a wide range of institutions, including political parties, legislatures, constitutions and judiciaries. As a taster, here are three important ways in which democratic rules constrain African leaders more than you might think.
Holding elections promotes democracy
It’s often said that Africa features elections without change. But repeatedly holding elections not only creates opportunities for the opposition to compete for power. It also promotes democratic consolidation.
Looking at all elections held in Africa since the early 1990s, Carolien van Ham and Staffan Lindberg find that as long as a minimum threshold of quality is met, holding elections increases the quality of civil liberties. This in turn creates greater opportunities for opposition parties to mobilise.
That’s because elections have a number of democratising effects. These include training voters in democratic arts, encouraging coordination between opposition parties and increasing the pressure on ruling parties to reform the political process. This last happens for example by allowing for a more independent electoral commission.
Repeatedly holding elections fosters new democratic openings that tend to make it more difficult for leaders to hold on to power in the long-run.
Legislatures are tougher to manage than before
The common depiction of African legislatures is that they are weak and feeble. They’re portrayed as “rubber stamp” institutions that can do little to hold governments to account. But this is not an accurate depiction of what happens in a number of countries where conflict between parliaments and presidents is becoming a more common.
As Michaela Collord highlights, in recent years the Ugandan legislature has threatened a government shutdown over an unsatisfactory health budget. Tanzania’s parliament has also forced seven Cabinet reshuffles. South African MPs from the radical Economic Freedom Fighters party captivated TV audiences nationwide by repeatedly calling President Jacob Zuma a thief because he was accused of corruption.
Significantly, parliaments are also beginning to play a role in some of the most important decisions. In both Nigeria and Zambia, it was the legislature that ultimately rejected efforts by sitting presidents to extend their time in office beyond constitutionally mandated limits.
Term-limits are starting to bite
On the theme of term limits, pretty much the only time you will read about this particular institution in the media is when an African leader has changed the constitution to remove them. In the last 20 years this has happened in a number of countries including Burundi, Chad, Uganda and Rwanda.
By contrast, when a president respects term limits and stands down, it goes largely unnoticed. This has created the misleading impression that African leaders can break the rules at will. The reality is that in most cases they can’t.
Reviewing every country in Africa from 1990 to the present, Daniel Young and Daniel Posner find that term limits are twice as likely to be respected as broken. This is especially true for states that lack natural resources.
Significantly, they also demonstrate that when one president respects term limits it creates a powerful precedent that subsequent rulers feel bound to follow. To date, there is not a single country in which a president has tried to outstay their welcome after their predecessor willingly stood down.
The shape of things to come
These examples are part of a broader trend. In 2015, a sitting civilian Nigerian president lost power to another civilian ruler for the first time. In 2016, the same thing happened in Ghana. In 2017, it was Gambia’s turn. Since then, Liberia and Sierra Leone have also seen opposition victories.
From a few isolated examples in the early 1990s, almost half of the continent has now witnessed a transfer of power.
Moreover, it is not only when it comes to elections that things are changing. In 2017 Kenyan became the first country in Africa – and only the third in the world – in which the election of a sitting president was nullified by the judiciary.
In South Africa, President Jacob Zuma never lost a national election and the African National Congress continues to dominate parliament. But he was nonetheless forced to resign and leave power early by a combination of public hostility and the emergence of Cyril Ramaphosa as the party’s new leader.
Of course, this does not mean that all presidents have to follow the rules, or that all of these institutions are starting to perform well. The continent features a remarkable variety of political systems and some of its states are on very different political trajectories. In more authoritarian contexts such as Cameroon, the Democratic Republic of Congo, Uganda, Rwanda and Zimbabwe, the quality of elections remains extremely poor; even when leaders suffer a setback they may be able to bounce back.
But while the process of institutionalisation may be patchy and uneven, one thing is clear: Africa is not without institutions, and we will deeply misunderstand its politics unless we pay careful attention to the rules of the game.