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THE STATE OF GHANA’s ECONOMY– One Year into the current government’s administration…

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The Ghanaian economy has improved remarkably, after a substantial fiscal slippage in 2016. The current government upon its assumption of office on January 07, 2017 promised its citizenries of turning around the fortunes of the economy, which many had described as distressed with huge debts, high fiscal deficit and declining growth rate culminating in rising unemployment levels, into a country of industrialized economy.

On the back of these promises, Ghanaians cast their votes in support of the new government’s economic transformation agenda. One year into its activities, Ghanaian electorates have started to assess its achievements on the back of the promises presented to them during the electioneering period.

The government reportedly started off with an improvement in the first half of 2017. According to the World Bank, the fiscal deficit for the first half of 2017 was 2.7% of GDP— on track to meet its target of 3.5% of GDP.

The country’s total debt was seen to have increased from about GHc 122 billion at the end of 2016 to over GHc 140 billion even though the rate of external debt accumulation reduced from 73.1% of GDP to 68.1% of GDP in 2017.

In an interview with Professor Augustin Fosu of the Institute of Statistical, Social and Economic Research (ISSER) at the University of Ghana on his assessment of the state of the Ghanaian economy, the economic Professor reveals that the economy has now recorded some macroeconomic stability after the impressive performance between 2016 and 2017.

“Certainly, growth has gone up by over 60%. That is more than two thirds– between these 2 years and that is quite impressive. It’s also true that there seems to be macroeconomic stability in the economy by way of reduction in the inflation rate from over 15 % or so down to about 10 %, and improvements in the fiscal and external balances as well as in the economic growth rate”.

A jobless growth?

Many have termed the growth in the economy as a ‘jobless growth’ as they believe that every economic growth must be able to create viable jobs for its citizenries but the current growth states otherwise. According to the latest figures released by the government, the economy has grown from 3.6% to about 8%, budget deficit reduced from 9.3% of GDP to 6.3% whilst international reserves have also increased to over $ 7 billion but has not culminated to job creation.

Professor Fosu however believes it would take more than a year for these to translate into the expected poverty reduction, job opportunities, etc.

“The fact of the matter is that sometimes it takes time for that to happen and from hindsight one would find that Ghana for instance experienced considerable growth since 1983 – but transforming the economy may take much longer and greater efforts. So, sometimes you may not see the results immediately; it takes some time” he noted.

Many also argue that even though these macroeconomic indicators are moving in the right direction, the growth offers limited employment opportunities. This is also mainly because the growth is underpinned by the services sector and the oil sub-sector which are unable to produce as many jobs as the agricultural sector and the manufacturing sector.

According to Professor Fosu, managers of the economy thus need to maximize the economic benefits of the oil sector by boosting the local content in the sector.

Converting the macro-gains into micro-benefits

The ISSER fellow believes the need for the macro-economic stability achieved so far to be translated into micro-economic benefits cannot be overemphasized.

“That can happen through certain policies to support business owners and enterprises in sectors such as the health care and education. So, there could be a number of government programs that can be used to assist those individuals who are not participating sufficiently in the production of the economy, in order to ensure that the average individual benefits,” he emphasized.

Meanwhile, the current government appears to be backing words with action having already emphasized a paradigm shift in the economic management from taxation to production in the 2017 budget. This saw the government review a number of what it deemed nuisance taxes in a bid to create a conducive climate for investment and job creation.

This included, among other initiatives, abolishment of the 1 percent Special Import Levy; the 17.5 percent VAT/NHIL on financial services; duty on the importation of spare parts as well as replacement of the 17.5 VAT/NHIL rate with a flat rate of 3 percent for traders.

With these initiatives from the government, Professor Fosu is optimistic these measures were timely in re-energizing the private sector to the benefit of the economy but wants government to do more by creating the enabling environment for businesses to thrive.

“Reducing taxes for businesses is important but businesses look beyond tax reductions. They look around to see whether indeed they get water for production, whether the electricity is available, sufficient and affordable, and whether transportation is not too expensive. These are important attributes when it comes to business investment.

This is what we call government effectiveness, that is, improvements in the economy to support and make it easier for the private sector to, for instance, also acquire lands for production purposes”.

“It may however take quite some time, certainly more than a year, before the expected impacts of such economic policies may be realized. Obtaining desired results also requires boosting revenues from a variety of sources, whilst reducing expenditures to free revenues for more productive activities,” asserts Professor Fosu.

The job creation agenda 

Unemployment remains a major challenge in the Ghanaian economy. Professor Fosu, like other analysts, blames it largely on the failure of successive governments to develop and implement policies that create sustainable employment opportunities in the economy.

“On the demand side, you reduce the cost of doing business so that investors would invest in the economy and employ people. But government has not done well in this respect.

On the supply side, I also think that there has been some misallocation of resources, that is, in terms of people who graduate from various tertiary institutions and cannot find jobs, and yet we continue to encourage that type of supply of people into the economy without making the appropriate investment on the demand side to absorb them,” he explained.

In a bid to finding a lasting solution to the country’s unemployment challenge, the government has rolled out policies such as One (1) District, One (1) Factory, Planting for Food and Jobs– also towards fulfilling its campaign promises. Even though analysts have generally hailed these initiatives as the panacea to the menace, some have expressed misgivings about the implementation.

Professor Fosu also said even though the initiatives indicate government’s commitment to proactively tackle the problem, the need for private sector participation cannot be over-emphasized if the policies are to yield sustainable results.

“There is no way the government can continue to provide the jobs that the country needs without assisting the private sector to provide the employment in the economy. There should be a lot of private-sector participation.

I don’t think the government, generally speaking, can be trusted to sustain the factories. We look around all over the place and where are the factories that the government began? What happened to them?  So personally, I don’t trust government to be able to sustain these initiatives except to provide favorable conditions for private-sector participation.

In some districts you may have a number of private investors interested in establishing certain factories and the government could assist in that particular process. In other districts, where that may not be the case, the project can thus wait until such basic requirements are met,” he stated.

The Professor, however, cautions against hasty implementation of particularly the One District, One Factory policy.   “If you look at it historically, this is one of the reasons we get into trouble economically. We rush into implementing such industrial policies and programs only for them to fail eventually.  So we have to be cautious this time around,” he cautioned.

Professor Fosu believes government should be given at least one more year to effectively deliver these policies. He is however also advising government to consider rolling out the One District One Factory program by beginning with the districts with viable factories rather than establishing factories across all the districts at the same time.

This, he says, is a better process and government may not even have all the requisite resources to support such projects.

“I don’t think it’s going to be feasible to have a factory for every district because we have about 216 districts. So we should limit it to the progress government is making and expect more down the line. What I’m suggesting is that sometimes it’s not a good idea to expect the government to accomplish everything, because it simply does not have the time and even if it does, the implementation might probably be shallow, which will not make the project last,” Professor Fosu noted.

The Free SHS policy in perspective

The Free Senior High School (SHS) policy which was rolled out in September 2017 is primarily to ensure equal opportunities for all and enhance human capital for the country.

Professor Fosu has hailed the policy which is one of the government’s flagship campaign promises but is impressing on government the need for a review in its implementation. According to him, the program, if not revised, may rather eventually deepen the country’s economic woes.

“First of all, let me salute the government for this policy. I think that is very commendable. But my concern is that, we will probably spend too much money at steady state and that means when the process is complete and we have all the three levels completed and the government is funding them, it will be spending about GHS 3 billion per year.

That’s a huge amount of money, and one may ask the question: what do you get out of it economically and politically? I think it’s good only because it means that those individuals are a little bit more literate so they can participate better in the democratic process, but then economically they are not sufficiently educated to be able to participate productively in the labor market, and that’s where my concern is,” he lamented.

According to him, the resources allocated for this program should have rather been used to improve the quality of the basic education.

“In a number of places around the country you see that the basic education is an eye-sore. The resources could have therefore been utilized in making sure that individuals leaving basic education have some technical skills to go into the job market and not necessarily the university. So, I think that in that sense there’s a misallocation of resources, so there needs to be a change”.

Professor Fosu dreads the unemployment situation could even be worsened by the conversion of the polytechnics into technical universities, as many graduates from these institutions would be expecting employment from government like regular university graduates, rather than participating in other sectors of the economy where there is strong demand for their technical and vocational skills.

Even though the review process for the Free SHS program remains a political decision, he is challenging government to start it as soon as possible.

“Try to understand the kinds of difficulty the program has encountered and begin the process of correcting them.  So, may be over time, as we look at the outcomes and implications of what has already been implemented, government can set up a fund to support the needy students and allow those who can afford to do so.

That way, government can save and utilize the savings made in other sectors that may badly need funding, whilst ensuring that individuals who finish the basic level or high school can also productively participate in the labor market without necessarily going to university,” he added.

The debt situation

Ghana’s debt situation remains a major factor hampering the country’s economic development. The President, President Nana Addo Dankwa Akufo Addo, stated in his State of the Nation Address (SONA) 2018 that his government “inherited an economy that was in distress, choked by debt”.    

The country’s debt stock was pegged around GHS 122billion when the government assumed office but one year down the line, it’s over GHS 140 billion and according to the 2018 Budget Statement more borrowing is expected this year.

This notwithstanding, Professor Fosu is rejecting suggestions that the economy could be in a debt trap– spelling doom for the country.

“The causes are related to the extent that government revenues are used to pay interests on debt; then there’s the syphoning of funds that could be utilized more productively in the economy. So in that sense, debt can cause problems for the economy, but debt itself needs not to be a bane. Indeed, one can use additional debts to reduce debt.

It means that you borrow the funds and utilize them productively, and you get enough returns to pay the debt; as far as this government is concerned, it will be a little bit too early to begin to judge whether or not the debt reduction could be sustained,” he noted.

Latest figures by government also indicate that the rate of public debt accumulation has also declined from 36% to 13.6%, after reprofiling of debt stock. Professor Fosu has lauded government’s debt management strategy so far.

“The management strategy, I think, has been quite good and the economy has responded, leading to the reduction in the debt rate.  The government has managed to increase the maturity profile of the debt from short term towards medium term and long term, which I think is a very good idea.

Consequently, we have noticed first of all that the debt as a proportion of GDP has gone down a little bit. Secondly, the short-term interest rates have also come down significantly, from over 20 % to about 13 %, that is, the Treasury bill rates.

So, I think it would be unfortunate to conclude that because we have high debt that the government should not take on more debts. I think so long as we are utilizing the debts incurred productively, it’s probably the right way to go in reducing the debts in the long term,” he noted.

Ghana and the IMF

President Nana Addo Dankwa Akufo Addo in his State of the Nation Address (SONA) 2018 also reaffirmed his government’s determination to put in place measures to sustain the macroeconomic stability achieved so far to forestall seeking assistance from the International Monetary Fund, IMF.

Professor Fosu has highlighted the role of the IMF in the Ghanaian economy over the years as largely positive.

“All what one has to do is to go back to the early 1980’s when the economy was in distress. Then, we had the Economic Recovery Program, the ERP in 1983, followed by the structural adjustment programs. Despite the criticisms against the IMF, the programs have largely improved Ghana’s economic situation.

“There’s no doubt that they (IMF and World Bank) have had certain things wrong in certain economies. For example, you know what happened in the latter parts of 1980’s when they instituted the “Cash and Carry” system at the hospitals in Ghana – meaning if you don’t have the cash, you are not receiving health services and so on. There was also the problems with the restructuring such that a number of government workers were laid off – creating distress, but it’s also true that the government sector was over-loaded. So, I think that over all, the IMF can help achieve macroeconomic stability but the short term may cause problems,” he expatiated.

He adds that the possibility of Ghana exiting the program by the end of the year is nearly a reality given the economic progress made so far.

“I think that there’s not much support for continuing in the program so, if indeed, the government can demonstrate that it has instilled enough of discipline in the economy, and the macroeconomic stability is on-going; then there will be no need for the IMF to continue in that process.  But they need to create the discipline; they need to create the confidence in the economy first,” he noted.

Sustaining the economic growth

Ghana’s economy has witnessed considerable growth over the post-1982 period under various administrations. The challenge for the managers of the economy has however always been how to sustain the growth.

Professor Fosu is confident the economic successes chalked under this government’s first year in office can be sustained if it remains focused and ensures more discipline in the management of its finances.

“It is a fact that the budget deficit has been reduced significantly.  The question now becomes whether that can be sustained. And do I have confidence in the government to do so? I don’t know. It depends upon how they operate from now on; if they succeed in reducing corruption sufficiently in the economy, for example, then they can probably do it,” he remarked.

The deficit is largely caused by the perennial phenomenon of unbridled spending or overspending by incumbent governments in election years and this has been a major factor accounting for the country’s huge indebtedness.  The current government however says it’s been able to reduce the deficit from 10% to about 6.3% of the country’s GDP.

Professor Fosu however believes government needs to show more political will beyond passing the Fiscal Responsibility Act to deal with the deficit challenge once and for all.

“One of the things that I like about this government is that they have concluded that they are not going to tolerate corruption, and if they can succeed in reducing the amount of corruption, they could save huge amounts of revenues for the appropriate programs in the economy,” he said.

Many analysts have also argued that the country’s economic woes could be largely addressed if revenue mobilization was significantly improved.

“The migration from manual to electronic operation at the port has generated additional significant revenue for the government. With this policy most of our payments are made electronically and thus reduce, as much as possible, manual handling of payments in turn ensuring that not much is going into people’s pockets. So I think if the government can do these things well, revenues could increase,” Professor Fosu said.

The need to boost revenue has become even more crucial due to the president’s goal of building a Ghana beyond aid – a move Professor Fosu has welcomed as holding good prospects for the economy.

“No country can develop in the long run by relying too much on aid and, in some sense, Ghana has been moving away from that because currently grants that are used to support budgeted programs in Ghana are actually less than 1% of GDP; so, Ghana is already moving in that direction.

There are some things that are being done right now with respect to the control of corruption, such as the Special Prosecutor appointment, which can help instill fiscal discipline in the economy. We could raise a lot of revenues if we were to shut down a number of these corrupt practices, and those revenues would likely be much more than the aid that the country is getting from overseas,” he said.

Lessons from Singapore

The Singapore government has reportedly indicated plans to pay bonus to all citizens after a “surplus budget” according to the Hindustan Times.

According to Professor Fosu, Ghana has a lot to learn from the Asian country’s economic success, especially given that the two countries started off their economic trajectory around the same time.

“I think Singapore engaged the kind of policies that were private sector friendly and market friendly – influencing a lot of their businesses and investments in the country, as opposed to Ghana which rather believed that the government was capable of doing everything.

Instead of providing the public goods to support the private sector, the government of Ghana rather dissuaded private investors from participating in the economy, and that was the major problem.

“Initially, we had a number of very useful industrial productions like Akasanoma, the jute factory and all that.  These were good but not sustainable. There was no private ownership and that did not auger well for the economy.

So the very strong public participation in the economy was the bane of Ghana’s economy, but in the case of Singapore, it was exactly the other way around,” he revealed.

He is however optimistic that Ghana could follow the example of Singapore if and only if private sector participation is prioritized in the implementation of such economic policies whilst maximizing the economic benefits of Ghana’s natural resources.

“If indeed the policy to encourage private sector participation is put in place in the economic process, then it seems to me that we can increase production and then tax sufficiently; that could bring us this particular surplus.  Also, I think that infrastructure is key.

If you use the revenues from the natural resources to improve infrastructure in the economy, then that’s what will encourage the private sector participation and expand the base of the economy; then we can have the appropriate resources to grow the economy”.

He concluded by saying “Ghana is also one of the success stories, believe it or not.  It seems to me that it is about time that we stopped comparing ourselves with the Koreas, the Singapore’s and so on, and instead take account of what we have done since the early 1980’s; that’s a tremendous progress since the early 1980’s and if we can continue to maintain and sustain the policies, we can then sustain the momentum that’s required for us to continue and perhaps be a Korea or Singapore someday”.

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Business Interview

Recapitalization– The panacea to the woes of Ghana’s insurance market? – Mr. Justice Yaw Ofori -Commissioner of Insurance, Ghana

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In a bid to ensure a robust Ghanaian insurance industry, the National Insurance Commission, NIC, has initiated moves towards recapitalization. The initiative, yet to be officially announced, involves a planned increase in the Minimum Capital Requirement (MCR) for insurance and re-insurance companies by over three (3) fold. The industry regulator has engaged stakeholders to ensure smooth implementation of the exercise which has seen financial analysts draw a parallel with that witnessed in the banking industry last year.

This has prompted questions- some comparative analysis with the banking one as well as questions about its economic significance. The Insurance Commissioner, Justice Yaw Ofori, in an interview with the Vaultz Magazine, gave a detailed explanation of the exercise.

 

State of the Ghanaian insurance sector

Ghana’s insurance industry has in recent years witnessed a significant growth especially in terms of the number of new entrants recorded. The industry however continues to record low insurance penetration which still hovers around 3%.

The Insurance Commissioner believes this among other issues highlight the need for the industry recapitalization.

I would say Ghana’s insurance industry is strong despite the challenges with respect to recapitalization. The market is still virgin and there are a lot of areas which are untapped and that is why we see foreign companies coming into Ghana to do business. The oil sector is booming and so is agriculture as well as inclusive insurance and all we need to do is to make sure companies are well capitalized so far as they want to operate in Ghana” Mr. Ofori stated.

According to the NIC’s annual report, Return on Equity (ROE) for insurance companies has consistently been less than the corresponding year’s prevailing treasury-bill rate with the overall picture worsening year on year especially for life insurance companies. Mr. Ofori attributes this to the tendency for investors to choose high-yielding financial instruments over insurance which is a relatively long-term investment option.

MR. JUSTICE YAW OFORI -Commissioner of Insurance

“I think it’s all because people get more returns when they invest their monies in T-Bills and other non-banking financial instruments.  For instance, there was a time people were promised 25% to 35% on their investment which was more attractive so they didn’t see why they should invest in other assets like insurance. So some insurance companies were consequently recording underwriting losses” he explained.

The insurance industry has been contributing significantly to Ghana’s economic growth– albeit constantly at less than 2% of GDP through the provision of long-term investment finance to the economy whilst influencing production and consumption, internal and international trade among others.

“Insurance is a vital pillar of every economy. In Ghana for instance, it contributes about GH¢ 5billion in terms of business generated annually. About 12, 500 people earn a living directly from the industry and many more indirectly such as lawyers, doctors, carpenters, masons, and mechanics. Without insurance you can’t get bank loans because they need some kind of guarantee that they can recoup their money in the event of default”.

 

Insurance recapitalization– the facts and figures

Following its engagement with stakeholders including brokers and shareholders alike, the NIC has proposed an increase in the Minimum Capital Requirement (MCR) for life and non-life insurance companies from the current GH¢ 15million (approximately US$ 3million) to GH¢ 50million approximately US$ 10million).

Re-insurance companies will also see their MCR reviewed upwards from GH¢ 40million (approximately US$ 8million) to GH¢ 125million (approximately US$ 25 million) while that of brokers will be increased from GH¢ 300,000 (approximately US$ 60,000) to GH¢ 500,000 (approximately US$ 100,000).

“We came about these figures by taking into consideration how much a company would need to break even and stay profitable. We realized it will take 4 to 6 years for a newly established insurance company to break even with GH¢ 50 to GH¢ 60 million capital” the Commissioner noted.

The last time the market underwent recapitalisation was in 2015 and this was pegged against the dollar with an initial plan of an annual increment which after a considered review, was implemented differently.

“On an annual basis, the minimum capital was supposed to be adjusted to reflect inflation but it has not been done for about 4 or 5 years. But even if we had those increments, the current minimum capital would have been around GH¢ 25million which is about half what we are proposing now because Ghana’s economy is not like it was about 10-15 years ago; it’s bigger now” he stated.

In 2017, about three (3) companies reportedly had challenges meeting the then minimum capital requirement of GH¢ 15million. Mr. Ofori confirmed this as a normal industry development.

“It’s always been so in every insurance industry. There are times that companies will have challenges meeting the minimum capital but that does not mean that it’s time to shut them down. We, as regulators, try as much as possible to encourage the shareholders to recapitalize because shutting down an insurance company is not an easy thing and it is the last thing a regulator wants to go through,” he disclosed.

 

The ultimate goal

The Insurance Commissioner reiterated that the purpose of the recapitalisation was to ultimately grow the industry to the benefit of the economy by protecting the interest of the policy holder.

“Following our stakeholder engagements, we’ve done our concept paper which has been reviewed by the board. We’ve explained to stakeholders, the rationale behind the calculation and of course not everybody is going to like it but at the end of the day, we want the best for the industry. The Commission is not interested in closing any entity but rather building a strong market that takes care of the interest of the policy holder,” Mr. Ofori stated.

“Our economy has also grown. The GH¢ 15million was implemented some years ago. Now we have the oil boom and the country is losing so much revenue, we are actually sending money out because our companies are not financially strong to take much of the risks,” he added.

“Over 90% of our risks have to be insured on the international market and these are some of the reasons our cedi is always affected by the dollar. There is more demand for the dollar than the cedi and this actually arises because we are sending these risks out which demands paying insurance premium in dollars. So, what we are trying to do is, we want everyone to increase their intake. The more absorption they can take, the less flight of insurance premium,” the Commissioner asserted.

He also defended the proposed 300% increase in the capital requirement as crucial in stimulating the desired growth.

 

Correlation with the banking crisis and recapitalisation

The NIC has already indicated the banking crisis and recapitalisation somewhat delayed its planned exercise in the insurance sector. This, according to the Commission is because banks were already looking for capital from the same market the insurance companies will be considering to recapitalize.

A recapitalisation directive in the insurance sector would have thus led to competition between banks and insurers in raising capital– making it a lot more difficult for both entities.

With the bank recapitalisation now over, analysts believe the way has now been paved for a similar exercise in the insurance sector. The Insurance Commissioner confirmed this assertion citing the banking crisis as a major factor affecting insurance recapitalisation efforts in 2017 which almost led to the collapse of about three (3) companies.

 “When we assess an insurance company, we don’t look at only the minimum capital but the totality of the risk that it carries. So GH¢ 15million is the minimum but we have companies worth over GH¢ 200million. So if you are worth over GH¢ 200million and you have risk of let’s say GH¢ 600million and you cannot pay your claims on time, it is a challenge despite meeting the minimum requirement. And most of the challenges some of our companies are facing are linked to the banking crisis because they have monies with these banks and they cannot access these monies,” he added.

The Insurance Commissioner also dismissed assertions that the insurance recapitalisation is a mere replication of that witnessed in the banking sector and states that the two exercises are mutually exclusive.

 

“No it’s not a replication for the fun of it. Everything is interconnected. Even some individuals have lost their monies because some of these banks have been consolidated. When such entities go under, it affects everybody. When insurance companies make their monies, these monies are kept in the bank for investment in the economy. Insurance companies go for those monies when there are claims or a need for it. Now we have an insurance company going to the bank and the bank has no money. Although on paper they have monies, once it’s inaccessible, it cannot be considered– affecting their Capital Adequacy Ratio,” he revealed.

This, according to the Commissioner, only makes a stronger case for the recapitalisation.

Meanwhile, banking and insurance operations are distinctly different with diverse inherent risks. Some analysts thus insist recapitalization may not necessarily be the way forward for addressing the woes of the insurance industry. Mr. Ofori however asserts, insurance companies even need more capital than banks.

 

Risk-Based Capital requirement

The NIC’s current regulatory approach is geared towards the global trend of Risk-Based Supervision framework and the Commission is still pursuing this approach by way of a Risk-Based Capital (RBC) requirement.

 

“The minimum capital requirement is also part of the risk-based framework because, that means, so much assets to absorb more risks. Risk-based means we’re looking at the totality of your portfolio to see the inherent risks and how we can manage them. It is a complex thing. Even though we asking for minimum capital, risk-based provisions will also come from it. When you suffer from malaria you don’t take only chloroquine. You add multivitamins and some pain killers to make you survive,” he illustrated.

 

Recapitalisation has always been used as a regulatory tool to check the financial soundness of the industry.  There is, however, an emerging school of thought that this is not as crucial as the regulator focusing on ensuring effective management of the capital of the companies by ensuring they maintain capital levels commensurate with their respective risks.

 

Mr. Ofori says all these complement each other in strengthening an industry.

“Even new companies entering the market are not allowed to start up with the GH¢ 15million which was the minimum but at least GH¢ 25million. We couldn’t ask for the GH¢ 50million and even with that, they are investing more.”

 

Local versus International standards

Internationally, capital is not necessarily used as the basis for assessing the strength of an insurance company as opposed to the company’s net worth– an assertion Mr. Ofori confirmed.

“In advanced countries, their capital requirement could be like that of Ghana or even less.      That doesn’t mean that the companies that applied for the license to operate insurance don’t have the capital backing. These companies know that insurance business is risky. So if the minimum capital required is US$ 3million, that company comes into the business with US$ 500million by way of net-worth.

When we say minimum like the GH¢ 50million, that money is not going to sit down doing nothing. It could be your businesses, assets and other investments. Insurance monies have to be working. So if you have an insurance company that owns apartments, it’s part of their total worth. When we assess your worth, we look at both your liquid cash and assets because an insurance company can have a chain of hotels which means it can take as much risks and when there is a problem, it can fall on them. The Aon’s, Allianz and CGI’s have big investments all over the world and when they have challenges, they know where to draw money from. So when we say minimum capital requirement, it is not only liquid cash but also investments in T-Bills and so on,” he further explained.

The MCR in the Pan-European Solvency RBC regime is only € 3.2million (approximately GH¢ 19million) for life and reinsurance companies and € 2.3million (approximately GH¢ 14million) for non-life insurance companies. Some analysts have in this light predicted Ghana may only end up being one of the over-capitalised industries in the world by end of the recapitalisation.

But Mr. Ofori is challenging such views insisting that the local insurance industry which is still a burgeoning one cannot be placed on a level pegging with such developed regimes when it comes to capital requirement.

The dollar equivalent of GH¢ 50million is about $ 10million or less depending on the exchange rate and other factors. Don’t forget the financial strength of those companies operating in those markets. One company is even worth more than all companies put together in Ghana. When we make reference to other places, Ghana is different. When you come to Ghana, the way people respond to work is different. Minimum capital has nothing to do with international best practices,” he emphasized.

Ghana is not the country with the highest minimum capital requirement in the world. There are African countries such as Kenya whose was higher than Ghana. We’ve done a lot of research. Kenya is about US$ 8million or so and in Ghana the GH¢ 50million which was supposed to be $10 million will probably come low depending on exchange rate and other things. Insurance is international and transnational and each company must be worth its weight in gold on the international risk market otherwise businesses coming from outside Ghana will not consider Ghanaians,” he elaborated.

 

Expected Outcomes

The Insurance Commissioner is confident the industry will respond positively to the exercise – citing special provisions to facilitate the process.

“If we should introduce the minimum capital, almost 50% of companies will meet it per our analysis. Looking at their portfolio, some of them qualify already, some with a little push will be there and a few may have challenges. But we will encourage them; that’s why we have transitional provisions.”

According to Mr. Ofori, the recapitalization is ultimately expected to reposition the insurance industry and the economy as whole on a stronger footing by addressing issues like low insurance penetration and undercutting.

“If you have a lot of companies on the market that are not financially strong, you will definitely have problems like undercutting because some of them are ready to sell for cheap. They take low premiums and when there is a loss, they are unable to pay. Strong companies have bad days but their account is so big and they are able to pay claims. So I think we’ll have a much disciplined market because minimum capital is not going to be easy. Recapitalisation will help eliminate undercutting because the more you undercut, the more it affects your minimum capital. So you’re going to do prudent underwriting”

In terms of the bigger picture by way of economic impact, he stated “I believe all in all, the industry can also retain much of their underwriting income and probably create more jobs. The more money we can create, more employment can be created, less monies leaving the country, our cedi might be more stable and the economic benefits are numerous”.

He also revealed a new bill is currently under consideration to complement the recapitalisation in addressing the longstanding challenge of low insurance penetration in Ghana.

“We’re working on a bill to make sure we can have more compulsory insurances. We are trying to make sure that these compulsory insurances will help boost the interest in insurance. We’re also increasing market conduct supervision to enable companies pay their claims on time. We’re providing a lot of insurance education to the industry and the general public. This year for example the Commission out of its own budget, through the Ghana Insurance College will train 10,000 Ghanaian youth as insurance agents nationwide for free so that there will be a pool of agents from which the industry can always fall on to recruit. We’re also doing much with respect to the compulsory fire insurance; creating awareness that it is compulsory to have these kinds of insurances. So we’re doing all we can.”

Even though the recapitalisation in the banking industry led to consolidation of several banks and lay-offs, Mr. Ofori believes the final narrative in the insurance sector may not necessarily be the same– allaying such concerns of concomitant job losses as a result of companies failing to meet the capital requirement.

With the banking recapitalisation, some banks were affected. We don’t want to have those challenges. We don’t want the companies to go under. Much as we want the minimum capital to go up, we want to do it in such a way that we move along with everybody,” he concluded.

 

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