Generally, insurance is defined in its simplest term as a paid promise. The challenges facing the insurance industry includes amongst others the underpricing of policies and the worsening position of bad debts which have resulted in most insurance companies making significant underwriting losses. Insurance in recent times is greatly affected by demand, technology and regulation. Insurance in Ghana hitherto has seen several of such regulations in the time past, one of such worthy of notice and mention is the recent one by the National Insurance Commission (NIC) effected on 1st April, 2014 on ‘No premium No cover’ (NPNC) in accordance with section 2(b) Act 724 of the Insurance Act 2006; Notice No. NIC / COI / 2014 /01.
The National Insurance Commission (NIC) before this implementation of this directive instructed insurance companies to clear their books of all debts by the end of the year 2014 so that there wouldn’t be the issue of outstanding debts on the books of insurers 2015 onwards.
The Commissioner of the NIC, Madam Lydia Lariba Bawa, instructed insurance companies to collect outstanding premium debts incurred since 2012 or else be compelled to write them off.
The huge outstanding premiums had a significant knock-on effect on all major industry players. Firstly, insurance companies were in distress when it came to prompt settlement of claims. Premiums that were supposed to be pooled together for such uneventualities were not available. Most of them were outstanding. This made it difficult for some insurers to fulfill their contractual promises to the insured on time.
Secondly, insurance companies’ balance sheets were dwindling year after year. Even though most insurers declared undersized profits, careful examination revealed a huge underwriting loss on their books. Most of the profits had debts which collections were doubtful.
Also, insurance companies were unable to pay their reinsurance premiums in view of the fact that the premiums remained unpaid by the policyholders. Subsequently, the reinsurers were unable to pay their retrocessionaires (reinsurer’s reinsurer). This creates serious credit risk exposures for both the insurers and reinsurers.
The introduction of the NPNC directive thus brought a huge sigh for relief for all stakeholders of the industry. The market indeed responded favourably to this all-important step. To buttress this, the information gleaned from the NIC indicates that by the end of the second quarter of 2014, cumulatively 22 general insurers wrote a total premium of GHC 349.3 million as against GHC 226.3 million in the first quarter of the same year. The premiums written in the second quarter, noteworthy to make, were paid for without any outstanding debts.
The industry now looks forward with a good sign of underwriting policies with adequate and available cash flow to pay claims promptly and support other business initiatives.
By Mike Adomako, ACII