Insurance industry consolidation good call

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The proposal by the National Insurance Commission (NIC), the insurance industry regulator, to increase the minimum capital requirement of insurance companies operating in the country ought to be supported by stakeholders, though modalities for implementation need to be discussed thoroughly.

The current minimum requirement for the about 50 insurance companies serving a population of 27 million is GH¢15million.

The total capitalization of the entire industry is not up to the capital base of one multinational insurance company in Europe.  This shows the weakness inherit in the country’s insurance industry that ought to be addressed.

Justice Yaw Ofori, Commissioner of Insurance, recently noted that: “I think even if we (increase) by a hundred percent it will be good because the more capital you have the stronger you are, and that means international companies will be ready to do business with you.  That is how it would be.  You can’t be a very effective international insurance company when you are small”,

He added: “When you go abroad, one insurance company is worth more than the whole insurance industry in Ghana, so in as much as it is a problem for players to recapitalize, we have to encourage them”.

With a growing economy, the insurance industry must also position itself to ply its role in the scheme of things.

While insurance, banking and securities markets are closely related, insurance fulfills somewhat different economic functions than other financial services.  This, indeed, requires particular conditions to flourish and to make a full economic contribution.

According to the literature available, insurance serves a number of valuable economic functions that are largely district from other types of financial intermediaries.  In order to highlight specifically the unique attribute s of insurance, it is worth focusing on those services that are not provided by other financial service providers, excluding for instance the contractual savings features of whole or universal life products.

The indemnification and risk pooling properties of insurance facilitate commercial transactions and the provision of credit by mitigating losses as well as the measurement and management of non-diversifiable risk more generally.

Typically insurance contracts involve small periodic payments in return for protection against uncertain, but potentially severe losses.

Among other things, this income smoothing effect helps to avoid excessive and costly bankruptcies and facilitates lending to businesses.  Most fundamentally, the availability of insurance enables risk averse individuals and entrepreneurs to undertake higher risk, higher return activities than they would do in the absence of insurance, promoting higher productivity and growth.

Given the important role the industry is to the growth of the Ghanaian economy, this paper calls on all stakeholders to meet and agree on a percentage increment in the current minimum capital and timelines for implementing same.