Premium undercutting still prevalent among insurers – NSIA GM

Insurance companies in the country are still underpricing risks as part of a grand scheme by most of the 26 insurers to gain customers and market share over their counterparts.

The unhealthy practice has resulted in reduced earnings to the companies, which has now translated into the weak financial results posted by the offending insurers, the General Manager in charge of Operations at NSIAH Ghana Insurance Limited, Mr Samuel Adoteye-Asare, told the Graphic Business in Accra.

Of the 26 companies operating in the general insurance category, Mr Adoteye-Asare said data from the industry regulator, the National Insurance Commission (NIC), showed that only five of them made profit across the board – on investment incomes and underwriting of risks.

The remaining 20 only gained in investment income but lost on the underwriting side, which comprises claims and management fees – the two areas that collectively make up the core business of every insurance company.

“If you are in the business of insurance and your underwriting activity is posting a technical loss, then there is something technically wrong. As a risk manager, it means you are not conducting your business profitability,” he said, referring to the continuous undercutting of premiums by some insurers in the country.

“One of the reasons will be the poor risk management and the other is pricing. So, it forces the question: ‘Are you charging the right price,’ he asked.

After a closer look at the financial results of companies, NSIA’s GM of Operations said it was obvious that companies were making profit from investment activities and not on the core activity and that could be traced to the amount of money companies charged the insuring public for the various insurance policies.

Premium undercutting, which is an age-old challenge in the local insurance business, means that lower premiums prices are offered for comparatively higher risks. While this may help attract more customers to a company, it means that that the insurer will be found wanting when claim payment for that underpriced risk arises. 

Causes

In the early 2000s, when Ghana's insurance sub-sector was still at its formative stage, a few companies competed for less than one per cent of the country's population, who bought insurance products for themselves and their properties.

As a result, competition in the sector was mild, as the few life and non-life companies jostled for customers in the emerging industry.

The situation has, however, changed.

Although the number of the insured public has barely expanded, the number of insurance companies has almost quadrupled. From a handful of 15 companies in the 2000s, the number of insurers in the country has risen to 52 as of May, this year. Of this figure, 26 were non-life, 23 are life while three are reinsurers.

But as the number of players increased astronomically, the number of the insured public barely grew; it rose from less than two per cent to three per cent, according to the NIC. 

“Once you have excess capacity, in this sense the number of players on our market, then they (the companies) will have to compete and they do that by under-cutting the premium,” Mr Adoteye-Asare said, noting that the situation required regulatory intervention to be addressed permanently.

Proposed solutions 

Given that it is unprofessional and tends to deny ethical insurers access to sound businesses, Mr Adoteye-Asare said the NIC needed to step up its monitoring mechanisms to help ensure that insurers that under price risks are punished severely.

Another way out, he said was the increment of the minimum capital of insurance companies, which has already been done, is almost forcing mergers and acquisitions within the industry.

He, meanwhile, commended the NIC for the introduction of the risk-based supervision mechanism, which will, in the long run, ensure efficiency in the industry.

“If we all properly rollout what the commission has put in place, it will help us in a long way, especially when it comes to the risk management function of the various companies,” he said.

On how the company fared, Mr Adotey-Asare said NSIA’s performance was subdued by series of write-offs in 2015, following the twin disaster of fire and floods, which cost the entire industry some GH¢322 million in claims.

“But we have since turned the corner. As I speak, our first half results show that we are both technically profitable and financially profitable and it makes our overall profitability very solid,” he added.