The implementation of the government's domestic debt exchange programme (DDEP) has had a less severe impact on the stated capital of insurance companies than initially anticipated. While some companies have suffered losses and impairment due to the DDEP, they are given a two-year period to recover from these challenges.
During this recovery period, insurance companies have two options. They can either seek recapitalization from their shareholders or turn to the Financial Stability Fund, which is yet to be established, for support. The Acting Commissioner of Insurance, Michael Andoh, expressed confidence that the affected insurance companies would be able to recover within the given timeframe, although specific figures were not provided to support this claim.
Impact of the DDEP on the Insurance industry
The first phase of the domestic debt restructuring exercise resulted in the government swapping old bonds valued at GH¢82 billion for 12 new ones with lower coupon rates and longer tenors. This had a significant impact on the financial sector, including the insurance industry. Prior to the exercise, there were concerns that it would severely undermine the insurance industry, given that 40% of its investments were in government securities.
Data reveals that the insurance industry had 40% of its investments, amounting to GH¢4.6 billion, directly exposed to government securities, with an additional 10% invested in licensed banks and fund managers. Considering that the industry pays approximately GH¢4.3 million in claims daily, the restructuring of the government's debt caused apprehension among industry players who called for the insurance sector to be exempted from the exercise.
Recovery of the Insurance Industry
However, after completing the exercise, Mr. Andoh stated that the impact was not as severe as feared. Although some companies experienced a reduction in capital, the commission remains optimistic that the Financial Stability Fund, once operationalized, will assist companies in recapitalizing.
Mr. Andoh further highlighted that affected insurance companies have until 2023 and 2024 to recover from any losses they may have incurred. He noted that available data for the first and second quarters indicate that the industry is showing signs of recovery. Despite initial concerns about certain companies facing dire situations, significant progress has been observed.
The Commissioner of Insurance also emphasized that many companies have been making underwriting losses and relying on investment income from government securities to break even and generate profits. However, with the purpose of the DDEP being to lower interest rates, insurance companies cannot continue depending solely on investment income. Therefore, a strategic approach is being taken to address underwriting losses and ensure long-term sustainability in the industry.
It is worth recalling that in June 2019, the National Insurance Commission (NIC) announced new capital requirements for insurance companies operating in the country following extensive consultations and discussions with industry players. The stated capital for life and non-life insurance companies increased from GH¢15 million to GH¢50 million, while reinsurance companies saw their capital requirement rise from GH¢40 million to GH¢125 million.
Insurance broking companies also experienced an increase in their stated capital from GH¢300,000 to GH¢500,000, whereas reinsurance broking companies maintained a capital requirement of GH¢1 million. All companies were initially expected to meet these new requirements by June 30, 2021. However, due to the COVID-19 pandemic's impact on the industry, the NIC extended the deadline to January 2020.
Despite the extended deadline having passed over a year ago, the NIC has yet to provide any official comments on which companies were able to recapitalize and which ones failed to do so. Nevertheless, the implementation of the DDEP now offers a lifeline to those companies that were unable to meet the previous deadline, granting them an additional two years to fulfill their capital requirements.
In conclusion, while the implementation of the government's domestic debt exchange programme had some impact on insurance companies' stated capital, it was not as severe as initially feared. These companies now have a two-year period to recover from any losses and impairment incurred during this process. The establishment of the Financial Stability Fund aims to provide support for recapitalization efforts. The industry is showing signs of recovery, and strategic measures are being taken to address underwriting losses and ensure sustainability. The NIC's new capital requirements remain in effect, and affected companies have been granted an extended deadline to meet these requirements.
(This article is sourced from Graphicbusiness and edited by Efya Forson | Mydailyreports24
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