-A move towards proper regulatory system in the Insurance industry? (A GNA Feature by Andy Fosu)

Accra, Sept. 18, GNA - Some Insurance experts have observed that low patronage, limited knowledge, as well as the lack of confidence in the Insurance business are negative factors that stifle the growth of the Ghanaian industry.

Others, according to them, include apparent past weak regulatory framework governing insurance practice, delays in claim payments, fraudulent claims and price undercutting. Mr Ebenezer Allotey, Managing Director of Prime Insurance Company Limited, a private company, has expressed worry over the fact that the practice of price undercutting on the part of some markets to create unhealthy competition had increased the risk in the industry. He has observed that the problem of quoting premiums below the feasible market rates posed a risk that was seriously affecting the growth of the industry.

"Insurance practice in the country now has become like selling tomatoes at the marketplace where the buyer tells you, I will give for example GH¢20 and then the insurer says okay I will accept GH¢10," he says.

Concerning fraudulent claims, Mr Gabriel Glover, Executive Secretary of Ghana Insurers Association (GIA), says the International Insurance Associations puts the level of detected and suspected fraud in insurance claims between five to 10 per cent each day. "Using our claims cost figure of 100,000 per working day, we are looking at a fraud cost of between GH¢5,000 and GH¢10,000 a day," he says.

These challenges presented are indications things are not moving on well in the industry owing to the weak regulatory system prevalent in the insurance terrain.

Furthermore, the National Insurance Commission's (NIC) enforcement powers under the old regime were woefully inadequate as these were limited to either suspending or cancelling the registration of a defaulted insurer, amending the accounts of the insurer in case of non-compliance to notice for amendment, inspecting the premises of any person engaged in insurance business, among other things. Other weak aspects of the old legal regime included the lack of clear cut corporate governance principles in the law, inadequate provision on financial reporting on the part of insurers and intermediaries, and the absence of whistle blowing provisions that will ensure that auditors inform the NIC immediately they detected the insolvency of, or wrong doing on, the part of an insurer or an insurance intermediary.

It therefore became necessary for a new Act that would strengthen the regulatory capacity of the NIC as a step towards instilling the confidence of the general public in the industry and promoting rapid growth in the industry.

Concerning this, Mr Gordon Akwowora Wiru, Legal and Compliance Manager of the Ghana Reinsurance Company Limited said "Contemporary thinking and practice amongst the world's economic giants as well as the World Bank, especially under the FINSSP project, is to strengthen the regulatory capacity of independent bodies such as the NIC to ensure sanity in their areas of operation instead of allowing direct governmental regulation."

With the assistance of the World Bank, the National Insurance Commission (NIC) engaged the services of some consultants to review the old Insurance Law and Regulations. The rationale being to bring the insurance law in the country in tune with the International Association of Insurance Supervisor's (IAIS) core principles on insurance supervision.

The core principles are the internationally accepted standards for the supervision of insurance business and are used to benchmark the effectiveness of insurance supervision worldwide.

The new Act (ACT 724) grants the NIC powers to conduct on-site inspections of insurance companies and insurance intermediaries. This provision, under Sections 165 to 167 of the Act, is expected to go a long way to keep insurance companies and intermediaries on their toes and to ensure that they followed the Insurance Act and Regulations. Under the old law, PNDCL 227 of 1989, Section 46 allowed the NIC to carry out an investigation into the affairs of an insurer, but only where it is in breach of the law or regulations.

Clearly, an investigation for cause is not equivalent to a routine on-site inspection. The carrying out of on-site inspections by the Commission is essential not only for checking compliance with the Act, the regulations and any guidelines issued by the Commission to obtain an update of the operations of the insurer and to evaluate its management. An on-site inspection is particularly important for assessing compliance with corporate governance guidelines and for ensuring that an insurer has adequate internal controls.

Under the old law, these were inadequate. They were limited to suspending or cancelling of registration of an insurer or an intermediary, petitioning the court for winding up. The new Act on the other hand, has widened the Commission's powers of enforcement and also allows the Commission to apply for a range of protective orders when it is taking enforcement action. These include an order to protect the assets of the insurer, the appointment of and administrator, the appointment of an examiner, the obtaining of a search warrant. These can be gleaned from Sections 175 to 182 of the new Act. The new Act contains very wide provisions on this. Some of these provisions require the insurer to submit reports and returns on quarterly basis to the Commission. This will ensure the effective regulation of the industry.

Provisions on good corporate governance and related issues such as the need for independent board members have also been inserted into the new Act. Under the Act, corporate governance principles will take centre stage. The Act will enable the NIC issue at the very least, guidelines concerning good corporate governance. Even though the old law allowed the NIC to prescribe insurance business standards, this did not really cover detailed corporate governance principles.

The New Act contains provision on the 'fit and proper person' test which enable the Commission to obtain financial and other relevant background information on the directors, senior managers, shareholders and beneficial owners of an insurance company. Indeed the Act has a broader scope of the fit and proper person doctrine than it existed under the old law since it extends the application of the doctrine to the shareholders of a company which applies for a license.

The liquidation procedures as per Section 48 of the old law were inadequate and unclear in terms of procedure. The new Act however provides clearer liquidation procedures and introduces a completely new judicial management procedure for insurance companies.

The offence provisions under the law have been clarified and more appropriate penalties provided in the new Act. Whiles the old law contained one general offence provision, the new Act provides separately for each offence with a different penalty. This is a reflection of the need for penalties for some breaches of the law to be higher than for other beaches.

The new Act also seeks to replace the existing registration process with a licensing regime. This is because whereas Registration suggests a mere administrative process, Licensing better describes a regulatory regime.

The new act contains whistle blowing provisions requiring auditors and actuaries to inform the Commission immediately they detected the insolvency of or wrong doing on the part of any insurance company. Though the old law contained similar provision, the new law focuses on quick action to protect policy holders.

Aside these safety mechanisms to insulate the interest of policy holders or stakeholders in the insurance industry and to strengthen confidence in the field, the New Insurance Act has other provisions geared towards restoring public confidence in the industry and to promote its growth. These include the following: The SIC Monopoly and the Ghana Re-Insurance Organisation Compulsory Cessions

The State Insurance Company used to enjoy monopoly over all the insurances of government businesses. Under the new law, such monopoly has been removed. The Ghana Re-Insurance Organisation received some 20 percent of premiums received in the industry and this cession was to check capital flight and to retain lots of premiums in the country. The new Act has removed such compulsory cessions and has subjected it to a two year transitional period. This move will create room for competition in the insurance industry thereby promoting the growth of the industry as a whole.

The Capital requirements for insurers and insurance intermediaries under the old law were utterly inadequate as they had been eroded by inflation. The old law did not also enable capital requirements to be easily adjusted to take account of inflation.

Under the new Act, this problem is solved by requiring that insurance companies maintained a certain minimum level of paid up share capital whilst the solvency margin would be calculated in accordance with the regulations. Thus under the Sections 69 to 77 of the new Act, which cover Capitalisation, Solvency and Financial Provisions, there is greater flexibility in setting the minimum capital requirements and solvency margin than it existed under the old law.

The new Act also requires the separation of life and non-life business to ensure a more prudent management of policy holder funds. Under the old law, composite insurance companies were allowed and this did not augur well for a prudent management of policy holder funds, since life funds which are long term in nature were often used by some companies to support general business operations. Indeed composite insurance companies are required to separate their businesses and float new companies to take charge of their life portfolios under the new law. This was subject to a transitional period of twelve months.

Even though Section 47 of the old law provided that an insurer must seek the permission of the NIC to transfer its entire life business or other business to another insurer, there is no provision requiring even notification of a change in control of an insurer or the transfer of a significant interest or holding by persons in insurance companies. Under the new Act, provision is made to ensure that the Commission approves any disposition of an interest by a person holding or owing a significant interest in an insurance company.

This will enable the NIC conduct a thorough background check to ensure policy holders are not short changed.

Compulsory Fire Insurance of Commercial Buildings and Fire Service Maintenance Fund Under the old law, there was no compulsory fire insurance for commercial building under construction and existing commercial buildings. Sections 183 and 184 of the new act makes compulsory the insurance of commercial buildings under construction and existing commercial buildings against the hazards of collapse, fire, earthquakes, storms and floods.

It is of interest to note that Sections 183 and 184 of the new Act mandates a set up of a Fire Service Maintenance Fund to provide funds and equipment to state institutions assigned with fire fighting functions and such other organization as the NIC may determine for the purpose of fighting unwanted fires.

This would be financed by insurers who pay premiums on policies issued in respect of commercial buildings. The general indemnity is necessary to encourage the protected individuals to take bold enforcement decisions without fear. It must be noted however that the indemnity is not absolute. Where bad faith on the part of the protected persons can be shown, then no such indemnity would be enjoyed. The Motor Compensation Fund was set up by the NIC in collaboration with motor underwriters in 1996 to provide compensation for persons who suffer death or injury through motor accidents and are unable to obtain compensation from an insurance company. The fund is resourced through the motor contributions received by NIC on every sticker issued by motor underwriting companies to insured persons.

The new Act now gives legal backing to this fund, considering its importance.

The new Act also establishes a client rescue fund to be used to compensate clients of insurance companies that become bankrupt. A percentage of the gross premium received by each direct insurer, to be determined by the Commission, would be paid into this fund and awards from it shall be made by a committee established by the commission. It is expected that compliance and adherence to the tenets of the provisions made in the new law (ACT 724) would promote public confidence in the industry and engender its growth.