Section or Brochure name a. Review of the Ghanaian Insurance Industry

Transcription

1 Section or Brochure name a Review of the Ghanaian Insurance Industry July 2014

2 Contents Page Introduction Background, objectives and scope 1 Macro Economic Review 2 Industry Overview - Insurance 5 Life and Non Life Market Performance in 2013 and Outlook 6 Market Outlook 7 Industry Issues, Future Developments & key trends 8 Foreign Participants in the Sector 10 Appendices Appendix 1: Performance - Life 11 Appendix 2: Performance Indicators 12 Appendix 3: Performance - Non Life 13 Appendix 4: Performance Indicators - Non Life 14

3 Section or Brochure name c Introduction

4 1 Review of the Ghanaian Insurance Industry Background, Objectives and Sources of Information Introduction The insurance landscape in Africa has undergone several changes in past years. With the increased foreign direct investments in Africa, the industry is expected to take to a higher level and KPMG intends to position itself as a provider of tested advisory solutions to insurance companies on the continent. In line with this vision, KPMG has carried out a review of the local insurance market to share with interested investors. Objective of the Assignment The main objectives of this study is to present an overview of the performance of the local insurance market in Ghana. Sources of information Information used in presenting an overview of the insurance market was obtained from the following sources: National Insurance Commission Annual Report General industry information.

5 Review of the Ghanaian Insurance Industry 2 Ghana Macro Economic Review Economic Analysis Gross Domestic Product The three broad economic sectors which contribute to GDP are the agricultural, industrial and services sectors. The structure of economy is currently dominated by the services sector. This accounts for about 51% of GDP, thus maintaining its dominance by way of its contribution to GDP for the past five years. The country s nominal GDP grew year-on-year from GHS 36.6 billion in 2009 to GHS 73.1 billion in 2012 and increased slightly to GHS 90.1 billion in The forecast of nominal GDP levels for 2014 are obtained from averaging IMF and World Bank expectations. Real GDP growth for Ghana averaged 8.3% over the five year period from 2009 to KPMG Analysis and World Bank Data. Forecasts obtained from average of IMF and WB expectations It recorded a growth of 4% in 2009, reached a peak of 15% in 2011 before declining steadily to 6.60% in The provisional outturn for 2013 stands at 5.10%. Sectoral Growth Financial and insurance activities recorded an average growth rate of 4.8% from 2009 to In 2013, it accounted for 6% of GDP. Financial and insurance activities form a core component of the services sector and has been growing over the last few years. From 8.8% of Services GDP in 2009, financial and insurance activities Source: GSS & KPMG Analysis

6 3 Review of the Ghanaian Insurance Industry increased to 13.2% of Services GDP in The financial and insurance sector, has been growing consistently since From GH 1.5 billion in 2009, it grew by 45% in After 10% growth in 2011, it further posted strong growths of 40% and 72 in 2012 and 2013 respectively. Prime Rate The Bank of Ghana s (BOG) prime rate stood at a rate of 18% in 2009 and was lowered to 12.5% in The rate was revised upwards three consecutive times in the year It was increased to 13.5%, 14.5% and 15% in February, April and June 2012 respectively and remained same as at April As at the end of the third quarter of 2013, the rate had inched up slightly to 16%. The rate shot up to 18% in February 2014 and has remained unchanged since then. Although the Monetary Policy Committee reviewed the economy in April 2014, the prime rate was maintained. Prime rates directly affect the cost of debt funding in Ghana which ultimately determine the cost of doing business and therefore prices of goods and services including sale of insurance policies. Interest Rate Lending rates are very responsive to the pattern of the prime rate as banks pass on increases to customers. Cost of borrowing is quite expensive. As at June 2014, the base lending rate of cedi-denominated loans from commercial banks ranges from 20% to 30%. The base lending % Interest Rate and Average Inflation rate for dollar-denominated loans on the other hand, ranges between 12% and 14%. Average Inflation Ghana achieved single digit inflation in 2010 and maintained it through to This achievement was as a result of the Government s efforts in stabilising the economy. This notable performance was however short lived. Recent data from the Bank of Ghana provides evidence for inflation being 13.8% at the end of January The pass through effect of the fuel and utility price increases, 2.5 percentage point increase in VAT and demand pressures have been the cause of this rise. As at May 2014, inflation was 14.8% Source: KPMG Analysis: GSS & BOG Inflation Interest Rate Year End Exchange Rate of the Dollar and Euro to Ghana Cedis 4 GH US$ Euro Source: KPMG Analysis & Bank of Ghana 11.5 The adjacent chart depicts a comparison between prime rate and average inflation. Exchange Rate For most parts of 2008 and early 2009, the cedi depreciated against the major foreign currencies. However, 2009 to 2010 saw the Ghana cedi appreciating against all major currencies. Since then the Ghana cedi has been depreciating against the major foreign currencies. By the end of December 2013, the rate of the dollar in terms of cedis was GH 2.16 and that of the euro was GH 2.98 as shown in the chart below. As at 12 June 2014, the rates stood at GH 2.98 and GH 4.04 for the dollar and Euro respectively

7 Review of the Ghanaian Insurance Industry 4 Economic Outlook Ghana is currently in challenging economic times. While debt levels have arisen leading to increase in debt repayment commitments, revenues keep declining due to falling prices of gold and cocoa on the world market. These among other factors, have sparked steady depreciation of the Cedi against major foreign trading currencies, contributing to the recent rise in consumer price indicators. Given the backdrop of current happenings, there is the need for government to roll out clear solutions to arrest the worsening economic challenges. Investor confidence in the economy remains questionable in spite of the politically serene environment. If government is successful in dealing with the current economic difficulties, investor confidence is likely to be restored and Ghana will record a boost in productivity. This will positively impact on the financial services sector. Conclusion Ghana s reputation for political stability remains intact following the December 2012 elections and the nation is widely regarded as a safe place to do business. The verdict from the Supreme Court following the 2012 presidential election petition, has proved the country s political stability despite the anxiety of many Ghanaians. Ghana has remained a top regional performer in terms of political and investment stability over the mediumlong term after the verdict. The nascent oil and gas sector is attracting substantial foreign investment. The current unstable macro-economic environment however is creating challenges for business in the economy and insurance companies are no exception.

8 5 Review of the Ghanaian Insurance Industry Industry Overview Insurance Life Non Life 120.0% 100.0% Market Share of Top 5 Non Life Insurers by GWP % 36.8% 40.0% 39.3% 60.0% 23.7% 22.2% 22.2% 40.0% 10.4% 10.0% 12.3% 20.0% 10.4% 9.6% 8.7% 9.5% 9.1% 9.0% 0.0% 9.2% 9.1% 8.4% Vanguard Assurance Metropolitan Insurance Enterprise Insurance Star Assurance SIC Insurance Others The Ghanaian life insurance market is consolidated with the top five companies accounting for about 80% share in 2012 (up from 78% in 2011). There were 19 life insurers as at May In 2012, the life insurance gross written premium (GWP) stood at GHS355.8 million, witnessing a growth of 31.7% (y-o-y) Ghana s top three life insurers performance in 2012 is summarised below: SIC Life Insurance collected GHS100.3 million representing a premium growth of 39% (y-o-y). SIC is listed on the Ghana Stock Exchange and owned by government (40%) and others including institutions and individuals (60%) Enterprise Life Assurance reported total premium collection of GHS89.1 million, representing a growth of 45% (y-o-y) Glico Life Insurance reported a gross premium of GHS36 million witnessing 4.65% growth (y-o-y) Please refer to the appendices for details of performance. The Ghanaian non-life insurance market is relatively fragmented with the presence of 26 players as at May of 2014 The top five companies accounted for 60.6% share of the total market in 2012 (little movement from 60% in 2011) In 2012, non-life insurance GWP stood at GHS million witnessing a growth of 38% (y-o-y) from 2011 Top three non-life insurers performance in 2012 is summarised below: SIC Insurance s GWP increased by 38% (y-o-y) to GHS million Star Assurance reported a premium of GHS million, witnessing 70% growth(y-o-y) Enterprise Insurance witnessed 25% (y-o-y) growth in GWP in 2012

9 Review of the Ghanaian Insurance Industry 6 Life and Non Life Market Performance in 2013 and Outlook Life The life insurance GWP witnessed a growth of 31.7%. There is still room for growth in this sector especially with the development of micro insurance and innovative distribution channels such as bancassurance The portfolio mix (proportion of life and non-life premium to the total premium) has shifted from 32/68% in 2007 to 42/58% in 2012 The portfolio mix is expected to witness a further structural shift in favour of life insurance segment The future growth of life insurance segment is expected to be driven by a large untapped market and an established regulatory framework, which is making Ghana a lucrative market for international players. Non Life The non-life insurance GWP witnessed a growth of 38.1% (up from 32.3% in 2011), driven by enhanced public education, development of innovative products and increased acceptance of alternative distribution channels Non-life insurance is divided into several broad categories, such as motor, fire, accident, marine, theft, engineering and medical insurance In 2012, the top three segments accounted for over 70% of the non-life insurance GWP Motor insurance (which is compulsory) is the largest category for non-life segment, accounting for about 43.7% of non-life GWP and 25.4% of total market premium in However, the category s relative share has been declining since 2008 due to a higher growth witnessed in other non-life categories. Other key segments fire and accidents account for about 20% and 21%, respectively Fire and marine were the fastest growing categories, witnessing 34% and 33%growth (CAGR ), respectively(1) The future industry growth would be driven by increasing disposable income and marketing efforts, and acceptance of niche products (such as micro-insurance and industry specific products) In 2009, 21 non-life members of Ghana Insurers Association formed a consortium to underwrite oil and gas industry risks. This is in-line with the government s focus to leverage growth from hydrocarbon deposits. During , the insurance penetration improved marginally to reach over 2%. The National Insurance Commissioned has supported the development of Micro insurance products for the sector with the hope that this will increase the insurance penetration in the country. In 2013, Prudential and Old Mutual invested in Ghana to leverage benefits from the country s growing insurance industry Note: (1) Others, which include travel insurance and bonds, witnessed a CAGR of over 97%. However, the segment accounted only for about 4% of the total GWP (including life and non-life) in 2012 Source: In prime position, Africa insurance Review (8 May 2013); Oxford Business Group; KPMG research

10 7 Review of the Ghanaian Insurance Industry Market Outlook Regulation The National Insurance Commission (NIC) regulates the Ghanaian insurance market. The regulator is responsible for licensing, setting standards, and approving insurance premium and commission rates In 2013, insurance industry stakeholders reviewed the draft insurance bill which would address limitations of the existing Insurance Act 724 (2006) The draft bill would support product development for critical sectors, and would prioritise licensing for specialised insurers dealing in micro-insurance and agriculture insurance In , the government directed the Ministries, Departments and Agencies (MDAs) to cover risks only through wholly or partially owned state insurance companies The directive would favour SIC Insurance and SIC Life Insurance companies, and would intensify competition for private players. As a result, the private insurers are planning to take legal action against the government s directive. Solvency / Capital The minimum paid up capital requirement for an insurance company (both life and non-life) is $1.0 million. Additionally, NIC has directed the insurers to deposit 10% of the minimum capital requirement in an escrow account with Bank of Ghana. This would ensure sufficient Distribution In Ghana, insurance products are distributed through agents, brokers, banks, micro-finance institutions (MFIs), mobile, etc. Individual agents are the key distribution channel for insurance in Ghana. According to the NIC website, there are 4,537 licensed agents currently operating in the country The licensed corporate agents (banks and MFI) distribution channel is expected to witness a high growth, driven by regulatory support and increased customer base The mobile insurance distribution channel is expected to witness significant growth, driven by increasing mobile penetration, acceptance of micro insurance, lower costs and large untapped market in rural areas The telecommunication providers, such as Tigo and MTN, offer life insurance products to their customers. According to MTN, premiums are significantly cheaper than competitors driven by mobile-based administration, which results in cost savings Going forward, insurance companies are expected to focus on the most suitable distribution channel for various insurance products. This would ensure high conversion rate and maximum utilisation of the marketing / distribution expenditure Further, an expected shift in focus to provide risk cover to individuals who do not earn a regular income or do not have a bank account would add to the need of developing new / niche distribution channels. resources to absorb liquidity shocks The NIC is planning to shift towards a risk-based management system (in-line with the global trends in insurance regulations) by 2015 The minimum paid up capital requirement for reinsurers is $2.5 million while, for insurance intermediaries, insurance brokers and loss adjusters, the requirement is $250 Source: NIC (Annual Report 2011); Oxford Business Group; Insurance Commission sets December 2012 deadline for new capital requirement, i-broker; Insurance companies consider legal action against gov t, Ghana Online (7 Feb 2014); KPMG research

11 Industry Issues, Future Developments & key trends Section or Brochure name 8

12 9 Review of the Ghanaian Insurance Industry Industry Issues, Future Developments & key trends Industry issues Challenges affecting the growth of the industry includes low patronage, limited knowledge, lack of confidence in the system, delays in claim payments, fraudulent claims and price undercutting. The National Insurance Commission (NIC) on April 1, 2014 began to implement the No premium, no cover policy, which requires insurance firms to collect premiums upfront before providing insurance cover. It implies that insurance companies will no longer be required to sell insurance products on credit to customers. Future Developments The discovery of oil in Ghana is expected to transform the economy in the years ahead. The insurance industry is expected to position itself by enhancing its balance sheet size in order to underwrite huge oil and gas related policies. Large demand capacities exist in corporate institutions, government agencies, professional and other bodies, new companies being established, and among high net-worth individuals. Moreover, a large number of shops do not have any insurance policy. The informal sector (workers who are mostly self employed and engaged in trading or other business outside the formal stream) has been largely ignored by insurance companies who usually target only the formal sector (government and privately employed workers who are captured on the national tax database and also on the social security and national insurance scheme. The formal sector is more attractive due to the stable and predictable flow of income). With the introduction of agricultural insurance and the implementation of compulsory insurance of commercial buildings, the industry is expected to grow significantly, going forward. Agricultural insurance which currently covers the production of maize in northern Ghana is expected to be extended to cover other crops like rubber and cocoa as well as livestock. The new draft bill which is pending approval from parliament has a provision for an appropriate micro insurance regulatory framework. This aims at targeting low income households in the informal sector by providing them with affordable insurance products that will meet their needs. All these initiatives are expected to lead to growth in the insurance industry and increase insurance penetration. With this, the contribution of insurance services to gross domestic product will also increase. Key trends The concept of Bancassurance was introduced in the country in 2007 by the National Insurance Commission (NIC). It aims at selling insurance products through other financial institutions, particularly the banks. As at September 2013, there were about 19 Bancassurance collaborations between commercial banks and insurance companies.

13 Review of the Ghanaian Insurance Industry 10 Foreign Participants in the Sector Foreign participation in Ghana s insurance market is mainly by large African insurance companies from Nigeria, South Africa and Ivory Coast through the local subsidiaries European insurance companies are also expanding their presence in Ghana to capitalise on economic growth, further oil and gas exploration, political stability and a good regulatory system. Large European companies, such as Old Mutual Plc and Prudential Plc, have acquired majority stake in local life insurance companies Overview of the main foreign participants in the insurance sector Life insurance companies Name of local insurer Headquarters Foreign partner % ownership Saham Insurance (formerly Colina Life Insurance Company Limited) Capital Express Assurance (Gh) Limited Accra Colina Group 100% Accra Capital Express Assurance Limited Enterprise Life Assurance Company Limited Accra Sanlam Ltd 49% Express Life Assurance Company Limited Accra Prudential Plc Majority IGI Life Insurance company Limited Metropolitan Life Insurance Ghana Limited Accra Accra Industrial & General Insurance Co. Plc na Majority MMI Holdings Limited (Metropolitan Holding Ltd.) 60% Provident Life Assurance Company Limited Accra Old Mutual plc Majority Note: IGI is facing solvency issues and it is currently not operational Non-life insurance companies Name of local insurer Headquarters Foreign partner % ownership Allianz Insurance Accra Allianz SE na Saham Insurance Accra Colina Group 100% Industrial & General Insurance Limited Intercontinental Wapic Insurance Company Limited Metropolitan Insurance Company Limited Accra Accra Accra Industrial & General Insurance Co. Plc Intercontinental Wapic Insurance PLC MMI Holdings Limited (Metropolitan Holding Ltd.) Majority NEM Insurance Ghana Limited Accra NEM Insurance Plc na NSIA Insurance Ghana Limited Regency Alliance Insurance Company Limited Accra Accra NSIA Participations S.A Holdings Regency Alliance Insurance Company Plc na 60% Majority International Energy Insurance Accra IEI Plc n/a Note: IGI is facing solvency issues and it is currently not operational na Recent M&A Activity in the Sector Insurance companies Announcement date Target 05/12/2013 Express Life Insurance Company Limited 03/06/2013 Provident Life Assurance Company Limited Acquirer/ Investor Country of origin of acquirer Deal value (GHS m) Percentage bought (%) Total premiums written by target in 2011 (GHS m) P/E P/B P/EV Prudential plc United Kingdom na na 1.2 na na na Old Mutual plc United Kingdom na na 16.1 na na na Source: Capital IQ; MergerMarket

14 11 Review of the Ghanaian Insurance Industry Appendix 1: Performance Life Key Growth indicators of the Life insurance Industry ( ) Indicator 2011 (GH M) 2012 (GH M) Growth Rate (%) Premium Income % Total Assets % Total Investments % Actuarial Liabilities % Investment to total assets This is an asset quality ratio which seeks to establish the percentage of the company s assets that are in investment instruments as to operational assets and depreciable assets. opposed Policy Holder benefit cover This is an investment adequacy ratio which assess the adequacy of the company s investments to cover the policy holder liabilities. The investment assets should at least cover policyholder benefits. Hence a ratio less than 100% indicates the company s inability to cover policyholders liabilities with its available investments. Industry ratio in 2012 was 121%. This was an increase from the 2011 ratio of 105%. The first five (5) companies with high policyholder benefit cover are; Colina Life Ghana Limited 815% Capital Express Assurance Ghana Limited 240% Ghana Union Insurance Co. Ltd 206% Performance Ratios Life Ratio s 2011 (%) Investment to Total Asset Policy holder Benefit Cover Retention Ratio Investment Yield 9 12 Return on Assets 3 3 Return on Equity 3 19 Expense ratio Glico Life Insurance Co. Ltd 183% Express Life Insurance Co. Ltd 138% 2012 (%) Retention Ratio This ratio calculates the proportion of the premiums that are not passed on to reinsurers. Retention among Life insurers in Ghana are generally high. This can be seen in the table where retention ratio remained 97% in both 2011 and The Life sector grew by 32% as compared to 38% by the Non-Life sector from 2011 to 2012 in terms of gross premium income. This is the first time in six years that non-life premiums have grown at a faster rate than the life premiums

15 Review of the Ghanaian Insurance Industry 12 Appendix 2: Performance Indicators Investment Yield This ratio calculates the return on a company s investments. It measures the quality of a company s investment portfolio. Investment yield increased from 9% in 2011 to 12% in The top five (5) companies with high investment yields are; Phoenix Life Assurance Co. Ltd 30% Glico Life Insurance Co. Ltd 22% Vanguard Life Assurance Co. 18% Ghana Life Insurance Co. Ltd 17% Ghana Union Assurance Life Co. Ltd 17% Return on Assets This is a ratio of profit after tax to total assets. It measures the efficiency with which management utilizes assets of the company to generate returns for various stakeholders. There was no improvement in the industry since it maintained a ratio of 3%. A negative return on assets implies the company experiences a loss during the period. The top four (4) companies which recorded the highest ratios are; StarLife Assurance Co. Ltd 31% Ghana Union Assurance Life Co. Ltd 20% Enterprise Life Assurance Co. Ltd 17% Glico Life Insurance Co. Ltd 16% Return on Equity This ratio calculates the return on Shareholders funds over a period. In this category the top four (4) companies which recorded the highest return on equity are; StarLife Assurance Co. Ltd 215% Enterprise Life Assurance Co. Ltd 57% Glico Life Insurance Co. Ltd 35% Unique Life Assurance Co. Ltd 33% Expense Ratio This ratio calculates actual management expenses incurred as a percentage of total inflows received from policyholders. This is an efficiency ratio. It measures the proportion of the policyholder inflows that is expended as opposed to the proportion that into policyholder benefit reserves. The industry experienced an increase from the 2011 figure of 44% to 57% in Return on equity improved significantly in 2012, driven in part by improving investment returns Expense ratio remains high and deteriorated further in 2012

16 13 Review of the Ghanaian Insurance Industry Appendix 3: Performance Non Life Key Growth indicators of the Non-Life insurance Industry ( ) Indicator 2011 (GH M) 2012 (GH M) Growth Rate (%) Premium Income % Total Assets % Total Investments % Total Capitalization % Change in Gross Written Premium This ratio measures growth or contraction in the company s gross premium relative to the previous years. The industry average was 41% which represented an increase in the 2011 growth of 29%. The top five (5) companies which recorded the highest ratios are; Colina Insurance Co. Ltd 206% NEM Insurance Ghana Ltd 85% Star Assurance Co. Ltd 76% Activa International Insurance Co. Ltd 66% Equity Assurance Co. Ltd. 66% Glico Life Insurance Co. Ltd 183% Express Life Insurance Co. Ltd 138% Claims Reserve Ratio This ratio is calculated as the provision for Outstanding claims divided by the Net Earned Premiums. It compares the relationship of provisions for outstanding claims to net earned Performance Ratios Non-Life Ratio s 2011 (%) 2012 (%) Change in Gross written Premium Claims Reserve Ratio Claims Ratio Investment to total assets Retention Ratio Investment Yield 9 10 Return on Assets 4 5 Return on Equity 5 12 Combined ratio premiums to assess whether the company is adequately reserving for claims in process. The internationally accepted range for this ratio is between 30% and 50%. The very low ratios for a number of insurers is a potential concern. Companies like Enterprise Insurance, Equity Assurance, International Energy Insurance, NEM Insurance and Phoenix Insurance recorded ratios below 10%. The Non-life business grew by 38% in terms of gross premium income. The various growth performance indicators have been summarized in the tables below

17 Review of the Ghanaian Insurance Industry 14 Appendix 4: Performance Indicators Non Life Claims Ratio This is calculated as net claims incurred divided by the Net Earned Premiums. It is a key ratio since it indicates how well an insurance company pays claims and to some extent, the fair treatment of customers since the ratio is an indication of how much policyholders get back in return for each cedi of premium paid to insurance companies. Internationally accepted standards is between 60% to 80%. This indicates that the industry s ratio of 33% (2012) is unacceptable since the core obligation of an insurer is the ability to pay out claims. Companies must make conscious effort to improve the ratio in order to win the confidence of the average Ghana in insurance. Investment to total assets This ratio is calculated as total investments divided by total assets. It is an ideal measure of quality of assets on the insurers balance sheet. The industry has recorded an increase in a 4% increase in 2012 from the 2011 figure of 45%. The top five (5) companies which recorded the highest proportion of investment assets as at 2012 are; Ghana Reinsurance Co. Ltd 78% Ghana Union Assurance Co. Ltd 77% Enterprise Insurance Co. Ltd 76% Priority Insurance Co. Ltd 75% Millennium Insurance Co. Ltd 66% Combined Ratio The combined ratio is the summation of the claims ratio and the expense ratio. It is the single best measure of an insurer s underwriting efficiency or profitability. The ratio does not measure total profitability as investment income and other earnings are excluded The industry s performance has therefore worsened from 107% in 2011 to 112% in Claims ratio is low relative to international norms, raising potential concerns around the level of trust in the industry The COR deteriorated in 2012 and is above 100% despite a very low claims ratio

18 Contact us Nathaniel Harlley Partner - Audit T: +233 (302) E: nharlley@kpmg.com 2014 KPMG a partnerships established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Ghana