Qualitative Research in Financial Markets

Risk management in the Ghanaian insurance industry

Joseph Oscar Akotey, Joshua Abor,
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industry", Qualitative Research in Financial Markets, Vol. 5 Issue: 1, pp.26-42, https://
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QRFM
5,1 Risk management in the
Ghanaian insurance industry
Joseph Oscar Akotey
26 Faculty of Economics and Business Administration,
Catholic University College of Ghana, Sunyani, Ghana, and
Received 16 May 2011 Joshua Abor
Revised 28 October 2011
Accepted 23 November 2011
Department of Finance, University of Ghana Business School, Accra, Ghana

Abstract
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Purpose – The purpose of this paper is to examine the risk management practices of life assurance
firms and non-life insurance firms.
Design/methodology/approach – Through a comparative case study methodology, the study
assesses the state of risk management in both life assurance companies and non-life insurance firms to
determine whether they exhibit different or similar risk management practices. The results of the survey
were also analyzed and compared to the principles of good practices in financial risk management.
Findings – The findings of the study revealed some differences and similarities in the risk
management practices of life and non-life insurance firms. Almost all the life companies have stated their
risk appetite levels, which enable them to identify which risks to absorb and which ones to transfer. But
non-life insurance firms have not laid down their risk tolerance levels explicitly. The results further
revealed that the industry lacks sufficient personnel with the requisite risk management skills and that
the sector does not manage risks proactively, rather they do so in a reactive response to regulatory
directives.
Practical implications – Effective management of risks by insurers will increase the penetration of
insurance in Ghana.
Social implications – Risk management is a crucial issue, not only for the survival and profitability
of the insurance industry, but also for the socio-economic growth and development of the whole
economy. As major risks underwriters, insurance companies need to adopt good practices or quality
measures in the management of financial risk. This is important, more so, as the industry prepares to
re-position itself to underwrite the risks in the emerging oil and gas industry of Ghana.
Originality/value – Research into financial risk management in the insurance industry from the
Ghanaian perspective is rare. This study is therefore timely and its findings are invaluable for the
efficient management of financial risk in the insurance industry.
Keywords Life insurance, Risk management, Life assurance, Non-life insurance, Ghana
Paper type Research paper

1. Introduction
The quality of risk management is a crucial issue not only for the survival and
profitability of the insurance industry, but also for the growth and development of the
whole economy. As major risks underwriters, insurance companies need to adopt good
practices or quality measures in the management of all types of risk. The principles of
Qualitative Research in Financial
Markets
Vol. 5 No. 1, 2013 JEL classification – G22, G32, G28
pp. 26-42 The authors are grateful to Catholic University College of Ghana and University of Ghana
q Emerald Group Publishing Limited
1755-4179
Business School for funding this research. The authors also appreciate the reviewer’s insightful
DOI 10.1108/17554171311308940 comments.
 effective management of financial risks concern such issues as: an autonomous risk Ghanaian
assessment department (RAD); an independent chief risk officer (CRO); the effective insurance
validation of the pricing mechanism and other models used in the institution by the
RAD; the proper separation of the audit department from the RAD; a clear policy on risk industry
appetite levels; and the timely communication of risk information to top management
(Dowd et al., 2008; FSA, 2003). Any insurer that ignores these risk management practices
can run into serious financial distress. 27
Different surveys carried out by the Financial Services Authority (FSA, 2003, 2005,
2006) about their UK insurance industry revealed amongst others that most insurance
firms responded to regulatory requirements concerning risk management reactively,
rather than appreciating risk management as good business practice. Again, the
findings of the 2003 survey indicated that 50 percent of the companies sampled had not
explicitly defined their appetite for risk. Deficiencies in risk management according to
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Santomero and Babbel (1997) can lead to the mispricing of insurance policies,
noncompliance with insurance regulations and financial malfeasance on the part of
officers and top management of insurance firms. These issues can lead to insolvencies in
the insurance industry as witness in the 2007 global financial crises.
This study contributes to the existing literature on the practice of risk management
in the insurance industry from the Ghanaian perspective. Previous studies have tended
to focus on the issue from the perspective of insurance companies in advanced
economies (Bartlett et al., 2005; O’Brien, 2006a, b; Dowd et al., 2008). To what extent
these studies are applicable to different countries have become increasingly important
to verify. Unfortunately, research about whether the Ghanaian insurance industry
adheres to good practice in risk management is non-existent.
The growing trend of the Ghanaian economy in terms of the GDP growth rate[1]
which is expected to be one of the highest in the world for 2011 (Business and Financial
Times, 2011) and the onset of the oil and gas industry has increased the demand for
insurance. This has led to the influx of many foreign insurance companies into the country.
In its attempts to re-equip the local insurance industry to underwrite risks associated with
large-scale capital investment related to the oil and gas industry, the National Insurance
Commission (NIC) has proposed the re-capitalization of insurance companies. However,
the capital base alone is not enough to enable insurers to underwrite risks, but the proper
management of risks which are in line with best practice within the insurance companies is
paramount to the successful absorption of risks in the real sector. Being a risk absorber,
the insurance industry is vulnerable to manifold risks which can render any insurance
firm insolvent. The main questions that arise are: first, what is the state of the practice of
risk management in the Ghanaian insurance industry? Second, how different is the risk
management practice of life insurance firms from that of non-life insurance firms?
Also, the many complaints against some insurance companies by policyholders as
reported by the Complaints and Settlements Bureau (CSB) are major sources of concern
not only for the NIC but all stakeholders of the industry.
This current paper therefore aims at addressing this research gap by assessing the
risk management practice in the industry as well as comparing risk management
practice in the life and non-life sectors. The rest of the study is structured as follows:
Section 2 provides an overview of the insurance industry in Ghana; Section 3 discusses
the extant literature; Section 4 describes the methodology employed in this study;
Section 5 discusses the empirical findings and finally Section 6 concludes the study.
 QRFM 2. Overview of the insurance industry in Ghana
5,1 The history of the Ghanaian insurance industry dates back to the 1920s, with the
establishment by the British of the Guardian Royal Exchange Assurance (Gh) Limited
now known as Enterprise Insurance Company in 1924.
The insurance industry is a small but fast growing sub-sector of the financial
market in the Ghanaian economy with an annual gross premium income of GH¢32.25
28 million in 2001, accounting for about 0.85 percent of GDP (compared with 17.34 percent for
South Africa and 1.32 percent for Cote D’Ivoire) (NIC, 2005). However, over the years the
industry has witnessed very vigorous activity and tremendous growth. For instance, total
gross premium has increased from GH¢32.25 million in 2001 to GH¢342.7 million in 2009.
This represents a yearly average growth rate of 34.49 percent (NIC, 2009; Ansah-Adu et al.,
2011). The contribution of gross premium to GDP which measures insurance penetration
or demand, even though lower than the 2 percent bench mark, has been increasing steadily
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from less than 1 percent in 2001 to 1.58 percent in 2009 (NIC, 2009). Table I and Figure 1
show the gross premium income and insurance penetration from 2001 to 2009.
Although the gross premium has been rising as shown in Table I and Figure 1, its
growth is at reducing rate. The industry has also recorded increased in the number of
insurance entities. The number of insurance entities excluding agents grew from 74 in
2007 to 84 in 2009. As at December 31, 2009, the number of licensed insurance entities
was shown in Table II.

Year Premium income (GH¢) Growth rate (%) Insurance penetration (%)

2001 32,251,600 26.0 0.85

2002 47,205,989 46.3 0.95
2003 71,283,978 51.0 1.08
2004 92,583,146 29.8 1.16
2005 122,925,795 24.7 1.26
2006 164,207,266 33.5 1.40
2007 209,554,718 27.6 1.49
Table I. 2008 278,255,336 32.7 1.57
Gross life and non-life 2009 342,703,760 23.0 1.58
premium income and
insurance penetration Source: NIC (2005, 2007, 2009)

Figure 1.
Gross annual premium
(life and non-life)
Source: NIC (2009)
 Competition in the industry, which is growing steadily, is mostly concentrated in the Ghanaian
top six life and non-life companies. The market shares by gross premiums of the top insurance
six companies in both sectors of the industry are presented in Tables III and IV. The
State Insurance Company, which was once owned by the government but has now industry
been listed on Ghana Stock Exchange, continuous to dominant both the life and
non-life markets. The future of the industry is bright especially with the introduction of
new products and the high demand for micro insurance products (Akotey et al., 2011; 29
NIC, 2008). Culturally-oriented products such as funeral insurance continue to enjoy
high patronage due to our traditional values.

Type of insurance entity Number

Non-life companies 23
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Life companies 17
Reinsurance companies 2
Insurance brokers 40
Reinsurance brokers 1
Loss adjuster 1
Agents 1,200 Table II.
Licensed insurance
Source: NIC (2009) entities as at 2009

Percentage of market share

Company 2003 2004 2005 2006 2007

State Insurance Company Limited 22 24 26 29 32

Gemini Life Insurance Company 18 16 15 14 16
Enterprise Life Assurance Company Ltd 8 10 12 13 15
Star Life Company Ltd 13 10 10 7 8
Metropolitan Life Insurance Company Ltd 14 10 9 7 7
Vanguard Life Insurance Company Ltd 6 8 4 9 6
Others 19 22 24 21 16
Total 100 100 100 100 100 Table III.
Market share by gross
Source: NIC (2007) premiums (life)

Percentage of market share

Company 2003 2004 2005 2006 2007

State Insurance Company Ltd 38 37 40 39 37

Metropolitan Insurance Company Ltd 12 10 10 10 9
Enterprise Insurance Company Ltd 16 14 15 12 12
Ghana Union Assurance Company Ltd 5 5 5 4 4
Vanguard Insurance Company Ltd 8 9 8 9 8
Star Insurance Company Ltd 5 7 7 7 7
Others 16 18 15 19 23
Total 100 100 100 100 100 Table IV.
Market share by gross
Source: NIC (2007) premiums (non-life)
 QRFM The industry in Ghana is governed by the Insurance Act of 2006, Act 724. This Act
5,1 complies largely with the International Association of Insurance Supervisors’ (2011) core
principles. It grants regulatory powers to the NIC, which is mandated to perform a wide
spectrum of functions including licensing of entities, setting of standards and facilitating
the setting up of codes for practitioners. The commission is also mandated to approve
rates of insurance premiums (especially premiums for auto insurance) and commissions,
30 provide a bureau for the resolution of complaints and arbitrate in claims disputes.
The Act among others things prohibits composite insurance companies. Therefore,
all composite firms were required by the law to be separated into life assurance and
non-life insurance companies. The enactment of Act 724 is a major milestone towards a
robust insurance regulatory environment as it empowers the NIC adequately. Together
with several other initiatives in the past decade, the new law provides a strong regulatory
framework for the Ghanaian insurance industry (Ansah-Adu et al., 2011; www.nicgh.org).
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3. Literature review
Risk management is said to have received increasing attention in both corporate practice
and literature (Abor, 2005). Shimpi (2001) considers risk as the lifeblood of every
company and functional managers deal with risk decisively wherever it appears. Rejda
(1998) defined risk management as a systematic process for the identification and
evaluation of pure loss exposure faced by an organization or an individual and the
selection and implementation of the most appropriate techniques to treat such exposure.
Risk management is also described as the performance of activities designed to
minimize the negative impact (cost) of uncertainty (risk) regarding possible losses
(Schmit and Roth, 1990). According to Fatemi and Glaum (2000) the objectives of risk
management include: to minimize foreign exchange losses, to reduce the volatility of
cash flows, to protect earnings fluctuations, to increase profitability and to ensure
survival of the firm. Risk management is intended to help an organization meet its
objectives which, in the case of proprietary insurers, may be to maximize shareholder
value. As Tchankova (2002) has stated, risk management has become an integral part of
the operations of every organization and its underlining goal is to facilitate all other
management activities in order to achieve the firm’s stated objectives efficiently.
Financial and other organizational risk management has undergone a paradigm shift. It
has changed from being “hazard type” to “strategic type”. Risks are no longer considered
only as threats (adverse financial outcomes) but also as potential opportunities for
growth and value maximization (Gupta, 2011). The recognition of financial risk
management as a strategic issue deserving a separate managerial function has many
benefits such as the enhancement of shareholder value (Suranarayana, 2003).
Risk and uncertainty can have negative effects on an organization, for example leading
to financial distress, and this leads to motivation to manage risk (Odonkor et al., 2011).
Hull (2007) explains that, one of the basic function of every organization, most importantly
insurers, is to understand the portfolio of risk that it faces currently and the risk it plans to
take in future. Oldfield and Santomero (1997) posit that risks facing all financial institutions
can be segmented into three separable types, from a management perspective. These are:
(1) risks that can be eliminated or avoided by simple business practices;
(2) risks that can be transferred to other participants; and
(3) risks that must be actively managed at the firm level.
 In the view of Sinkey (2002), modern risk management in the banking and insurance Ghanaian
industries can be highlighted by five active verbs and these are: identify, measure, insurance
price, monitor and control. Every insurer faces double tasks in the identification and
management of risk: the first is the identification of the risk that its prospective industry
policyholders carry. The proper identification and measurement of the risk associated
with policyholders determine the pricing (premium setting) of insurance products. The
second is the identification and management of the risks inherent in the portfolio of 31
assets in which insurance companies invest proceeds of premiums and equity capital.
This double approach to risk management underpins the capacity of insurance
companies to properly underwrite risks in the economy.

3.1 Best practice risk management

Dowd et al. (2008) explain that, there has been a long and active debate in the
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mainstream financial risk arena about the tenets of proper risk management in financial
institutions (most especially in insurance firms), and this had led to the establishment of
common values quite fairly and clearly. They outlined the most popular principles or
guidelines of risk management and these are:
.
The top management, that is, the Board of Directors (BOD) must institute the
firm’s risk policies very explicitly in a risk policy document. The risk policy
document contains guidelines which indicate the various procedures and controls
that can be used to implement the policies. The board then ensures that the risk
policies are enforced at all levels of the firm. A risk policy is a very invaluable tool
to every insurance company because it adds value to the company by giving it a
clear focus as far as the underwriting of risk is concerned. It also helps
management to plan ahead in terms of marketing of its products and the types risk
to target.
.
Good practice requires an independent risk management function. The basic
function of such a unit/department is the formulation and implementation of
risk-control systems. This department should have its own independent budget,
be clearly differentiated and independent of or distinctly separated from the
internal audit unit. It should set the firm’s risk appetite levels and validates
the pricing models of the firm. It should also have appropriate enforcement
authority.
.
A risk manager (sometimes called CRO), and not an internal auditor, should be in
charge of the risk management unit/department and should, ideally, report to the
CEO and may have a seat on the firm’s principal governing body (BOD).
.
The risk management department should be able to use high-powered models to
identify the major risks faced by the company. Some of the principal risks likely
to be faced by an insurance firm may include different types of market risk,
credit risk, operational risk and underwriting or insurance risks. It should also
undertake periodic financial stress tests to assess the strength and weakness of
the firm concerning changes in the market such as market crashes, market
volatility or market liquidity and financial crises.
.
Information about changes in the major risks facing the company should
be made known to top management in a timely and appropriate manner.
 QRFM Keeping the top management abreast with any serious risks to which the firm is
5,1 exposed will enable them to take timely decisions on how to manage such exposures.

Santomero and Babbel (1997) outlined four main procedures for implementing a
broad-based risk management system and these include:
(1) standards and reports;
32 (2) underwriting authority and limits;
(3) investment guidelines and strategies; and
(4) incentive contracts and compensation.

According to Santomero and Babbel (1997, p. 5), these guidelines are set up:
[. . .] to measure risk exposure, define procedures to manage these exposures, limit exposures
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to acceptable levels, and encourage decision-makers to manage risk in a manner consistent

with the firm’s goals and objectives.

3.2 Enterprise risk management

An important aspect of risk management is the enterprise risk management (ERM)
and this has been gaining importance across industries globally in recent years. This
has never been truer than in the 2007-2009 global financial crisis, as companies
(both financial and non-financial), financial regulators, shareholders, rating agencies
and other stakeholders in the financial sector worldwide try to comprehend the
systemic damage suffered by the very institutions which should have had the best
ERM practices, and therefore be least vulnerable to a major risk management failure
(Cater et al., 2009).
Advanced ERM is recognized by industry experts as a valued-added tool that has
the potential to enable an insurer to create cutting-edge services. According to Lam
(2003), ERM enhances organizational effectiveness, improves upon quality in risks
reporting and facilitates business performance. It creates competitive advantage by
helping insurance firms not only to avoid unacceptable risks but also to actively take
on acceptable risks (Cater et al., 2009). The ultimate aim of ERM is not only to preserve
value, but also to create value (Wang and Faber, 2006). It improves upon the abilities of
a company to respond to risk and seize opportunities (Miccolis, 2001). ERM is defined
severally by different entities to mean basically the same concept. According to the
Committee of Sponsoring Organizations (COSO, 2004) ERM is:
[. . .] a process, effected by an entity’s board of directors, management and other personnel,
applied in strategy setting and across the enterprise, designed to identify potential events that
may affect the entity, and manage risk to be within its risk appetite, to provide reasonable
assurance of entity objectives.
Some rating agencies, especially Standard & Poor’s (S&P), use ERM as one of the main
parameters for the assessment of the risk levels of companies especially financial
institutions. Standard & Poor’s (2007) defines excellence in ERM for an insurer if:
[the] insurer has extremely strong capabilities to consistently identify, measure, and manage risk
exposures and losses within the company’s predetermined tolerance guidelines. There is
consistent evidence of the enterprise’s practice of optimizing risk-adjusted returns. Risk and risk
management are always important considerations in the insurer’s corporate decision-making.
 ERM generally consists of three fundamental components and these are: Ghanaian
(1) risk management culture and governance; insurance
(2) risk appetite and risk management strategy; and industry
(3) risk control (Cater et al., 2009).

A strong risk management culture is one where all persons at all levels of the firm
appreciate, understand, own and practice the core values of the firm (Cater et al., 2009;
33
Wang and Faber, 2006). It includes a clear understanding of the company’s risk
tolerances, various structural changes to align risk management, strategic planning,
the creation of a democratic working environment that encourages all employees to
raise risk management concerns, and an acceptance and willingness to incorporate risk
management concerns into decision-making and business processes (EIU, 2001;
Cater et al., 2009). Risk management culture is concerned with having knowledge of the
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risk exposure, acceptance or transfer of the risk exposure and “embeddedness” of risk
management in the company as well as recognizing the change of risk management
from an individualistic narrow silo type to portfolio type or an integrated management
practice (Cater et al., 2009; KPMG, 2001; Gupta, 2011).
Generally, risk appetite is the term used to describe the level and nature of the risk that
an organization is willing and able to actively manage at the firm level, what to reject or
eliminate by standard business practice, and those to reinsure (Santomero and Babbel,
1997; Cater et al., 2009). For instance, ISO 31000 defines risk appetite as the “amount and
type of risk an organization is prepared to pursue or take” (ISO, 2009). The nature of risks
that an insurance company may take on range from market risks, actuarial or
underwriting risks, credit or reinsurance risks, operational risks, liquidity risks and legal
risks (Rejda, 1998; Santomero and Babbel, 1997). A statement of risk appetite, which is
mostly stated clearly and formally endorsed by an insurer’s BOD and top management,
seeks to determine the risks to be avoided, risks to be reduced, and the parameters around
which acceptable risks should be taken on by the firm (Cater et al., 2009).
Risk control entails the processes of identifying, assessing and monitoring the
nature and degree of risk taken by a firm (Cater et al., 2009). Risk identification develops
the foundation for the effective control of risks (Tchankova, 2002). In assessing how
efficient and effective a company’s risk controls is, we may pose questions such as:
.
What systems are designed to identify emerging risks?
.
What strategies are used to assess each specific risk?
.
What measures of risk tolerance/appetite are used, e.g. value at risk, conditional
tail expectation, etc?
.
What policies and systems are in place for dealing with risk avoidance and
transfer? (Cater et al., 2009).

Insurers’ risk control can be done through tools such as underwriting standards, risk
classification and review standards (Santomero and Babbel, 1997).

3.3 Risks in providing insurance services

The key risks facing the insurance industry can be grouped into six generic types:
actuarial, systematic, credit, liquidity, operational and legal risks (Santomero and
Babbel, 1997). These are discussed in turn.
 QRFM Actuarial risk. This risk results from the selling of insurance policies and other
5,1 liabilities to raise funds. Actuarial risk according to Santomero and Babbel (1997, p. 8):
[. . .] is the risk that the firm is paying too much for the funds it receives or, alternatively, the
risk that the firm has received too little for the risks it has agreed to absorb.
Actuarial risk may have adverse effects on the long-term profitability of an insurance
34 company due to underwriting losses and overpricing of liabilities.
Systematic risk. It is the changes in the values of assets and liabilities of insurers as a
result of adverse changes in macro-economic factors such as inflation, interest rate,
exchange rate[2] and basis risk. Systematic risk affects all companies in the economy and
they are undiversifiable. Since systematic risks affect the investment performance of
insurers, most try to forecast the impact of such macro-economic risks factors on their
investment portfolios, attempt to hedge against them, and thus mitigate the sensitivity of
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their financial performance to changes in systematic risks (Santomero and Babbel, 1997).
Credit risk. It is the likelihood that a borrower will not pay its debt on time or failed
to make repayment at all. Credit risk is the uncertainty that a debtor will not perform in
accordance with its obligations such as loan payment or that counterparty does not
make a swap payment (Sinkey, 2002; Santomero and Babbel, 1997). Insurers face two
issues concerning credit risk. The first is the possibility that reinsurers may default as
a result of large cluster claims due to natural catastrophic event. The second is the
possibility that borrowers of insurers’ funds may default due to insolvencies or adverse
macro-economic conditions.
Liquidity risk. It is a “run” on an insurance firm resulting from a funding crisis due
to the making of large unexpected claims, loss of confidence, write-down of assets or a
legal crisis. Such unexpected massive policy withdrawals or cluster claims make the
liabilities of insurers much more liquid. However, their assets are less liquid due to the
long-term investment horizon of most insurers, especially life assurance firms. Lack of
proper judgment in the management of liquidity risk can render an otherwise solvent
insurer insolvent. As Santomero and Babbel (1997, p. 10), put it:
[. . .] an insurer that would be solvent without a sudden demand for cash may have to sell off
illiquid assets at concessionary prices, leading to large losses, further demands for cash, and
potential insolvency.
Operational and legal risk. The improper processing of policy documents, inaccurate
handling of claims procedures, system failures, fraud on the part of insurance agents
and employees, lack of compliance with the provisions of the Insurance Act of 2006,
Act 724 and other regulations constitute operational and legal risks associated with the
provision of insurance services.

4. Methodology
We used both secondary and primary data for our investigation into the risk management
practices of the Ghanaian insurance industry. The secondary data consist of the annual
reports of the CSB of the NIC from 2005 to 2009. The CSB, an organ of the NIC, receives
complaints from the general public against insurance companies concerning various
breaches of the contractual agreements underlying some insurance policies. The reports
of the CSB show how insurers handle some essential risk management issues especially in
the areas of liquidity, operational and legal risks. The key financial indicators of the
 industry as reported by the NIC from 2007 to 2009 will also be used to aid the data Ghanaian
analysis. We selected the three year period of 2007-2009 due to the availability of data. insurance
A questionnaire instrument was used to gather the primary data. In total, 20 insurers
comprising of ten life and ten non-life companies were randomly selected for the sample industry
size. The survey instrument involved both closed-ended and open-ended questionnaires.
The open-ended questionnaire sought to encourage respondents to share as much
information as possible in an unconstrained manner. The closed-ended questionnaire, 35
on the other hand, involved “questions” that could be answered by simply checking a box
or circling the proper response from a set provided by the researcher (Fowler, 1993). While
this method allows for easier analysis of the data due to standardized questions, its
limitation is that it allows the researcher to determine only what the respondents are doing,
not how or why they are doing it. We also pre-tested the survey instruments in order to
fine-tune the final field questionnaire. This is necessary given the sensitive nature of the
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study. A total of nine insurance companies, made up of five life insurance and four non-life
insurance companies completed the questionnaires. This represents a response rate of
45 percent. For the purpose of confidentiality, we have termed the five life insurance
companies as cases A-E. The four non-life insurance companies are also referred to as
cases W-Z. We employed the comparative case methodology in analyzing and discussing
the results of the study in line with the general guidelines of risk management in insurance
companies as outlined by Dowd et al. (2008).
The study compares the risk management strategies of Ghanaian life insurance and
non-life insurance companies. This was done by examining the methods of risk
management as practiced by Ghanaian insurance companies in the light of best practice
risk management such as a clearly defined risk policy by the BOD, an independent RAD,
a clearly stated risk appetite level and the timely communication of risk information to
the BOD (Dowd et al., 2008). This is to determine whether or not the best practice risk
management principles are being applied by these insurance companies which are
established to absorb, cover and manage the risk of others.

5. Discussion of findings
In this section, we discuss the risk management practices in both life insurance and
non-life insurance companies. The discussion is structured under risk management
principles such as risk policy document, risk appetite levels, independent RAD,
reasons for risk management and risk information and reporting. The rest of the
discussion relates to the reports of the CSB and the key financial indicators of the
industry as reported by the NIC.
5.1 Risk policy document
A good risk management system requires the unambiguous setting up of risk management
guidelines in a policy document (risk policy) by a company’s BOD. The risk policy
document outlines the necessary risks to cover, the procedure for underwriting such risks
and the necessary control measures to implement such policies. The results of the survey
showed that 80 percent of the life assurance companies sampled have risk policy documents
clearly laid down by their top managements. This is a good sign because, not only does it
conform to the principles of best practice in risk management but also it protects the
companies against unnecessary risks exposures. Again it facilitates the effective and
efficient underwriting of insurance products in terms of premium setting (pricing).
However, 75 percent of the non-life insurers sampled do not have risk policy documents.
 QRFM This situation, we assume may be due to the “dependence” of some non-life companies on
5,1 their parent life companies for technical and risk management support even though the
insurance law has decoupled all insurance companies. Those who have risk policy
documents are set out by their actuarial departments. This may not ensure effective
compliance. This is because, though the actuarial department is the key underwriting unit
of every insurance company, it may lack the needed authority to ensure that all departments
36 and persons at all levels of the company comply with the laid down risk policies.

5.2 Risk appetite levels

Risk appetite levels enable management to find out the types of risk to avoid, those to
be reduced, the risks to transfer to reinsurers, those to syndicate and the conditions
under which acceptable risks can be underwritten by the company (Cater et al., 2009;
Santomero and Babbel, 1997). The results of the survey showed that there is significant
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difference between life and non-life insurance companies as far as the statement of risk
appetite levels is concerned. All the five life assurance companies have risk appetite or
risk tolerance levels in place. The result of the non-life companies revealed that only
25 percent has risk appetite levels in place. This confirms the above results of their lack
of risk policy document which we consider to be a clear situation of omission, because
in practice an insurer should be able to state its risk appetite in order for it to determine
which risks to cover and those to ignore.

5.3 The independence of the RAD

The principles of effective and efficient risk management demand the establishment of an
independent RAD by every financial institution. The output of the survey indicates that in
the non-life insurance business, 50 percent depend on their risk assessment (actuarial)
departments for their risk analysis and underwriting while the rest make use of their
internal audit departments. In addition, the results[3] showed that the audits units are
used for both risk management (underwriting functions) and for internal auditing of
accounting transactions. Thus, there is no separation between the internal audit unit and
the risk management unit. This arrangement may pose serious challenges for the effective
management of risk. Such arrangement is likely to create serious conflict of interest
situations. For instance, the duty of the internal audit is supposed to be independent and
non-executive, while the duty of the risk assessment (actuarial) department tends to be
executive. We would consent with the FSA (2003) and Dowd et al. (2008) about the doubts
concerning the capacity and skills of a typical internal audit department to undertake an
efficient assessment of underwriting risks, because it may not be well placed to be as
involved as underwriting risk assessment requires. The results further revealed that most
of these actuarial departments do not have their own independent budgets which we
presume may undermine their operational autonomy relative to other departments. Since
insurance companies are the major risk underwriters or managers in the country, it is
expected that their RADs will receive the needed attention in terms of budgetary
allocations, staff strength, skills and qualifications in order for them to meet the
expectations of the stakeholders in the insurance industry.
The results indicate that the set up and characteristics of the RADs of the life
assurance companies are not different from that of the non-life companies. The survey
further revealed that 50 percent of the non-life and 80 percent of the life
insurers depend on chartered accountants and qualified actuaries for their risk
 management, respectively. The usage of qualified actuaries we believe would make Ghanaian
insurers better equipped to undertake effective evaluation and control of risk as well as insurance
the proper validation of the pricing models used by the firms.
industry
5.4 Reasons for risk management
The results of the survey indicate that nearly 89 percent of all the insurers have
compliance to regulations and the need to avoid legal or court actions as the most 37
important reasons for practicing risk management. This finding indicates that most
insurance companies do not manage risk proactively, but they do so reactively just to
meet the prescriptions and guidelines of the NIC. In 2009, five non-life insurers and four
life assurance companies who failed to submit their quarterly returns, annual returns
and actuarial valuation on time to the NIC (2009), were made to pay penalties as
prescribed under the Insurance Law. The commission also took legal actions against
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two insurers due to bad management practices, poor finances and unaudited accounts
(NIC, 2005). These issues suggest that most Ghanaian insurance firms have yet to
appreciate the tremendous value that effective risk management can bring them. These
findings corroborate that of the FSA (2003) and Dowd et al. (2008).

5.5 Risk information reporting

Risk information should be designed to keep top management well informed and
abreast with any serious threats or risks facing the company, so that they can take
timely decisions concerning the management of such risks. The results of the study
indicate that all the non-life insurance companies report risk information to their top
management quarterly whereas those in the life insurance firms do so semi annually.
This difference may be due to the fact that life insurance companies have long-term
investment horizons as against the short term nature of non-life insurance business.
The specific risks faced by both life and non-life firms as shown by the results of the
survey are operational risks, marketing, liquidity and insurance risks. Among these
risks, operational risks received considerable attention in terms of resources from both
life and non-life insurance companies.

5.6 The reports of the CSB

Between 2005 and 2009 an average of 265 complaints were received by the CSB from
the public against many insurers. Table V represents the number of complaints from
2005 to 2009. Majority of the complaints were against non-life insurers especially the
motor insurance sub-sector for reasons such as:

Year Number of complaints

2005 312
2006 262
2007 245
2008 245
2009 260
Total 1,324
Average 264.8 Table V.
Number of complaints
Source: National Insurance Commission Annual Reports against insurers
 QRFM .
repudiation of claims by insurers;
5,1 .
delay in settlement of claims;
.
dispute over quantum of claims; and
.
delay in payment of settled claims (NIC, 2008).

38 The reasons cited for the complaints against life insurance companies were:
.
differences between benefits promised by insurers and what is stated on policy
documents;
. insurance company’s failure to cease deductions after policy had been
surrendered;
.
payment of low surrender values;
delay in processing matured policies for payment;
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.
delay in returning refund of wrongful deductions;
.
unauthorized premium deductions; and
.
period of surrender value (NIC, 2009).

The CSB also dealt with inter-industry complaints referred to it and special complaints
from staff against management, insurance companies against insurance brokers and
vice versa. These many complaints and the reasons assigned to them suggest that the
industry is having serious challenges in the management of operational, liquidity and
legal risks. Much of the complaints against the non-life companies indicate ineffective
management of claims. This operational handicap (ineffective management of
operational risk), may be due to the inadequacy of qualified personnel in the industry
as discussed above. With regards to liquidity risk, the pertinent question we will like to
ask is this: are the delays in paying claims and the unauthorized deductions of premiums
“deliberate tactics” for addressing liquidity challenges?

5.7 Key financial indicators of the industry

The NIC uses key financial ratios to analyze and monitor the financial health of the
industry and risk management practices among insurers. Three of these financial
ratios are: the claims ratio, retention ratio and outstanding premiums ratio. These are
discussed in turns.
The claims ratio. It is used to measure underwriting efficiency. The claims ratio is
the percentage of claims incurred to gross premiums. It indicates the part of the gross
premium that is available to contribute towards profits. That is, underwriting profits
as a percentage of gross premiums (NIC, 2009). The lower the ratio, the better the
underwriting efficiency. For life insurers, claims include maturities, surrenders and
withdrawals (NIC, 2007). The average claims, retention and premiums outstanding
ratios for the industry are shown in Table VI.
The claims ratios for both sectors have been rising steadily over the years. However,
the increases in the claims ratio for life companies are almost twice that of the non-life
companies for each of the years under consideration. This may be due to high
surrender and withdrawal rates, under-pricing or excessive expenditure by life
companies. According to the NIC (2008, p. 25):
 Almost all the Life companies made underwriting losses in both 2007 and 2008. Ghanaian
This underscores the utmost importance of ensuring the adequacy and efficient management
of investments by life insurance companies. insurance
industry
It is important to point out that under-pricing and underwriting losses indicate poor
management of actuarial risks.
Retention ratio. The retention ratio indicates the part of the underwritten risks which
was not syndicated or transferred to reinsurers. It is a risk management parameter 39
meant for the evaluation of the percentage of net premiums to gross premiums. Apart
from one company, all the other life insurers reinsured less than 10 percent of their
business from 2007 to 2009. This has contributed to the high retention rate of 96 percent
in the industry. The lower levels of reinsured life businesses may be due to the fact that
the average amount insured per policy is quite low and thus can be retained (NIC, 2008).
There is however the need to ensure that insurers do not take on so much unnecessary
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risks. This is because, it can lead to insolvency in an event of a natural catastrophe

which may result in unexpected massive policy withdrawals or cluster claims. We thus
agree with the NIC (2008) that risk aggregation and concentration need to be checked.
Although the retention rate of the non-life companies recorded a significant leap of
10 percentage points between 2008 and 2009, it was quite lower than that of life insurers.
However, a sizeable minority of the non-life insurers recorded very low retention rate
between 9 and 22 percent. In as much as we agree that an insurer should cede some (about
40 percent) of its business to a reinsurer, it is a clear sign of lack of prudence and improper
risk management for an insurer to transfer as high as 91 percent of its business to a
reinsurance firm.
Outstanding premiums. This is used to measure the efficiency of management in
terms of premium debts collection and thus a parameter for credit risks management. It
compares outstanding premiums as at the end of the year to the total premiums written
during the year. The industry average rate recorded a remarkable increase of 34 percent
in 2007 to 44 percent in 2009. In 2009, as many as seven non-life insurers and two
reinsurers recorded premium outstanding ratios in excess of 50 percent. This shows
that more than half of the gross premiums written in 2009 were outstanding as at the
end of the year (NIC, 2009). According to industry experts, the rapid deterioration in the
industry’s credit risk management which is adversely affecting the profitability and
solvency status of some insurers is being fuel by the growing competition in the
industry (NIC, 2008). According to the NIC (2008, p. 50), “this makes the management of
credit risk one of the major issues for Ghanaian insurance companies”.

Type of ratio Life insurance Non-life insurance

Years 2007 2008 2009 2007 2008 2009

Claims ratio (%) 31 36 39 16 17 18

Retention ratio (%) 98 96 96 64 62 72
Premiums outstandinga (%) – – – 34 43 44 Table VI.
The industry average
Note: aLife insurers do not have outstanding premiums because hardly do they sell life products on claims, retention
credit basis and premium
Source: NIC (2009) outstanding ratios
 QRFM 6. Conclusion and implications
5,1 This study investigated the state of risk management in the Ghanaian insurance
industry. The results of the study revealed some differences and similarities in the risk
management practices of life and non-life insurance firms. The setting up of risk policy
documents and risk appetite levels by the life insurers is a sign of good risk management
systems. However, the absence of such policy documents in the non-life companies may
40 militate against effective underwriting of risks in terms of what risk to cover, what to
reinsure and what to avoid entirely. This may explain the low retention rate of about
9 percent and the high premium outstanding ratios among some non-life companies.
The findings also indicated that some of the firms in both life business and non-life
operations do not have independent risk assessment units. Many of them depend on
their internal audit units for the assessment and the underwriting of risks. This may lead
to conflict of interest and ineffective management of risks. The study further revealed
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that the industry lacks sufficient personnel with the requisite risk management skills.
The inadequate actuaries in the industry may explain the reliance on chartered
accountants for the management of risks in the non-life insurance companies. It is
however interesting to note that the NIC is working hard to address this shortfall in the
man power needs of the industry through the Insurance Industry Training Centre, the
Ghana Insurance College and collaboration with some universities in Ghana.
The high rate of complaints against insurers as reported by the CSB has two
implications. The first is the possible creation of negative perception by the public about
the activities of insurance companies. Such negative perception has the tendency of
affecting the already low rate of insurance penetration in Ghana. Second, it implies that
some insurers are not managing their operational risk well. This may be the reason for the
rising rate of claims and the high underwriting losses in both life and non-life companies.
The findings of the study also showed that, much of the drive towards risk
management in the insurance industry is a reactive response to the regulatory directives
of the NIC, rather than self-driven. This implies that some insurers are yet to appreciate
the value of instituting self-driven risk management practices. Taking a reactive
approach to risk management simply makes risk management a mere exercise in
regulatory compliance and this has the tendency of adversely affecting an insurer’s
growth in terms of market share and profitability. It is therefore imperative for Ghanaian
insurance firms to take a more proactive approach in the management of risk.

Notes
1. The GDP growth rate of Ghana is expected to be between 12 and 14 percent for 2011.
2. The exchange rate risk affects most Ghanaian insurance companies which have contracts
with foreign reinsurance companies.
3. For those who use the internal audit units.

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About the authors

Joseph Oscar Akotey is a Lecturer and Researcher in Finance, Risk management and Insurance
at the Catholic University College of Ghana.
Joshua Abor is the Vice Dean and a Professor of Finance at the University of Ghana Business
School. He is also a Researcher with the African Economic Research Consortium.

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