Underwriting losses and declining investment yields pose risks to profitability within the insurance industry, a Bank of Ghana report has revealed.
For both life insurance and nonlife insurance companies, the combination of weak underwriting performance and declining investment income has led to a reduction in Return on Equity, the Central Bank’s Financial Stability report indicated.
“Given the general decline in investment income and underwriting losses, there is the need for insurers to strengthen their cost control measures, deal with underpricing issues and adjust business models to address underwriting losses”, it mentioned.
It however expects the introduction of the new minimum capital regime will help improve efficiencies through consolidation.
It said declining investment yields in the presence of weak underwriting performance is gradually reinforcing an investment strategy shift towards investment properties.
The assets of the insurance sector continues to be concentrated in fixed income securities particularly fixed income instruments such as fixed deposits, treasury instruments and Bank of Ghana securities.
Amidst persistent underwriting losses, the report said investment income continues to play a pivotal role in the near to medium term sustainability of the insurance sector.
To optimise returns on investment and maintain profit margins, it advised insurers in response to investment losses to gradually readjust their investment portfolio in favour of investment properties.
A rapid change in the prices of investment properties can also impact the profitability of the insurance sector.
The report stated in addition, to preserving investment income, there is the need for government to enhance policy in order to expand the bond market as an alternative investment option to investors, including insurers.