Who insures insurance companies?

‘It is only prudent to hold on to the shoulders of others else life’s storm may carry us away’ – Author

Three years on and the memories of the devastating firefloods of June 3, 2015 are beginning to fade from our minds, somehow. At the time, the dilemma of many Ghanaians regarding the capacity of our insurers to adequately honour the claims arising thereon came to the fore. Industry pundits expressed confidence in the ability of insurers to honour the claims, since almost every insurance company had also reinsured the risks they underwrote prior to the tragedy.

Indeed this write-up is not only to assess claims paid in respect of the disaster and what percentage of that was the contribution of reinsurance companies in Ghana and how they came in strongly to support insurance companies to compensate victims but it is also to understand the concept of reinsurance.

Understanding Reinsurance

As insurers accept risks and share same with other insurers and reinsurers, a sense of security and peace of mind is established, since some losses could be beyond the reach of individual insurers. In spite of the fact that insurers often base their businesses on calculated predictions, certain occasions require the sharing of risks. A reinsurer therefore becomes an eminent partner. Typically, the risk transfer mechanism may be adopted on account of the following:

1.     Insurer wants to venture into new risks;

2.     Insurer is faced with risks larger than own capacity; and

3.     Insurer wants to protect own business portfolios.

Meanwhile, the premium kept by the insurer is called retention and what is given out to the reinsurer is called cession; thus, making the insurer the ceding party transferring part of the accepted risk to the reinsurer. Similarly, reinsurers may also transfer part of their risks to the third level of insurance called retrocession. In reinsurance arrangements, the client is usually not privy to this arrangement between the insurer and the reinsurer. The client is only settled by the insurer on the full value of the risk in the event of a claim. The insurer then falls on the reinsurer to pay its share of the claim amount, as previously agreed upon.

Benefits of Reinsurance

The following are some essential benefits of reinsuring risks:

1.     Catastrophe/Solvency Margins:- Since insurers are not immune from catastrophes, which could lead to insolvency, the purchase of surplus relief insurance therefore, allows companies to accept new clients and avoid the need to raise additional capital.

2.     Capital Management/Stability:- Insurers typically concern themselves about avoiding fluctuation in claims costs, as they often have debilitating effects on the companies’ sustenance.   Insurers can, therefore, avoid this phenomenon by passing / sharing risks to free up excess capital.

3.     Capacity:- Suffice it to say, some risks may be bigger than the capacity of an individual insurer; thereby leading to some risks either being turned down or partly accepted. Reinsurance therefore, helps in large risks mitigation, as the risks would be shared between the partnering companies.

4.     Security:- If buying insurance gives clients peace of mind, then, reinsuring the same risk gives the insurer peace of mind, as the insurer has a relief from the uncertainties of losses.

5.     Macro Advantages– The impact of losses does not rest on one economy, as the cost of the risk is spread around the market place and across the world.

The Reinsurance Market Space

The main players in the reinsurance market space include brokers, insurers and reinsurers themselves. In some jurisdictions, reinsurance arrangements are facilitated by brokers, who would, typically, arrange a relationship between an insurer and the reinsurer. The following are two main forms of reinsurance arrangements:

1.     Facultative reinsurance:- Where risks are offered on a one-off basis and it is up to the reinsurer to accept the risk or not based on factors such as history of the insurer and/or client. This arrangement is however, associated with high cost.

2.     Treaty reinsurance:- In this insurer-reinsurer relationship, risks are proportionately ceded to the reinsurer; hence, the reinsurer has no right to decline any risks and the insurer cannot also be selective in the types of risks to cede. Indeed, the reinsurer necessarily accepts all the risks without an option; thus, relieving the insurer of the challenges in arranging such partnerships on case-by-case basis. This is similar to the case of a standing order arrangement with a bank, as against, frequently issuing cheques. A good balance is therefore expected of the reinsurer in order that it will continue to be in business.

Meanwhile, reinsurance may also be taken where multiple insurers share common risks. This further limits the claims obligations on individual companies. In this regard, insurers may have the luxury to take on risks larger than they could individually handle, since they could share both the risks and premiums with other insurers.

Reinsurance Companies

In Ghana, the three known reinsurance companies are the Ghana Reinsurance Company, Mainstream Reinsurance Company and GN Reinsurance Company. Traditionally, Mainstream and Ghana Reinsurance companies enjoyed a duopoly, until the advent of GN Reinsurance. Insurance companies in Ghana therefore have the luxury of sharing risks with either of these three companies or some others outside the country. It is worthy to note that Ghana Re, for instance, operates across the Continent through its Kenya and Cameroon Offices.

Other notable reinsurers in Africa are Continental Reinsurance, Africa Reinsurance and WAICA Re and all of these possess the endowed capacity to absorb huge risks and honour claims in the event of losses.

Meanwhile, some of the world’s most renowned reinsurers include Hanover Re, Munich Re and Swiss Re.

June 3 Claims Paid By Insurers and Reinsurers

In lieu of available current data, it is confidence-boosting to know that as of May 2016, over GHC236million, US$25million and EUR453,000 have been paid in claims by insurance companies from the June 3 flood fire alone. This is enough to bring insurance companies down on their knees but for reinsurance arrangements prior.

Out of this amount, the contribution of reinsurance companies to these claims paid amounted to over GHC100 million and still counting.

The Way Forward

In order to enhance local capacity however, insurers are encouraged to exhaust the local content before seeking external partnerships. This would help address the issue of some insurers and brokers placing businesses overseas, without exhausting the local capacity.

Apart from concerns of developing our local economy, suffice it to say, our local reinsurers have the capacity to handle most risks presented to them.