Domestic Debt Exchange Programme: Impact on insurance companies minimal — Insurance Commissioner

The impact of implementing the government’s domestic debt exchange programme (DDEP) on the stated capital of insurance companies in the country is not as bad as earlier anticipated.

However, the companies which suffered a hit from the DDEP have up to two years to recover from the losses and impairment.

They have two options: first, to return to their shareholders for recapitalisation or, to fall on the yet-to-be-established Financial Stability Fund for support.

Responding to a question from the Graphic Business at the just-ended International Conference on Inclusive Insurance in Accra in what is expected to restore confidence in the sector, the acting Commissioner of Insurance, Michael Andoh, did not immediately provide figures to support his claim, except to say that the National Insurance Commission (NIC) was confident the affected insurance companies would recover within the two-year time frame.

“We had some projections before the exercise; and after the exercise, what we saw was not as bad as anticipated,” he stated.

DDEP impact

The first phase of the domestic debt restructuring exercise saw the government swap old bonds valued at GH¢82 billion for 12 new ones at lower coupon rates and longer tenors hit hard at the financial sector, and the insurance industry was no exception.

Before the exercise, there were fears that it would bring the insurance industry to its knees, considering that the sector had 40 per cent of its investments in government securities.

Data available to the Graphic Business indicated that the industry had 40 per cent of its investments, which amounted to GH¢4.6 billion, directly exposed to government securities, with an additional 10 per cent invested in licensed banks and fund managers.

For an industry which pays about GH¢4.3 million claims daily, the attempt to restructure the government’s debt owed to them unsettled a lot of players, who made numerous calls for the insurance industry to be exempted from the exercise.

Impact not as bad as feared

However, following the completion of the exercise, Mr Andoh said the impact was not as bad as feared.

He said although the exercise had affected the capital of some of the companies, the commission was hopeful that the yet-to-be-operationalised Financial Stability Fund would help the companies that fall on it to recapitalise.

Financial Stability Fund

To help cushion financial institutions affected by the DDEP, the government announced the Financial Stability Fund, with an initial amount of US$750 million to provide recapitalisation support to financial institutions whose stated capital has been impaired.

Mr Andoh said for insurance for 2023 and 2024, the affected insurance companies have the latitude to recover from whatever losses that they may have incurred.

“Available data for quarters one and two suggests the industry is recovering. There are some companies that we thought were going to get into a worse situation but we have seen a lot of recovery,” he stated.

Underwriting losses

The Commissioner of Insurance also noted that one thing that had come to the attention of the commission was that a lot of the companies tend to be making underwriting losses and have been depending on investment income from government securities to break even and make a profit.

He said with the whole purpose of the DDEP being to lower interest rates, insurance companies cannot continue relying on investment income.

“So we are taking a strategic approach to address the underwriting losses to ensure that there is sustainability in the industry,” he said.

Recapitalisation

It will be recalled that the NIC in June 2019 announced a new capital requirement for insurance companies operating in the country after a series of consultations and discussions with the industry players.

The stated capital for life and non-life insurance companies moved from GH¢15 million to GH¢50 million, with that of reinsurance companies also moving from GH¢40 million to GH¢125 million.

Insurance broking companies had their stated capitals also increased from GH¢300,000 to GH¢500,000 while that of reinsurance broking companies was maintained at GH¢1 million.

All the companies were expected to meet this new requirement by June 30, 2021. However, six months to the deadline, the NIC extended the deadline to January 2020 due to the COVID-19 pandemic and its effects on the industry.

Despite the deadline elapsing over a year ago, the NIC is yet to make any official comment on the exercise, as to which companies were able to recapitalise and those who failed to do so.

The DDEP, however, appears to have given a lifeline to the companies that failed to recapitalise last year, as they now have two more years to meet the deadline.