The contribution of reinsurance to June 3 claims
Two years on, and the memories of the devastating fire/floods 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.
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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 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.
Why reinsurance?
For reinsurance, an insurer would, typically, pay a percentage of premiums received on a particular risk to a specialised company called a reinsurer in order to share the risk, so that in the event of loss/damage, both the insurer and reinsurer would contribute to the claim, based on their proportion of premium received and shared.
Claims paid by insurers and reinsurers
In spite of the unavailability of current data, it is confidence boosting to know that as of May 2016, over GH¢236 million, US$25 million and EUR453,000 had been paid in claims by insurance companies from the June 3 disaster 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 GH¢100 million and still counting.
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:
- Insurer wants to venture into new risks
- Insurer is faced with risks larger than own capacity and
- 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 among themselves (reinsurers). 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:
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.
- Capital Management /Stability:- Insurers typically concern themselves with 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.
- 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.
- 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.
- 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 place 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:
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.
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 so 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
In Ghana, the three known local 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 any of these three companies or some other foreign-based ones with their offices now in Ghana, including WAICA Re.
Meanwhile, some of the world’s most renowned reinsurers include Hanover Re, Munich Re and Swiss Re, all with endowed capacity to absorb huge risks and honour claims in the event of losses.
The way forward
Every individual and business entity have an equal responsibility to always take self precaution (e.g. insurance) as this will not only provide them protection or security against unexpected losses, but also the peace of mind to focus on other aspects of life and their business interests.
If there is any lesson to learn from the June 3 disaster and corresponding claims paid so far, it would be that of a good one for those who had insurance policies on themselves and an unfortunate one for those who did not!
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 and for that matter the insuring public can go to sleep and rest assured that no matter the extent of any potential disaster, adequate provisions have been made through reinsurance to absorb the shocks!
The insuring public must ensure that their insurance policies remain in force at all times to avoid claim repudiation. It is good to learn that the aftermath of this has led to many businesses getting insured. Life can take us by surprise no matter how careful we are.
Until next week: “This is insurance from the eyes of my mind.”