Local insurance cover for marine cargoes: The new regime

Finally, after decades of wrangling and the passing of three versions of the Insurance Act that governs how insurance is provided in Ghana – each an upgrade of the previous law – local marine cargo insurance has been made compulsory, not just with regards to the letter of the law, but also with regards to actual practice.

This is a major victory for Ghana’s general (non-life) insurance industry which has championed advocacy for the effective enforcement of compulsory local cover for marine cargos over the past two decades.

Until early this year their victories were pyric at best; while insurance regulations insisted on local insurance cover for incoming cargoes, those regulations, without a definitive law to back them up, provided lots of leeway for importers to bring in their goods already insured from where they were imported.

No longer – effective from February this year, any cargo imported into Ghana on Cost, Insurance and Freight (CIF) basis will still have to be given insurance cover by an underwriter licensed by the National Insurance Commission, for it to be allowed through the port of entry.

This means it makes complete sense for importers to bring in their goods on Free On Board (FOB) basis uninsured from abroad, but rather insured from here in Ghana.

The insurance companies have every reason to celebrate the new dispensation, given legal status by Section 222 of the current Insurance Law in force – Act 1061.

But they are by no means the only beneficiaries; importers and the national economy stand to gain immensely too. In fact the most curious aspect of the entire legal change is why it took so long to implement. As one insurance industry chieftain succinctly puts it ‘Common sense has finally prevailed.”

Marine insurance is the oldest form of insurance cover in Ghana, dating back to the beginning of the previous century as evidenced by the Marine Insurance Act of 1906.

Economies around the world benefit immensely from marine insurance activities (both cargo and hull) with respect to both enhanced trade risk management and mobilization of investible capital which translates into bigger economic growth and job creation.

But hitherto, Ghana has been left behind in all this. There are no indigenous shipping lines since the state owned Black Star Line collapsed over two decades ago and indeed there are no sizeable  commercial ships flying the Ghanaian flag which means there is no marine hull insurance activity.

More tellingly, despite the fact that the national economy is inordinately import dependent, most imports have been insured in the countries from where they are sourced, depriving the country of the benefits of marine cargo insurance too.

Import statistics for 2018 and 2019, for instance, show that out of the total imports of GH¢62 billion and GH¢77 billion respectively, only GH¢4 billion (seven per cent of the total) and GH¢4.5 billion (65 of the total) respectively were insured locally.

This is because most of these cargoes have been imported on CIF basis contrary to the statutory requirement to insure locally.

These circumstances, and concerns raised by the Ghana Revenue Authority Customs Division about the wide variations in the marine cargo rates by local insurers and the absence of minimum requirements combined to persuade insurance industry stakeholders to constitute a seven-member committee to draw up a framework to rectify these shortcomings.  

The committee, inaugurated in December 2020 comprised: Mrs Mercy Boampong, CEO of Serene Insurance - but at that time an executive at Enterprise Insurance - as its Chairperson; Elliot Honu of SIC Insurance; Fifi Blankson of Activa International Insurance; Aiphonse Quainoo  and Joseph Allan, both of the Ghana Revenue Authority’s Customs Division;  and both Ansong Dankyi and Mrs Eugenia Ofori Apeagyei of the NIC.

The framework and procedures for compulsory local insurance of marine cargoes has the potential to be a game changer for Ghana’s non-life insurers, as it has the potential to increase their premium incomes from that class of their business lines more than tenfold. This could translate into a small fortune. 

For instance, in 2022 Glico-General was Ghana’s biggest gross premium earner from marine cargo, generating GH¢41.022 million.

Conceivably the company could thus make as much as GH¢400 million a year going forward if it can retain its current market share.

Similar upward potentials face the other insurers in the top five gross premium earners from marine cargo insurance in 2022: Enterprise Insurance was second with GH¢29.108 million, SIC Insurance was third with 16.422 million; Activa Insurance fourth with GH¢8.641 million; and Hollard Insurance was fifth with GH¢8.488 million.

The rest of the industry stand to grow their gross premiums in similar fashion and this will give impetus for much fiercer competition for business in this class of insurance lines than ever before.

Crucially this also means the potential for ten times as much industry wide premium income being retained in Ghana for investment into economic growth generating activities accompanied by job creation, which hitherto has been repatriated abroad, having been embedded in the import cost paid to foreign suppliers and which has therefore gone into economic growth and employment in those foreign countries.

Ghana’s importers themselves will be better off too.  By importing goods Free on Board (FOB) and taking local insurance cover they need lower foreign exchange outlay than if they imported the same goods from the same supplier on CIF basis.

Just as importantly, if anything goes wrong it is easier pursuing claims from a local insurer than from a foreign insurer based in the far away country from which the goods were bought in the first place.

Actually, some importers may still have lingering fears about the capacity or sheer willingness of local insurers to pay up when genuine claims arise. But such fears are   misplaced and indeed have receded in recent times.

Over the past two decades, a combination of stronger capitalization of local insurance companies, better risk management and wider corporate governance, and most importantly, better regulation of their activities by the NIC have minimised sharp practices by insurers to evade claims payments and indeed the newer generations of shippers are not even aware that their used to be a time when such unfair claims repudiation by insurers in Ghana was commonplace.

But most crucially, based on the recommendations of the committee, a framework for marine cargo insurance in Ghana has been put in place which is fair to all parties involved, spelling out the obligations, responsibilities and rights of all counterparties and their agents as well as the duties and powers of the NIC as the industry regulator.

This is the result of the comprehensive work done by the committee which was tasked to determine minimum standards and requirements for the various classes of marine cargo insurance that will make it easier for customs officials to access the adequacy of insurance covers for the calculation of duties; to recommend minimum premium rates for marine cargo insurance for the NIC’s review and approval; and to propose modalities for the implementation of all this within the framework of the cargo insurance protocol.

Crucially, the framework which has emerged from the committee’s work has the willing support and approval of all the various stakeholder groups and is based on international best practice adapted to already existing procedures locally, offering precise standardised documentation that ensures compliance within a level playing field.

To achieve this the committee made reference to the existing minimum ratings of the NIC and Ghana Reinsurance Company, which it then modified for the product classification with respect to the appropriate risk types.

It also reviewed the Marine Cargo Insurance Proposal Forms of selected industry leading insurance companies in order to develop a standardized form.

A similar review was done to harmonize the marine cargo certificates for the three institute cargo classes. Tailor made Marine Cargo Claims Guidelines have also been crafted out of the already existing NIC General Claims Guidelines. 

The committee reviewed the ratings for cargo insurance carried by both air and sea and consequently drafted a comprehensive ratings guide to cover the various cargo risk types which set out the minimum allowable premium rates for the listed categories.

Importantly, the rates are inclusive of war, strike, riot and civil commotion thus providing comprehensive, port to port cover. 

The committee also reviewed the loadings for inland transit and transshipments, which enabled it to establish minimum premium rates which take into consideration the existing NIC approved rates for cargo.

In drafting the processes, procedures and documentation, extensive stakeholder engagements were done to bring everyone on the same page by considering their perspectives, needs and challenges, while best practices used successfully in similar economies to Ghana’s were considered and where useful, incorporated into the new framework.

Practices in Nigeria, Kenya and Uganda among others were considered and the best ones were adopted for Ghana’s framework.

At the same time extensive engagements and consultations were done with key stakeholder such as the Ghana Union of Traders Associations (GUTA) freight forwarders, importers and exporters to gain further insights into their patronage of local marine insurance cover.

The resultant framework is most comprehensive, covering air cargoes as well as freight carried by ocean going vessels, and covering both transshipments and internal transit within Ghana, thus covering the importers risk from port of exit to the client’s goods final destination.

Premium computations are set out clearly differentiating premiums payable for international shipping, transhipments en-route to Ghana and those covering the internal transportation of goods from the port of entry to the final destination.

A range has been set for premiums for cover of inland transit risk, the premium rate actually applicable for each transaction depending on the distance.  There is also a fixed GH¢100 levy for each cargo import development and maintenance of software.

Indeed, information and communications technology plays a pivotal role in how the new system will work.

Based on the recommendations of the Committee, the Ghana Revenue Authority’s Customs Division has been tasked with responsibility for deploying a Marine Insurance Database to facilitate validation of Marine Cargo Insurance Certificates and ultimately for digitizing those certificates issued to enhance efficiency and confidence in the system.

Particular emphasis is placed on guidelines for claims management which will be most reassuring for importers, many of whom have been using highly reputable global insurers through their suppliers but now have to turn to relatively smaller – and in many cases younger - local insurers.

Indeed the need for stand-alone cargo claims guidelines  was necessitated by requests from various stakeholders  for a document that speaks  to clear timelines and procedures  in relation to cargo claims.

These guidelines are specific to cargo claims (air, sea and inland transit) and relate more specifically to timelines for settlement and payment of claims. They also provide detailed requirements for dealing with cargo claims.

The guidelines insist that insurers must include in their policy documents directives and instructions as to what a claimant should do in the event of a loss including timely indication of a claim and a list of the documents to be submitted for the claim to be processed.

The guidelines also insist that the insurers must inform the claimant about the process to be followed and the timelines to be kept. Maximum timelines for claims processing and ultimate payment are included.

The guidelines also establish the process for resolution of disputes through the NIC over contested claims.

Among other things the guidelines dictate that notification of a claim must be made to the insurer within 60 days of the discharge of the cargo.

However, if this timeline is exceeded the insurer cannot automatically repudiate the claim consequently; rather the insurer has to ascertain the reason for the delay and determine if there was just cause. 

Another clause is that if the claimant gives notification of a claim verbally it must be followed by a formal written notification for the clock to start running.

Indeed, the clock for claims processing and payment only starts running when full documentation has been provided by the claimant.

Here the regulations have established the documentation that is required by a claimant to back a claim. The insurer can investigate the claim itself or contract an expert to do it.

Where a claimant informs its insurance broker of a claim the broker must inform the underwriter for the clock to start running.

The insurer must keep the claimant informed of the status of the claim and progress made in the processing on demand while processing is ongoing. This includes providing the claimant with a copy of any claims assessment report generated by or on behalf of the insurer, if the claimant demands for it.

The insurer is required to determine liability on a claim within 10 working days of receiving full documentation from the claimant.

Where the claim is rejected the insurer shall inform the claimant within five working days, giving reasons for the repudiation.

Where the claim is accepted the insurer has a maximum of three working days to compute the claim and issue a discharge form after which it has another five working days to actually pay the claim.

Similarly, after the acceptance of the underwriter’s claim by the reinsurer, the latter also has five working days to pay the underwriter its share of the liability created by the claim.

Under the new framework, an insurer must have a documented system and procedure for receiving, registering and resolving complaints in each of its offices.

This must include a system to deal with all sorts of complaints, including complaints on claims management processes, systems and procedures as well as the actual outcomes of claims investigations and assessments.

When a claimant makes a complaint, the insurer is obliged to provide the claimant with regular updates as to its progress.

Of course not all complaints can be settled to the satisfaction of the claimant.  The new framework for cargo insurance provides a system that would save claimants from going into expensive and time consuming court cases when a complainant is not satisfied with the insurer’s verdict on a complaint.

If the complainant is not satisfied with an insurer’s response, the insurer is obliged to advise the complainant to take the matter to the NIC as the industry regulator.

The NIC has the authority to reassess the complaint and pass judgment.  

While this is not an ultimate arbitration, in the cases of complaints received by the NIC regarding disputes over contracts concerning other lines of insurance cover, both parties tend to accept its verdict rather than proceed to court, even if still not satisfied, since the Commission is recognized as a fair and unbiased arbiter whose verdicts on such complaints are completely in keeping with the law; therefore, a court would be very unlikely to judge any differently.

Sanctions

To complete the new framework, it sets out the sanctions to be imposed on an insurer that fails or refuses to comply with the Cargo Claims Guidelines. Any such insurer would be subject to any or all of the following sanctions: 

• Payment of the claim plus an additional 5 per cent cost;

• Payment of the claim in full without the insurer’s right to enforce the excess/deductible amount as would normally have been allowed under the terms of a standard marine cargo insurance contract.

• Any other sanction that the NIC may deem fit.

Finally, the framework sets an ultimate deadline for the process leading up to the payment of a marine cargo claim, which is six weeks from the date when all the requisite documents backing a claim had been submitted by the claimant.

However, this could be exceeded without regulatory sanctions by the NIC if the peculiar circumstances surrounding the claim and its nature are recognized by the regulator as requiring more time.

In such situations the NIC could grant an agreed extra amount of time with the claimant being informed of the situation and the consequent time extension for the payment of the claim.

Continuous engagement

Even with the new framework now having full legal backing as contained in section 222 of Act 1061, which is the current Insurance Act in force in Ghana, the NIC , primary insurance companies underwriting marine cargo insurance, insurance brokers , and other professional firms involved in the delivery of marine cargo insurance have been tasked to engage in continuous engagements with key stakeholders, to ensure that everyone remains on the same page and to identify issues of potential contention before they actually arise.

To this end, several key stakeholders have been identified for such continuous engagement with the insurance industry. 

These include: The African Continental Free Trade Area (AfCFTA) secretariat; the Association of Ghana Industries; the Ghana Association of Bankers; the Bank of Ghana; Ghana Institute of Freight Forwarders; Ghana Ports and Harbours Authority; and Ghana Union of Traders Associations.

These organizations - and a few similar ones – cover the shippers who import goods into Ghana, the enterprises that facilitate the financial aspects of international trade and their regulator, the enterprises that handle the actual logistics required in executing international trade and the facilities through which the goods are brought into Ghana.

But a particularly interesting identified key stakeholder is the AfCFTA secretariat which conveniently is located in Accra. 

In terms of the general population within it, AfCFTA is the largest free trade area in the world - although not of course by economic value of the area encompassed nor value of international trade conducted within it. 

However, arguably the biggest challenge facing the pan continental free trade area, apart from the severe inadequacy of intra African freight transportation infrastructure and capacity, is the flakiness of confidence in each other among African producers and traders capable of engaging in cross border trade with each other. 

Risk Management

A strong framework for risk management available to international traders operating from Ghana, as established by the new marine cargo insurance framework, should serve to strengthen their confidence, encouraging them to try and make the most of the huge business opportunities thrown up from being part of  a pan African preferential trade area. 

Indeed, hitherto many importers in Ghana have accepted to bring in goods on CIF basis because of their trust in the foreign insurers in well developed insurance jurisdictions in Europe, the Americas, Asia, the Middle East and Australasia, who had provided cover even before the goods had passed through the suppliers factory gates.

However that confidence does not necessarily extend to insurers in fellow African countries – especially in those countries where insurance is still not very well regulated and insurers are undercapitalized - and this may have provided a stumbling block with regards to the confidence of Ghanaian enterprises seeking to import goods from such countries. 

With the new compulsory local insurance of marine cargoes however, within a very well structured framework applied to a local insurance industry that is well regulated and whose underwriters have recently undergone a 2333 per cent increase in minimum capital requirements that has made them more than adequately capitalized, those importers can now engage in trade with their African neighbours knowing that their international trade risks are adequately covered.

Other benefits

This is just one of the many pivotal advantages that compulsory local marine cargo insurance is bringing to Ghana.

For shippers – most of whom are used to importing goods on CIF basis rather than FOB basis – obtaining insurance cover for their goods from local insurers by they themselves, rather than from foreign insurers contracted by their foreign trade counterparties, is a huge step in a new direction.

However, they have been assured that it is well worth the effort and they have been told the truth; if claims do arise, they are far better placed to pursue their claims from an insurer domiciled within the same country where they operate from than to pursue their claims from a foreign based insurer that they did not even secure their cover from directly.

But the gains of the local insurance industry and the national economy as a whole are even bigger still.

Indeed for the local insurance industry this is a total game changer. It holds the potential to increase the contributions of marine cargo insurance to overall premiums from slightly less than just five per cent as at 2022 to as much as 40 per cent within the next couple of years, increasing the industry’s annual gross premiums by  well over GH¢1 billion.

To be sure it will also increase their total potential liabilities in commensurate fashion but the recent recapitalization of the industry puts them in much better stead to meet claims than ever before, not just with regards to marine cargo insurance cover provided, but indeed all classes of insurance cover provided clients.

Profitability

Besides marine cargo insurance has proved to be strongly profitable for Ghana’s non-oil insurance industry over the years, which indeed is why they have pushed for the enforcement of compulsory local cover so determinedly.

However, to maximize the potentials that the new dispensation now offers, insurers offering marine cargo insurance – which means all of the general insurance companies in Ghana – would do well to take deliberate steps to enhance their underwriting capacities for this class of insurance.

While their current technical capacities may be adequate the sheer increase in business volumes that are being unleashed means that local insurers will have to increase the number of underwriting professionals allocated to marine insurers as well as claims management professionals and the requisite support staff.  

Without this they may be faced with more business than they can handle and consequently would have to start refusing good business propositions.

The size of the new market being made available to them is huge but the insurers who will gain the most from it are those who are able to increase their market share.

This means considerable more effort will have to go into intensifying marketing efforts and enhancing the quality of customer service to retain the increased clientele base that enhanced marketing efforts would attract. 

Some potential benefits to Ghana’s insurance industry may be less obvious but are nonetheless no less tangible.

For instance all those new clients who will sign up for marine cargo insurance will also become targets for other classes of insurance including life and group life insurance.

Unlike in the case of the recent recapitalization of the financial intermediation industry, which was done to provide adequate buffers against loan losses and thus protect customers savings and investments, the similar 233 per cent increase in the minimum capital requirements for primary insurance underwriters, which was completed last year, aimed to enable them retain more business in-house since they had prudently been ceding an inordinately large proportion of their premium income to reinsurers because their capitalization levels persuaded them to pass on a lot of the risk – much of it this going abroad and thus costing the country direly needed foreign exchange. 

Conclusion

The new dispensation of compulsory local marine cargo insurance cover will save Ghana considerable forex too, since insurance premiums will now be paid to locally domiciled insurers rather than to their foreign domiciled counterparts who have been providing the insurance cover on Ghanaian imports on CIF basis.

Apart from this crucial forex aspect, bigger premiums accruing to local insurers will help to create a bigger pool of investible funds than hitherto has been the case.

Insurance funds are among the biggest and thus most important sources of such investible funds so the inevitable dramatic increase in premiums accruing to local insurers will be absolutely pivotal towards financing economic activity in Ghana. In turn this will help facilitate the creation of direly needed jobs, across all the other sectors of the economy in addition to those that will be created in the non-life insurance industry itself.

Ghana’s non-life insurance industry is nowhere near as glamorous as its banking counterpart and so major changes in the size and structure of the industry tends to go largely under the radar of the general public unlike similar changes in the banking industry which are put under the bright public spotlight.

The changes being brought about by the enforcement of compulsory marine cargo insurance will be huge but will also go largely un-noticed by most Ghanaians.

But this takes nothing away from the monumental impacts that it will generate.  

Some of those impacts will be too large to ignore – like the effects on the economy at the macro level – although their sources will not be understood by most.

Simply put though, the introduction of the new framework that facilitates enforcement of compulsory local marine cargo insurance cover in a prudent, well regulated manner is a victory not just for the immediate stakeholders in the import and insurance industries, but for all Ghanaians – even if they do not know it.