Risk sharing is undoubtedly, an important principle in insurance. Globally, Insurance companies collaborate by sharing or co-insuring risks amongst themselves.
There are various forms of risk sharing which include co-insurance, facultative or treaty reinsurance. In our market today, facultative and treaty reinsurance (both local and foreign) are common while the market is still not favorably disposed to co-insurance arrangement.
The National Insurance Commission (NIC) over the years have begun to introduce different initiatives to deepen insurance penetration in Ghana. The contribution of insurance to Gross Domestic Product (GDP) is currently less than 2% and to address this low penetration, the regulator has espoused different initiatives such as the proposed changes to Insurance Bill and regulations.
The introduction of these initiatives is with an intent to increase the number of compulsory insurance covers, partial liberalization of Oil and Gas insurance business by allowing Non-Life and Reinsurance companies participate in the insurance of the sector along with the Ghana Oil and Gas Insurance Pool (GOGIP), amongst others.
However, the achievement of the objective of these initiatives may take a while before the market will begin to enjoy the benefits.
This article is therefore an attempt to advocate the benefits of a co-insurance arrangement as an alternative source of risk sharing and revenue growth as well as a major contributor to ongoing efforts by the NIC towards deepening and enriching the insurance market in Ghana.
What is Co-insurance?
Co-insurance is arguably one of the most misunderstood concepts in insurance. It can be interpreted to mean different things depending on the context of its use. The term, when used under health insurance, is synonymous with co-payment. While co-payment is fixed, co-insurance is a percentage that the insurers pay after the insurance policy's deductible is exceeded, up to the policy's limit.
In property insurance, where a client has insured below the value of the property, co-insurance in this context is as a penalty imposed on the insured by the insurer for under-reporting/declaring/insuring the value of the tangible property or business income. However, for the purpose of this article, we will simply describe co-insurance as a means of sharing insurance risks between two or more licensed insurance companies.
Co-insurance Vs Facultative or Treaty Reinsurance
Co-insurance arrangement may be a quick fix to the challenges of low market penetration if adopted by practitioners, as this is arguably a low hanging fruit. We have identified co-insurance as sharing of risks between two or more licensed insurance companies.
The focus of co-insurance is on existing risks/businesses and the share percentage amongst insurance companies.What is currently obtainable in the market is facultative reinsurance practice, wherein an insurer assumes 100% of a risk and takes its net retention while ceding the surplus as facultative reinsurance to a partner insurer either directly or through a reinsurance broker.
The challenge with this model is that the facultative reinsurer (company accepting the risk) is unable to utilize its capacity in accepting the risk due to the limits imposed by reinsurers on the maximum risks that can be accepted on facultative businesses.
Other risks include delays in meeting the insured’s expectation in the event of large losses. These are some of the challenges facing facultative reinsurance model in our market today.However, under a Co-insurance arrangement the risk is shared 100% amongst a consortium of insurers.
The lead insurer is responsible for direct interface with the customer and handles the administration of the policy or risk for a fee. Depending, on the number of co-insurers and their underwriting capacities, the risks will be shared with the lead insurer having the highest proportion of the risk e.g. let’s assume there are four (4) companies sharing a risk, the risk can be proportioned accordingly 40%, 30%, 20% and 10% for four insurers on an industrial fire risk.
The advantage of this arrangement is that all the four insurers will fully utilize their underwriting capacities on the risk, place the excess above their net underwriting capacities in their treaty cover and also give the balance to facultative reinsurers.
This method of sharing an insurance risk ensures the risks circulates the market thereby ensuring full utilization of the available market capacity before overseas cession.
Co-insurance also helps to build collaboration amongst local insurers especially as it concerns information sharing, risk improvement and a more informed understanding of the risks in our market. This therefore calls for the need for the market to begin to turn its attention to co-insurance arrangement.
There are various arguments against co-insurance arrangement ranging from low commission income that is lower than facultative reinsurance commission, unhealthy competition leading to account poaching by co-insurers and price war amongst others.
Although, these arguments are valid based on experiences, the market is still experiencing severe lack of market penetration and share of wallet as opportunities to grow local participation are lost while reinsurers (especially the foreign reinsurers) are benefiting from the gap created by the lack of trust and collaboration in the local market.
Recently, the Commissioner of Insurance, NIC, Mr. Justice Yaw Ofori reported that each year, the Commission approves over US$10 million dollars which transferred overseas in respect of services or covers that should have been utilized to build local capacity with the attendant negative impact on the cedi and on the local economy. Co-insurance if adopted undoubtedly will be an instrument to help reduce capital flight from the country.
The way forward
These challenges as highlighted are not peculiar to our environment. Excellent service delivery, best-in-class customer experience and fair treatment, consultation with the lead underwriter (before a new insurer can take over a major account from an existing insurer especially after they have paid a major claim, the new insurer must let the lead insurer know) are ways by which these issues can be managed.
This will create transparency and curtail the fiend of undercutting. Market collaboration is also one of the measures that have been used to overcome the challenges.
From the customers’ perspective and for ease of administration, corporate customers will rather deal with one insurance company than several. Here the lead insurer and broker would be responsible for the day to day interface with the insured.
The liability under co-insurance arrangement is several and the lead insurer must ensure all information, changes or endorsements on policies are signed by co-insurers in order not to create a gap which might unduly expose the insured.
Conclusion
In conclusion, co-insurance arrangement holds the key for immediate growth of the Ghanaian insurance industry and all hands must be on deck to embrace this risk sharing model for the benefit of the industry at large.
We can only deepen market penetration through collaboration among insurers, ethical discipline, fair treatment of customers and continuous sensitization of the public on the benefit of insurance. Like the popular saying, a rich man that builds a mansion in a slum, still lives in a slum.
The market must eschew self-contentedness and embrace collaboration, through co-insurance business model which will help all insurance companies grow, reduce to the barest minimum instances of rate cutting, make risk information readily available in the market and also curtail unhealthy competition.
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