Insurance regulations, risk and performance in Ghana
| Pages | 74-96 |
| DOI | https://doi.org/10.1108/JFRC-09-2018-0126 |
| Date | 28 August 2019 |
| Published date | 28 August 2019 |
| Author | Baah Aye Kusi,Abdul Latif Alhassan,Daniel Ofori-Sasu,Rockson Sai |
| Subject Matter | Financial compliance/regulation,Financial risk/company failure |
Insurance regulations, risk and
performance in Ghana
Baah Aye Kusi
Department of Finance, University of Ghana, Accra, Ghana
Abdul Latif Alhassan
Development Finance Centre, Graduate School of Business,
University of Cape Town, Cape Town, South Africa
Daniel Ofori-Sasu
Banking and Finance Department, Data Link University College, Tema, Ghana, and
Rockson Sai
Xiamen University School of Economics, Xiamen, China
Abstract
Purpose –This study aims to examine the hypothesis that the effect of insurer risks on profitability is
conditional on regulation, usingtwo main regulatory directives in the Ghanaian insurance market as a case
study.
Design/methodology/approach –This study used the robust ordinaryleast square and random effect
techniquesin a panel data of 30 insurers from 2009 to 2015 to test the researchhypothesis.
Findings –The results suggest that regulations on no credit premium and required capital have
insignificant effects on profitability of insurers. On the contrary, this study documents evidence that both
policies mitigate the effect of underwriting risk on profitability and suggests that regulations significantly
mitigatethe negative effect of underwriting risk to improveprofitability.
Practical implications –The finding suggests that policymakers and regulators must continue to
initiate, designand model regulations such that they help tame riskto improve the performance of insurers in
Ghana.
Originality/value –This study provides first-timeevidence on the role of regulations in controlling risks
in a developing insurancemarket.
Keywords Regulations, Liquidity risk, Insurers’performance, Underwriting risk
Paper type Research paper
1. Introduction
The financial sector of most economiesprovides essential functions and services that propel
economic growth and development. The functions and services performed by the financial
sector include mobilization of funds, efficient and effective allocation of these funds, risk
sharing and reduction, monitoring of corporate insiders and provision of credit information
for informed investment decision (Mishkin, 1999;Bain and Howells, 2009). Given the
dynamism and ever-changing and increasing competition in the operations of the financial
sector in most economies, financial institutionsare pressured to meet the fierce competition
by developing new and innovative products and services which are riskier. Thus, the
competitive financial environment pressures financial institutions to assume risky
operations and dealings which increase their risk-taking behavior and risk appetite and
tolerance, leading to less financial system stability and performance. In the awake of the
JFRC
28,1
74
Received14 September 2018
Revised4 March 2019
29April 2019
Accepted20 June 2019
Journalof Financial Regulation
andCompliance
Vol.28 No. 1, 2020
pp. 74-96
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2018-0126
The current issue and full text archive of this journal is available on Emerald Insight at:
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2007-2008 global financial crisis, lessons show that excessive risk (including liquidity and
credit risk) (Cai and Zhang, 2017;Imbierowicz and Rach, 2014;Varotto, 2011;Crotty, 2009)
are cited as major contributors to the crises. In conjunction with the 2007-2008 global
financial crises, international and national agencies propose an array of regulations in an
attempt to shape risk taking behavior in the financial sector. For instance, Bouyon (2014)
posits that financial sector regulations and reforms are introduced with the objective of
achieving financial stability objective which reinforces stability at the firm level and the
economic efficiencyobjective which also reinforces stability in the entire economic system.
The Ghanaian insurance sectorhas undergone three main regulatory changes within the
past two-and-half decades. The first required the separation of life business from non-life
businesses leading to the abolishment of composite insurance business since 2006 with
passage of the InsuranceAct 2006[1]. The second major development relates to the abolition
of premium credit in the market in 2014because of the high levels of outstanding premiums
in the books of insurance companies, resulting in indebtedness of primary insurers to
reinsurers and increased credit risk. Under the campaign headline “no premium no cover,”
the policy was to safeguard the funds/policy holder of the profitable businesses from the
non-profitable ones. The third policy was relatedto increases in the capital base of insurers
by the end of 2015. Together with the first and third policy directives, the no premium no
cover directive was aimed at protecting the fund holders through the reduction in
underwriting risk that insurers assumeby providing insurance cover for clients that do not
pay premiums (NIC, 2014)[2].The question of the effectiveness of these regulatory directives
enhancing profitabilitythrough risk reduction remains unanswered empirically. Hence, this
study seeks to examine how regulation has affected profitability in the Ghanaian insurance
market. Because of the importanceof insurance in the absorption of risk to promote a “sense
of peace within the business world”(Oscar Akotey et al., 2013) and its positive effect on
the Ghanaian economy (Alhassan and Fiador, 2014), the current investigation will enhance
the understanding of the regulator and other stakeholders by providing an empirical
assessment of effectsof regulatory directives.
Although there is ample empirical evidence[3], several studies respond to the call on
investigating how regulationsmoderate risk taking in the financial sector, majority of these
studies focus on banks ignoring other financial institutions such as insurance firms.
Similarly, many studiesinvestigate how regulations affect performancebut have focused on
mainstream banking sector (Rachdi and Ben Bouheni, 2016;Ozkan et al., 2014;Hagendorff
et al.,2010;Ahmad and Hassan, 2007;Barth et al., 1998). The few studies focusing on
regulations in the insurance market (Lee et al., 2016;Swain and Swallow, 2015;Gaganis
et al.,2016;Gaganis et al., 2015) appear to be concentratedon developed markets, with very
limited empirical studies on how regulations influence risk-taking behaviors of insurers’
affect insurance profit performance especially in Ghana and Africa at large. Despite the
growing literature on the microeconomic analysis of insurancemarkets in Africa (Alhassan
et al.,2015;Oscar Akotey et al.,2013;Alhassan and Biekpe, 2018,2017,2016a,2016b,2015;
Alhassan, 2018), theydo not focus on regulations and insurers’performance; hence,there are
limited or scanty studies on how regulations influence risk-taking behaviors of insurers’
affect insurers’performance. It is in this regard that these studies attempts to explore how
regulations affect insurers’profitability through insurer risks. It is argued that regulations
may tame or shape risk-taking behavior of corporate entities (including insurers) to affect
performance.
The rest of the paper consists of a brief overview of the Ghanaian insurance sector,
overview of no premium no cover policy, literature review and hypothesis development,
Insurance
regulations
75
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