Risk insured outside Ghana is considered a lost income opportunity, and Ghanaian law and regulations are designed with that in mind. Companies operating in the country are required to insure their risks domestically, or to at least exhaust local capacity before going abroad. However, as economic activity grows in scale and complexity, the size and types of risks to be insured increasingly exceed local capacity.
PULLING TOGETHER: In the energy sector, which Ghana hopes will bring in wealth that can be leveraged to boost the entire economy, the insurers’ solution has been to combine their resources to offer whatever insurance protection they can manage. Members of the Ghana Insurers Association formed a consortium in 2009 for oil and gas, and though they are taking on only a small proportion of the overall risk, this move has helped further the country’s overall aim of developing the economy, and have underscored Ghana’s ambitions to extract as much value as possible from its hydrocarbons deposits.
NO SMALL TASK: Insuring the hydrocarbons sector is hard, even for the world’s most capable underwriters. The biggest upstream energy companies typically have in-house captive insurance departments, in part based on the assumption that their business, particularly in offshore blocks, is so complex and develops at such a rate that no insurer has the expertise to properly evaluate it.
Other options for energy companies include specialist insurers and subscription-based insurance: using a large-scale underwriter as the lead insurer and also as a reseller of smaller portions of the risk to others that wish to share in the business.
Even if Ghana’s insurers had the expertise, they do not have the capital – as of June 2010, Tullow Oil and Gas, the lead producer at Ghana’s Jubilee field, had bought insurance worth $1.18bn, which is far beyond the collective capacity of Ghana’s entire insurance sector, even after the coming capitalisation increase. At the new minimum level of $5m per firm, and assuming all of the current 43 licensed insurers in the country reach that level, the paid-up capital of the entire industry is only about 18% of Tullow’s needs. By forming a consortium, 21 of the 23 local non-life insurers participating can at least take their own small stake – a toehold from which expertise can be gained and capital accumulated. Any of the members can solicit business on behalf of the group, and stakes are assigned according to companies’ risk retention rates.
Leadership of the group was meant to change among members every two years; however, thus far the State Insurance Company (SIC), the dominant non-life insurer in the country, has been the consortium’s manager. According to SIC’s 2010 annual report, each insurer is required to contribute at least 5% of their gross earned premium income as of 2009, and that amount was seen as enough to capture about 1% of risk from energy sector activity. SIC said it had an overall share of 30% of the energy insurance market as of 2010, and that as of April 2011, the pool had generated about $2.15m in income.
DEALS GO AHEAD: The biggest deal signed was the coverage of Tullow’s floating production, storage and offloading unit. Most of the risk, of course, has been reinsured outside the country. In addition to this, four other deals had been signed by the group as of June 2011, and the five in total represent less than 5% of the risks underwritten so far, according to Michael Andoh, the head of supervision at Ghana’s National Insurance Commission.
In response to the success seen by the consortium, Ghana’s insurance brokers have decided to emulate the move with one of their own. The Ghana Insurance Brokers Association (GIBA) has formed GIBA Energy, and appointed Edward Mensah Wood and Associates, one of the country’s largest insurance brokers, as the managing member. The idea is similar to that of the insurers’ pool, in which business solicited by the brokers’ association will be brought to the group and commissions shared among members.
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