Domestic debt exchange program poses threat of asset loss up to 50% for insurance companies - GIA issues warning
The Ghana Insurers Association (GIA) has issued a warning, stating that insurance firms could potentially lose half of their assets if the domestic debt exchange program of the government is not exempted for the sector.
The risk, as per the GIA, stems from the fact that around 40% of the sector's assets are directly invested in government securities, and an additional 10% is held by licensed banks and fund managers, who, in turn, have also invested in government securities. This intertwined exposure could compound the situation for insurance firms.
Insurance companies have reportedly invested over GH₵1.5 billion with licensed banks and money market mutual funds. The statistics show that non-life insurance funds invested in government securities stand at GH₵4,929,714,527, while life insurance stands at GH₵6,604,295,694, totaling about GH₵11,534,010,22 for the third quarter alone. Overall, total assets in GOG securities account for 40%.
This implies that if the domestic debt exchange goes through, a substantial number of insurers' assets could be at risk, leading to considerable challenges for the insurance industry.
In the third quarter of the year, insurance companies reported an underwriting loss of GH₵356 million for both life and non-life, meaning they rely on investment income to meet policyholder obligations. Any debt exchange could negatively impact their ability to pay claims, leading to an asset-liability mismatch and potentially affecting planned cash flow.
The GIA emphasizes the necessity of exempting insurance companies from the domestic debt exchange Programme. In times of uncertainty like this, assets must be protected, and insurance, being a key risk management tool, plays a crucial role in this protection. The association also urges for the accrued interest on the government of Ghana Bonds to be paid to insurance companies to enable them to meet their policyholder obligations.
Insurance has been identified as an essential tool for increasing financial inclusion from the current 58% to 75% by 2023. Therefore, actions taken by the government should inspire confidence in insurance to help formalize the informal sector, which constitutes over 80% of the Ghanaian workforce. The GIA also insists that this exemption is critical for insurance companies whose funds are still locked up in banks and other institutions as part of the banking cleanup.
From a broader perspective, the Ghanaian financial sector, including insurance companies, has faced challenges due to the Domestic Debt Exchange Programme, such as liquidity constraints, erosion of capital buffers, and potential impacts on investment portfolios. These challenges could indirectly affect economic growth and access to financing for small and medium-sized enterprises (SMEs), affecting demand for insurance products. Any regulatory focus on recapitalization could also necessitate reassessments of capital structures and risk management strategies for insurance firms.
- The insurance sector's investment in government securities, amounting to over GH₵11 billion in the third quarter alone, suggests a significant exposure to the domestic debt exchange program.
- The Ghana Insurers Association (GIA) urges the government to exempt insurance companies from the domestic debt exchange Programme to protect assets and maintain the insurance industry's stability.
- insurance, being a key risk management tool, plays a crucial role in financial inclusion, with the goal of increasing financial inclusion from 58% to 75% by 2023.
- The challenges facing the Ghanaian financial sector, including potential impacts on investment portfolios due to the Debt Exchange Programme, could indirectly affect economic growth and access to financing for small and medium-sized enterprises (SMEs), thereby impacting demand for insurance products.
