Gabriel Glover, CEO, Ghana Insurers Association
Edited transcript
David’s Introduction: We continue our series on the oil and gas industry with a focus on the readiness of insurance companies to take up the challenge of a fast emerging oil and gas industry. Mr. Gabriel Glover, our guest is the CEO of the Ghana Insurers Association and a Risk Management professional. He is a former employee of the Ghana National Petroleum Corporation and the Tema Oil Refinery.
David: Before we talk about insurance in the oil and gas industry, I’d like us to talk about insurance generally. It seems to me insurance companies could make much more significant contributions to national development than they currently are. That is not the case. Why?
Gabriel Glover: Well it is not the case because there is a lot of financial illiteracy in this country. If people understood the financial industry, they would be considering insurance rather than banking.
David: Why do you say that?
Gabriel Glover: If you put money into your savings which for instance attract an interest rate of 15%, you will get 15% at the end of the day. But if you buy an insurance product which provides you with a security and you were to die today, you would get the full insured value; that is in life insurance policy. And yet people do not understand this and so they don’t go for it.
David: You mean people usually associate insurance with vehicles and equipment only.
Gabriel Glover: Well insurance companies have braced themselves to look after people as well as equipment. It is human beings who actually manage properties and so their lives are also important. Though we have life insurance policies that take care of the people, we also have personal accident policies that take care of the people.
David: Premiums in the oil and gas industry must be sizable, right?
Gabriel Glover: There is a sizeable amount of money in that area.
David: Larger than usual?
Gabriel Glover: Yes, it’s larger than usual because developing an oil field demands large volumes of money and financiers need to feel comfortable.
David: Comfortable about what?
Gabriel Glover: That in the event of a loss, the people who have invested their monies do not lose.
David: What accounts for the greater risk in oil and gas?
Gabriel Glover: Most of it has to do with development in the offshore area. And we all know the sea is a rough area and so it’s hazardous by nature. Apart from the hazards at the offshore area, the equipment used offshore is highly sophisticated; and so they have high values and therefore have risks attached to all this.
David: Can the foreign oil and gas companies rely on local insurance companies to deliver the size of insurance they require as well as good service standards?
Gabriel Glover: I will look at that from three perspectives. The first is the legislation; the second is insurance practice and third is the arrangement made by Ghanaian insurance companies. By law a foreign company cannot underwrite an insurance business in Ghana. You will need a license or an approval from the regulator which is the National Insurance Commission. That is what the law provides for. In insurance practice, the insurance business thrives on the law of large numbers and the spreading of risk which makes it prudent for insurance companies in Ghana, based upon the principles of re-insurance, to be re-insured overseas.
David: So foreign insurance companies cannot underwrite insurance in Ghana?
Gabriel Glover: Because they are not registered in Ghana. There are serious regulations in the insurance industry worldwide. And this is because policy holders have to be protected. And as part of the regulations a company needs to register as a licensed insurance company in order to do business in Ghana.
David: Can you elaborate on the point you made on preparedness of the local market.
Gabriel Glover: the local market has started bracing itself with regard to Ghana’s emerging oil and gas industry. Local insurers have formed a consortium so that every energy business will operate from the consortium. The consortium also has a certain capacity.
David: But as individual companies there is insufficient capacity.
Gabriel Glover: Yes. But on the same basis, even in the developed markets insurance companies share the risks through a collective approach and that is what we are doing in Ghana. Also based on the high values involved, if we insure everything in Ghana we will be sitting on a time bomb.
In the event of a loss, our companies will all go into bankruptcy because of the amounts involved.
David: I discovered recently that some of those rigs offshore Ghana are rented for $1 million per day. Isn’t your capacity even as a consortium insufficient?
Gabriel Glover: It’s not insufficient. The principle of re-insurance is what evens out everything. What ever we insure, the rest is re-insured in an overseas insurance market. And I can tell you that the risks that come to Ghana goes round in the world. We have some of it in the American market, the UK market, the European market and the Scandinavian market.
David: Are you saying that insurance companies in those markets participate in this risk?
Gabriel Glover: Yes, and that is what we call spreading of the risk; so that every insurance market takes a little bit of the risk. The burden therefore will not be on just one market.
David: So the oil operating and service companies can feel reasonably secure after all?
Gabriel Glover: Yes, they feel secure with these arrangements. We have been talking to them and we make them comfortable. Re-insurance is the normal practice in the insurance industry. Sometime it’s even from the accumulation of risks. For instance if one company decides to be greedy and insures all the companies around Odorna and the industrial area in Accra, in the event of a flood the company is going to loose all the money it has.
David: Will other sectors of the economy that require insurance as well suffer as a result of the emergence of the oil and gas industry?
Gabriel Glover: No. Insurance companies are expected to have a minimum capital on being licensed as an insurance company but a company can also build over its minimum capital. A company’s minimum capital can be used to back the liability the company is picking. So it will not affect other classes of business.
David: What is the minimum amount required?
Gabriel Glover: The current minimum is $1million
David: That’s small
Gabriel Glover: Well that is small. The insurance commission is thinking of raising the minimum in the range of about $5million to $10million in the medium and long-term.
David: Is that part of why you earlier predicted a boom in development in the industry?
Gabriel Glover: That is what I said; if you are able to retain more you get more premium into your books but it also comes with additional liability in terms of claims; that is also good reason for risk management because if proper risk management policies are put in place the losses will be minimized.
David: Are insurance professionals required to develop a new set of skills because of the emerging oil and gas industry?
Gabriel Glover: Definitely, they should develop a new set of skills.
David: Why? Insurance is insurance.
Gabriel Glover: Insurance is insurance but this is a risky and different area. The underwriting and claims aspects are quite different from the normal insurance. Insurers assess risk based on certain parameters and information. For instance if someone went in for a life policy, he would need a medical officer to provide certain parameters and information to make the insurance company feel comfortable to accept to provide insurance. On the other hand, in the energy sector, you will require petroleum engineers and other sorts of engineers to be able to assess the sort of risks that are being presented to the insurance company.
David: That is why insurance professionals must develop a new set of skills - an understanding of the industry that you are entering , to ensure that you apply the right judgment to premiums among other things. Is that correct?
Gabriel Glover: Yes.
David: And if you don’t?
Gabriel Glover: If you don’t it will be done by some other company that has the required skills needed for the job. In fact the overseas markets have these skills so we need to learn from them and then apply it.
David: They have the skills and yet they can’t provide the service.
Gabriel Glover: Currently we are partnering with them. They can’t do it directly so they’ll have to partner with us to do it.
David: So Ghanaian insurance companies are protected. You don’t have the skills or the money, yet you get to win the job.
Gabriel Glover: We are not being protected. You see each government would want to have some sort of protection for businesses that come from this country. Almost all these oil prospecting companies are from overseas. If we don’t ensure that the business comes to us they will place the rigs in their countries and we will not be able to earn some of the premiums, build the technologies and develop expertise that we need and we will be at a disadvantage.
David: Is the Ghanaian insurance industry prepared to take on these new challenges?
Gabriel Glover: We are ready because we are currently participating in the Jubilee Field construction phase as the direct insurers and passing on the rest of the rigs to other parts of the world. We formed a consortium which has a leader. So the rigs coming from this oil business will all go through the leader who will in turn share it among the participating companies in the market. We have gone into discussions with oil companies who are preparing their fields and they have agreed on these arrangements.
David: Do you know the size of insurance resources required to insure the Jubilee field operations?
Gabriel Glover: I don’t know the figures off-head but I know the Ghanaian insurance market is picking up 5% to 10% of the sum insured.
David: What does that come to?
Gabriel Glover: I don’t have an idea of the value.
David: Is it substantial?
Gabriel Glover: Yes, it’s substantial. Based on our current financial position, the amount is substantial.
David: And the oil and gas companies are happy with arrangements with the consortium? Is it not restrictive? Why can’t they simply approach an insurance company of choice and negotiate directly with it?
Gabriel Glover: This country is coming out with a local content policy law with the aim of retaining the benefits from the oil and gas business. Aside that there are so many mechanisms that insurance companies use to write business and one of them is the idea of the consortium, co-insurance or pulling.
David: Because on their own they don’t have the capacity, that’s basically the reason.
Gabriel Glover: They don’t have both the financial and human capacity. Even if a company has both finance and human capacity, the company will still go and re-insure; because insurance business is based on the principle of spreading the risk.
David: It doesn’t sound like a competitive environment.
Gabriel Glover: It is competitive. Let me tell you why. With regards to the premium rate, the terms and conditions that are charged for oil and gas business are determined worldwide and in one centre. That is the UK insurance market - the London market. On this basis whatever the insurance companies will be doing will be following the re-insurers. On the UK market, what they do is that they do not allow one company to pick such a risk. A broker picks the business, goes round to all the companies with each company picking a bit of the risk. What the consortium is doing is that it’s assigning the risk to each and every company and also every company shares the benefits that come from the business.
As our market develops and we get those capacities the oil companies can then start dealing with individual oil companies on the market but for now this is the best arrangement. Under current arrangements the oil and gas companies are very happy because everything is not left to the Ghanaian market only because of the practice of re-insurance. There is re-insurance placement worldwide and they are very happy. The oil and gas companies are law abiding and so in abiding by the law they are working together with us as a team in order to place this particular risk.
David: Is this also linked to the service industry that will emerge as a result of the oil and gas?
Gabriel Glover: Yes, it is linked to the service industry that will emerge. All these players in the oil and gas sector get their licensing from GNPC and as part of GNPC operations they are to regulate them. Regulating insurance is one of the areas that is mandatory and has to be done by a Ghanaian company. To be able to do business in Ghana one will have to abide by these laws.
David: And the downstream sector?
Gabriel Glover: The downstream sector is quite different in the sense that the Ghanaian market has been placing these risks over time.
David: What about refineries?
Gabriel Glover: Refineries are placed from the local market and it’s also a property of Ghana and so insurance must start from Ghana. In the case of the Tema Oil Refinery, we don’t have a consortium. What we have is a risk sharing arrangement between the Ghanaian companies which is in a form of co-insurance.
David: What do you think about the emerging industry and its potential impact on Ghana’s development?
Gabriel Glover: Let me divert this discussion. This year the insurance association is organizing an insurance awareness month. Interestingly, the theme for this year’s celebration is “insurance an industry for national development”. What is the importance of insurance to national development? All these monies we collect in term of premium are invested in this country.
David: Long term or short term investments?
Gabriel Glover: Most of it is long-term. Long-term investments can be done by insurance companies and not banks. This gives investors the comfort to be able to move the economy forward. Apart from that, most financial institution especially banks request for some form of guarantee as adequate insurance when giving out loans. Without any form of insurance they would not issue out those huge monies to investors as financiers. Banks are comfortable because in the event of a loss the insurance companies will come to pay.
David: Returning to the subject of insurance generally, what could you do to improve understanding of insurance and elevate the image of the industry?
Gabriel Glover: We have embarked on an educational plan and we have now picked certain sectors we think impact the insurance industry and we periodically hold seminars for them. During our awareness month we will go to areas such as lorry stations, markets and other places to interact with the people and educate them on the need for insurance.
David: These people you target hardly have any disposable income. When you are poor insurance is not the first things to come to mind.
Gabriel Glover: Well, we are developing products that will be able to meet the needs of the people in the lower sector of the economy.
David: Can you tell me why life insurance is not such a big thing and why we do not insist on it the way we insist on insuring vehicles?
Gabriel Glover: All over the world vehicle insurance is compulsory. It is the liability aspect that is made compulsory. If you drive a vehicle on the road and you are a man of timber and caliber, your wealth is at risk and that is what a lot of people should realize. If you injure somebody and go to court and the judgment is against you, your assets are at risk.
David: In which part of the world would you say insurance is most developed?
Gabriel Glover: The UK market and the US market.
David: Why there?
Gabriel Glover: Well the UK market is where insurance started. In the US if you live without insurance you will be heading for trouble. The values for liability claims are very high in the US.
David: So what accounts for the crisis that hit the leading insurance group - AIG?
Gabriel Glover: Yes, that’s an insurance group and they are diversifying into other areas. They went into mortgages because of the large amount of monies they got and so they got hit. A country like the US has a lot of natural disasters. I’ll tell you a funny story that occurred in the US.
In one of the disasters that occurred when the white-men where packing their suitcases and moving out the black-man was struggling to hold on to his properties and he died because he did not have insurance.
David: Do you have to be very smart to see the value of insurance?
Gabriel Glover: You don’t need to be smart to see the value of insurance. The ordinary man on the street should be able to see the value of insurance. When people are unable to meet their daily needs they cannot put money aside for this purpose. But I believe things will change as we develop into a middle income country.
David: Is there a sector of the market that is responsive to insurance?
Gabriel Glover: I think the middle income group knows the value of insurance.
David: Is it because they are more educated or because they have more money?
Gabriel Glover: I think both factors account for their responsiveness to insurance.
David: Thank you for coming.
First Broadcast 17th October 2009, TV3 Ghana
