What May have Really Caused the failure of State Insurance Corporation

Most Ghanaians dread risks. How do I know?

Because, we do not go sky-diving or roller-skating. We fear the consequences of the loss of a relative, a damage to property,etc. Unfortunately for us, our insurance firms (SIC especially) which are required to protect us against these risks are not living up to expectation: Despite the gazillion number of trips my mum made to SIC about seven years ago, she did not even receive a pesewa,as compensation, to at least reduce her transportation cost accumulated from her persistently fruitless visits to SIC branch. My mother's unfortunate experience has compelled me to be very interested in how things work in the insurance markets.

As a child, I, like most other Ghanaians, blamed and hated the corrupt management of SIC, for their consistent deviations from their promise to deliver the customer when needed(in my case, repair my mum's car). Growing up as an Economist, however, I have deduced that, the failure of Ghanaian insurance firms is more likely to be as a result of a non-sophisticated insurance team and an informationally-sick environment, than just the pocketing of company's money. If lack of corruption was the key to success, Provident insurance as well as other private insurance firms would not have failed as it has! (Provident as a private firm would sternly be checked for any corruptive hands, trust me).

What do I mean by an informationally-sick environment? The success of an insurance system depends heavily on the insurer’s ability to infer the risk probability of the insuree. This ability of the insurer allows him(the insurer) to design insurance premium based on the insuree’s risk probability so that the insuree’s premium is directly proportional to his or her prone to risk. However, in our Ghanaian environment, where no active record is kept on any citizen, it makes it unnecessarily impossible for any insurance company to achieve any reliable source of data for inference on insurees’ risks. Ghana's economic environment is suffering from a fatal version of an information malady called Information Asymmetry. Information asymmetry occurs in every trade or transaction where one party has more information than another party involved in the transaction. In the insurance market, for example, insuree knows how risky he or she is but the insurance company without any historic data is ignorant about the insuree’s risk. This makes it hard for insurance companies to distinguish between risky drivers (like Ashifi GOGO, a very good friend of mine) and non-risky ones like myself. Consequently, they charge everybody the same premium! Doesn’t it sound pathetic, even without any economic theory, that despite my carefulness on the street, I pay the same premium as Gogo who does like 100mile per hour on a 55 per hour speed limit road. Well, such a pricing strategy would result in all non-risky types not buying insurance and all risky types cramming for it.(Good luck to an insurance company patronized by only Ashifi Gogos.) Also, because one’s insurance premium is not dependent on one’s accident history, insurees find no reason to employ safer methods of behavior like driving without drinking, not exceeding the speed limit, among other ways. These reasons and many others cause the number of claims filed within a given period to explode uncontrollably! To give a sense of the complications SIC and any other insurance companies face in Ghana, running an insurance system in an informationally-asymmetric environment is like scratching yourself whilst standing in a beach sand of ants; it is also analogous to weaving kente and being color blind. One can therefore easily verify Gyasi's equality: INSURANCE + INFORMATION ASSYMETRY (+or-)Corruption = FAILURE like SIC (Aside:Information asymmetry also apply to other markets as well and it’s the main reason why the poor collateral-less but motivated farmer in ketekrachie cannot get any substantial loan from any financial institution in Ghana. I hear recently that, Bank of Ghana (BOG) is trying to solve this market failure by the initiation of a central credit bureau system. While I would like to congratulate BOG for at least trying to fix the problem, I would also like to ask them why it took them so long!)

What do I mean by lack of sophistication? Though I fully understand and obviously sympathize with how hard it is to run an insurance company in a noisy economy like Ghana’s, I also think that insurance officials in Ghana could have done better. For instance, even though there is no reliable driving record kept on any Ghanaian, there is information in exogenous characteristics of human beings. Insurance folks could approximate (using sound statistical or econometric tools) from historic data on previous customers the average risks of future customers and hence be able to design risk premiums accordingly. When i called Geico(a US-based insurance firm) for an insurance quote, they grilled me like a criminal for pertinent information (age, GPA, sex) that would enable them estimate my probability of an accident on the road. This makes me wonder why no taxi-driver in Ghana is asked a single "quosa"(question) by SIC before he gets insured.

The conventional wisdom that corruption caused SIC’s failure sounds intuitive and appealing but disintegrates with a little bit of thought. Most insurance companies in United states (obviously private), not so long ago, struggled to make positive profits until George Ackerlof (a Nobel price winner in Economics) revealed the hand of information asymmetry in their losses. While we listen to conventional wisdom and accept them readily because of its intuitive appeal, let’s not stop there. Let’s challenge these conventional wisdom (like “Brain-drain is the reason behind Ghana’s lack of economic performance, SIC fails because of corruption, privatization is the only key to success), go beyond them, and continue to investigate other probable causes so we can come up with a comprehensive solution that would work. This is necessary if we are interested in the progress of our nation. God bless Ghana!

Footnote: In this article, I have presented information asymmetry in its dilute form since I always hesitate to write long articles. The interested reader should email for a more detailed and enlightening article. However, a little math background is required.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.