Delivering Life Insurance: The Untapped Market in Ethiopia

Modern insurance transaction in Ethiopia was started by an Egyptian Bank in 1905. According to Ethiopian Chamber of Commerce there were 19, 33 and 40 insurance companies in Ethiopia in 1954, 1960 and 1967 respectively. Following the nationalization in 1975, the state owned Ethiopian Insurance Corporation emerged as a sole insurer transacting life and non life insurance. After the partial liberalization of the sector [allowing domestic private investors to engage in insurance business] in 1991, 16 insurers have so far come to existence with a combined branch network of 264 as of June 2012. Nine of these companies are composite (offering both life and non life insurance services), while the remaining transact only non life insurance.

In the eyes of life insurance marketers, the Ethiopian economy with its 85 million plus predominantly young population presents lucrative and diverse business opportunities. Akin to all sectors, insurance in general and life assurance in particular needs to be correlated with the country’s development plan as a corollary to the emerging middle class and educated society. However, the intricacies that make up life insurance market in the country are not very well known to most, including to those engaged in the business. This makes the study of the Ethiopian insurance industry appealing as it presents untapped market. But it needs a sound understanding of the dynamics of the markets

The importance of life insurance in modern economies has been recognized much earlier. It is the essential means by which a disaster to an individual or a community is shared by many. Great catastrophes are thereby lessened, and, it may be, repaired.  Apart from the benefit it bestows to the policy owner and beneficiaries upon the occurrence of certain events, such as untimely death, terminal illness, critical illness of a bread winner or maturity depending on the type of contract, life insurance plays a vital role in a country’s socio-economic development. This can be achieved through saving mobilization it embraces the national economic development via development of the financial market, creation of employment opportunity and overall enhancing the socio-economic development of the country. This in turn will enhance the supply of long-term financial products, thereby triggering a series of effects on the development and structure of the financial markets.

While the basic premise of life insurance has always been ‘protection’, certain insurance products also provide the flexibility of it being used as a long term saving and wealth creation tool. These products allow the individual to systematically save over the long run and generate returns to create a corpus that can be used to fund different milestones such as children’s education, marriage or retirement. Simply put, purchasing a life insurance means, having a peace of mind knowing that one’s family’s financial future is secured, by providing them when one may no longer be able to.

Ratio of life insurance premieum to total premium portfolio in selected Aftican Countries.
Source: African Insurance Organization, 2012.
Country, Region South Africa Zambia Namibia Sub Saharan Africa Ethiopia
Ratio of Life insurance to total premium 77.8 pct 75.5 pct 73.4 pct 32.4 pct 6 pct

Despite its potential benefits, insurance business in general and life assurance in particular has not yet developed in Ethiopia. This can further be explained by low level of insurance per capita and penetration. As of June 30, 2012, insurance branch to population ratio in Ethiopia was 1:334,608, insurance density (Premium/Population) reached Birr 44.2 per person and Insurance penetration (Premium/GDP) registered less than 1pct, 0.61pct. These measures categorically show that significant proportion of the total population has limited access to insurance services. The issue gets worse in life insurance. According to African Insurance Organization, only 6 pct of the total premium portfolio in Ethiopia is derived from it whilst the percentage in South Africa, Zambia, Namibia and African average account for 77.8, 75.5, 73.4 and 32.4 respectively. Based on this data, Ethiopia stood as the least in the World whilst there is progress and matured market in other African countries. Looking at the track record of insurers in Ethiopia, the life insurance business has been shunned from their business portfolio and weak handedly annexed to the general insurance business.

Having the foresighted factors in mind, one may ask why life insurance is less developed in Ethiopia. Surprisingly, the real factors contributing for such a low figure are not well investigated and documented. However, an oversight which many households typically make is that they benchmark the returns from life insurance products with other investing options. In doing so, what they completely fail to comprehend is that the primary purpose of life insurance is protection followed by returns and not the other way round. To worsen the matter, the necessary efforts have not been exerted from the concerned stakeholder’s: the regulator, insurers, insurance auxiliaries, intermediaries, the government, and academic institutions, to mention a few.

Moreover, availability of saving instruments with better interest rate, unemployment, accessibility of pension as a means of financing retirement and price of life insurance, whether it is commensurate or competitive, among others constitute factors contributing for the low performance of the life insurance sector. On the other hand, socio-demographic and cultural factors such as life expectancy, dependency ratio and source of income, age, urbanization, family size, and culture contribute to the advancement of life insurance. In this regard, availability of close substitutes, like ‘Idir’[a community welfare association], ‘Equb’[a social institution of saving] and other traditional services, though highly informal, have big impact on the growth of life insurance since many, in Ethiopia, prefer such services to insurance as far as funeral related insurances and or short term financial services are concerned.

The alternative to foster the growth of life assurance in the future requires a collaborative effort of stakeholders. Since growth in life insurance would bring meaningful benefit to the economy and the society at large, stakeholders should uphold life insurance as financial plan through keeping an awareness creation campaign on the importance of the service. Moreover, tailored life assurance products should be developed and marketed so that policy holders could yield better results as compared to other investment options, close substitute and self insurance to provide unique solutions for the Ethiopian consumer’s demand.

Insurance market is described as “reluctant market”, as this is one in which customers won’t buy sufficient products unless they are obliged by law or pressing need, such as the need to avoid an undesirable outcome. Ethiopians may assume life insurance is over and above their basic need but everyone should start to consider life insurance as a necessity rather than a luxury. For instance, for parents who still have children living at home, not having a life insurance policy could put their kids at risk if something that could affect their economic gain were to happen to them. In the event parents die, a life insurance policy can provide a safety net for the children to live off. It is the “selfless gift” of a true parent. This aspect of protection is unique to life insurance and hence it should be a key ingredient in an individual’s financial plan. As a risk-management tool, the importance of adequate life insurance in an individual’s financial plan cannot be over emphasized.

Finally, the popularity of life insurance has significantly improved in other economies after languishing for a number of years. Premium volumes expanded in the majority of African countries. A number of Takaful companies (insurance companies that provide insurance products in which   an Islamic insurance concept is grounded and Islamic pillars are respected) have set up operations in different African countries, potentially broadening the appeal of life insurance among the continent’s significant Muslim population.  However, this is not the case in Ethiopia where the contribution of life insurance is minimal. The relevance of life insurance as a long-term protection-cum-savings tool has not received the attention it deserves.

Fikru Tsegaye

Fikru Tsegaye holds MBA in Marketing and MA in Human Resource and Organizational Dev’t. He is currently working at Ethiopian Insurance Corporation as Marketing and Strategic Management Team Leader. He can be reached at fikru.tsegaye@yahoo.com

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