Ethiopian Business Review

Reinsurance in Ethiopia: Something old, something new

Ethiopia’s current economic progress, as well as its future development prospects, could open the door to more business opportunities and challenges. With that comes the increased possibility of risk and warrants the emergence of insurance and reinsurance businesses in Ethiopia. Herein lies the question: shall Ethiopia shoulder all the risk exposure or share it with other continental or global risk carriers? The topic of cultivating proficient insurers and reinsurers begins here. 

Reinsurance is nothing but insurance for insurance companies. Although reinsurance demand is a ‘derived demand,’ since it is highly dependent on the demand of the primary market (i.e. insurance), contracts do not involve the primary insured. By reinsuring risks in excess of its retention capacity, the direct insurer is able to manage risks of being crippled by catastrophes.  

The insurance industry in Ethiopia, which consists of one state-owned and 16 private companies, is believed to be working on the insurance fraction (shouldering 70-75Pct of the risk exposure) while ceding the remaining 25-30Pct, on average, to the backing of global reinsurers. However, it is astounding not to see a complimentary, locally-incorporated reinsurance company since the liberalization of the industry more than two decades ago.

Some argue that for too long there has been a gross lack of strategy, capacity and expertise in dealing with catastrophic risks to which the country is exposed. These risks — ranging from strategic to operational, speculative to pure — abound throughout the country’s socio-economic, financial and governance infrastructure and are not managed properly.  Yet despite the old adage that necessity is the mother of invention, the failure in addressing these opportunities with vision and proper reinsurance remains a cause of concern.  One step  to remedy this problem is to establish an indigenous national reinsurance company that ensures diversification and the spread of risks. 

Reinsurance is not as old as the common insurance business. Scholars note that the practice of reinsurance evolved as pattern of development, which included marine, fire and accident reinsurance. The world’s first professional reinsurer was the Cologne Reinsurance Company in Germany, which was incorporated in 1842. In 1880, Munich Re was established and became renowned after the San Francisco Earthquake of 1906 as the only reinsurer that remained solvent after paying out all claims. Munich Re had become a world leader in its field and has continued to play an important role in shaping the industry up to the present day.  

In Africa, domestic reinsurance companies have emerged as recent additions to the insurance industry, mostly since the 1970’s, when governments throughout the continent were urged to establish financial institutions independent of international insurance conglomerates. Many of these reinsurance companies were created and managed by governments through wholly-owned parastatals and provided with ‘compulsory cessions’ and ‘rights of first refusal.’ Realizing the economic value of insurance and reinsurance, many African countries have now made significant strides, although considerable work still lies ahead.

Sources indicate that the United Nations Conference on Trade and Development (UNCTAD) was instrumental in drafting and passing legislation to recognize the hemorrhaging of foreign exchange in Africa. Establishing national reinsurance companies was preordained to hold back outflow of much-needed foreign exchange and in doing so, backing up development endeavors. They are also praised for the inward flow of foreign currency.

The level of success of these state-owned reinsurers differed by country, for various reasons, but in general they have contributed a lot to the development of the insurance industry in their respective countries and in Africa as a whole.  All this in spite of many challenges: limited managerial experience, limited capital and some political interference. Furthermore, the existence of reinsurance institutions may be more likely to uphold ethical competition than if the market were exclusively in the hands of direct-writing companies. 

Tackling the obstacles

There are hurdles associated with this solution : resource constraints (both financial and human), strategic orientations, increased regulatory oversight, investment options, confrontation on compulsory sessions, getting global brand recognition through international ratings, among others.  However, there are still a number of positive prospects that exist out of accepting risks selectively. National predicaments alone cannot guarantee success unless done strategically. 

Laying the foundation

A strong capital base is required to create capacity and global branding. The combined effort of all is necessary to make a company successful. It’s a joint effort involving the insurers, insurance auxiliaries, the regulator and other regional and international partners. Its existence creates a national consensus among industry players, since it has a unifying role in managing shared risks, which allows for there to be a good feeling among industry participants about growth opportunities. Compulsory sessions won’t face resistance if ownership is shared by many and until the firm stands on two feet.

Regulatory landscape

Regulators are leading the crusade in leveling the playing field through programs that dictate the manner of conducting the business. The newly-publicized ‘Reinsurance Company Establishment Directive’ by the National Bank of Ethiopia (NBE) (effective this month) is a stepping stone for the establishment of reinsurance share companies. Regulatory agencies could also expand to cover a broader set of issues affecting these businesses, including options for investment, compulsory legal cession on policy and treaty programs, and learning best practices from other companies.

Closing thoughts

Reinsurance practice was thought exclusively the province of overseas reinsurers.  However, following the revelation of its secret formula, recent developments signify the involvement of local, predominantly state-owned reinsurers. The establishment of state-owned reinsurers depends largely on state commitment. It should also involve as many owners as possible and, eventually, private reinsurers could emerge. For now, strategic partnership would be most beneficial to building human and financial capacity. We should start the journey by having our own reinsurers in an effort to ensure the equitable spread of risks enshrined in insurance business. Having domestic reinsurers is one thing the country should attain prior to opening the sector for global players. We anticipate seeing capable reinsurers flourishing in Ethiopia! 

2nd Year . June 2014 . No.15

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

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