Cut Throat: The Vicious Cycle of Price Based Competition in Ethiopian Insurance Industry

For most, it was imprecise how Ethiopian insurers would manage their prices devoid of actuaries. As most insurers know, premium has a more significant impact on the bottom-line than any other item on a company’s income statement. For the average insurance company, a 1Pct drop in price can slash operating profits by up to 15 - 20Pct if not more. While there is no single recipe to determine insurance pricing, professionals commonly follow a general sequence of steps for developing the pricing of insurance premium. The insurance premium collected should at least be sufficient to fund expected claim costs and administrative costs and provide an expected profit to compensate for the cost of capital. Scholars argue that, cascaded from corporate strategy, the firm's pricing objectives must be identified in order to determine optimal pricing.

However, the competition in the Ethiopian insurance industry is principally characterized by the repeated cutting of prices below those of competitors even to the extent of “price war”. One insurer will lower its price, and then others will lower their prices to match and capture customers. If one of them reduces their price again, a new round of reductions starts. In the short term, repeated cutting of premiums below costs seem good for the insured, who can take advantage of lower premiums. Often they are not totally good for the insurers involved because the lower premiums can threaten their survival. War is an appropriate word since, like conventional warfare, it leaves lots of casualties and rarely does anybody really win. 

There are many ways in which a price war can get started, but often managers from different companies will have different versions of what precipitated the price war. None of them started it, yet they’re all in it. Often price wars are started due to misreading competitors’ actions or intentions. The results can be a downward spiral in prices that ruins existence of all insurers. By misreading the intent of the price cut, the other insurers respond with own deep price cut. If they had not done so, prices would have returned to normal; instead, the result was a price war that led the industry to charging premium that is not commensurate to the risk brought to the pool.

Currently the price war has reached to the level of “cut-throat competition”. There is distinct risk with “cut-throat price competition”. The insurers end up with prices that do not chronically or for extended periods of time cover costs of production, particularly claim costs. 

In the medium to long term, premium wars may also seem good for the dominant firms in the industry. Typically, the smaller, more marginal, insurers cannot compete and must close. The real losers then, are the marginal firms and their investors. In the long term, the consumer may lose too. Insurers may find it difficult to meet expectations of the insured at times of claims.

Lower premium per se may not mean failure if it emanates out of pricing strategy. For new products, and companies the pricing objective often can be either to maximize profit margin or to maximize quantity (market share). To meet these objectives, skim pricing to "skim the cream" off the top of the market by setting a high price and selling to those customers who are less price sensitive, and penetration pricing strategies often are employed with the objective of quantity maximization by means of a low price. But it is a mere failure unless the pricing objective considers many factors including production cost, existence of economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm's resources, and the sustainability of the insurer. To illustrate the issue, let see some cases in premium variance in charging the same risk in a sample tender.  There exists huge price gap for the same market value, same risk exposure, etc 

As the above case illustrates figures have shown a variance of over 65Pct with one being over 89Pct by the highest bidder. 

Class of BusinessMaximum Premium Offered in BirrMinimum Premium Offered in BirrAbsolute Variance in Birr% Age Variance (lower by)
Marine 29,616 .00 3,086.00 26,530.00 89.6
Motor 16,896 .00 5,613.00 11,283.00 67.1

If the above phenomenon persists for long, the inevitable state of affairs-namely bankruptcy is sure to come. Some argue that, companies that charge very low premium are those that do not have good business and these are so desperate to get business that they charge any premium without thinking about the risk involved. The point is how the industry can come out of this vicious circle.

Insurers in the Ethiopian insurance industry should avoid price wars and shift their attention to non-price competition. Each insurer should work hard to distinguish its product or service from competing insurers on the basis of product attributes, quality of service, extensive distribution, customer focus, promotion or any sustainable competitive advantage other than price.

Price stickiness should surface

To protect the industry, players should adopt market prices to become ‘sticky’ in which if the price rises; competitors will not follow the rise. So the “bad boy” will reconsider its decision on lower prices. It’s in companies best interests to reduce price competition because price wars can harm an entire industry.

But diplomatic resolutions of price wars are generally impossible because overt diplomacy is a form of price collusion and may attract regulatory over-sight. Insurers should continuously monitor price changes in the industry and vary their prices accordingly until they reach the point where any further decrease in their price will affect survival.

There should also be a means for the customer to consider both price and other comparison factors. In this regard price comparison sites may help a lot. When choosing an insurance product or provider it is important that the customer chooses the policy that meets all their requirements and provides them with the best protection and service. 

The regulator and AEI

To right the wrong, the regulatory organ can set minimum price as a floor to protect the public. Strong Competition law is required so as to promote or maintain market competition by regulating anti-competitive conduct of insurers. The Association of Ethiopian Insurers (AEI) can also help in alleviating such bottlenecks through creating the awareness and other feasible ways.

Preventing a price war would be easy if it were possible to demonstrate the benefits of peace. The negative consequences create a strong motivation to avoid price wars. A price war is every insurer’s worst nightmare. Price wars are detrimental to all involved. They destroy industry profits and rarely lead to long-term advantage for anyone.

2nd Year . July 2014 . No.16

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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