Africa Insurance Company is one of the oldest private insurers established in Ethiopia after the partial liberalization of the financial sector. Established in 1994 with ETB15 million paid up capital, the company has been engaged in all classes of insurance — general and life insurance.
As the industry is being challenged due to the growing cut throat price based competitions and rising clams, some insurance companies are witnessing a declining profit, Africa Insurance is one of them. EBR had a brief discussion with its managing director, Kiros Jiranie, to learn about the company and the overall development of insurance business in the country.
EBR: The profit of Africa Insurance declined in 2016/17 compared to the profit in the previous fiscal year despite the surge in premium income. What are the reasons?
Kiros: The rise of income from premium comes because of the increment registered in motor class. Despite the decline in the motor insurance premium rate, the severity and frequency of car accidents have increased at national level. In Africa Insurance, more than 65Pct of the premium income is generated from motor insurance. On the other hand, out of the total claims paid, motor’s share was around 90Pct. In addition, maintenance, manpower, and other related costs also increased. So, in an environment where the rate of premium is decreasing while claims are raising, the profit is expected to decrease.
Why the growth rate of motor premium declined while claims and other costs are increasing?
The rate of premium should have increased parallel to claims and other costs. Unfortunately, motor and other insurance policy premium rates have never increased in Ethiopia in recent years. This is due to the stiff price based competition in the sector. The industry has been selling traditional insurance policies. Since there is no other competition edge, the 17 insurance companies compete with each other cutting price only. However, a study is being conducted to identify the root causes of the problem.
What will be the impact of the study that is conducted to identify the problems related with the decline of premium rate?
After the rate of premium fall reached alarming point, the NBE become concerned about the future of the industry. The insurers are also concerned about their survival. So the Ethiopian Insurers Association started to conduct a study with the support from the central bank. The study will identify the gap between the existing rate of premium and the risk. After the study is finalized NBE will take corrective measures.
What are the reasons for the undiversified nature of insurance policies in Ethiopia?
When the financial sector was partially liberalized 25 years ago, the paid up capital that is required to established insurance company was ETB3 million for life insurance and ETB4 million for general insurance. This has remained until four years ago. Offering diversified and new policies needs hiring local and foreign experts, conduct studies, investing in research and development. So, it was difficult to offer diversified insurance policy when you have little capital. Instead, surviving in the industry by selling traditional insurance policies became a trend.
What is your company doing to diversify insurance policies and introduce new once?
Assessing the level of insurance industry at a national level is important to answer this question. Most of the insurance companies in Ethiopia are concentrated in the capital city. Between 60Pct to 80Pct of the total premium is generated from Addis Ababa. But, the number of branches of insurance companies outside of Addis Ababa is small. Broadening customers’ base and introducing new products is not the trend in Ethiopia.
However, it is inevitable for insurers to come up with new and innovative insurance policies in order to stay in the business. In a similar pattern, Africa Insurance recently conducted a pilot project to assess the demand for insurance policy from farmers. In rural areas, only agricultural inputs are insured through weather index based crop insurance. Due to the recurrent drought, the demand for agricultural insurance policy is also increasing.
Despite the economic growth registered especially in the past decade, why the insurance converge remains low in Ethiopia?
Theoretically, the insurance premium is expected to increase parallel to the growth of the economy because of the economic activities that are crated, nurtured and grew. However, this is not the case in Ethiopia. Limited capital problem, lack of government attention for the sector and lack of awareness also contributes to the low level performance of the industry.
Do you think there is enough room in the country for the growth of the insurance industry?
There is huge potential, not room. The huge population of the country can prove this argument. The economy is also expanding. For instance, the construction sector is booming. The number of vehicles operating in the country is increasing as well. So, there is a big potential in Ethiopia. The issue is how to utilize this potential.
How do you evaluate the role of the National Bank of Ethiopia (NBE) in nurturing the insurance industry?
The job of the NBE should not be limited only to controlling insurance companies through financial auditing. It should work to bring growth in the industry and increase its contribution to the economy. In addition to the insurers’ weaknesses, NBE’s reluctance to develop the sector has also contributed to the poor performance of the industry.
The central bank mostly supports the banking industry and parallel efforts to support the growth of the insurance industry are minimal. That means, the support that the insurance industry is receiving is not as viable as the banking industry enjoys. For instance, NBE did not conduct studies to identify the problems observed in the industry as much as it does for the banking sector. Officials tell us they cannot do anything unless the industry strives to develop, as if it grows only by the insurers’ effort.
What should the government specifically do in order to improve the insurance industry?
In some countries, insurance companies are directly administered by central banks and in others a commission that reports to the central bank handles the insurance industry. In Ethiopia’s case, it is better to establish a commission to administer the industry and provide concrete support. I am not saying the insurance industry should not be regulated by the NBE. But a commission is needed because the NBE could not give attention to banking and insurance industries equally. The commission could be dedicated to devising strategies that could solve problems observed in the insurance industry. The industry could not have reached this stage, if such moves were taken earlier. Insurance commission must be established if the industry has to grow fast.
The Ethiopian Reinsurance was established last year. How far it has been helpful for private insurance companies so far?
Insurance is risk transferring mechanism. The insured transfers their risk to the insurer. The insurer, in turn, transfers the risk to reinsurers. Since it establishment we have been buying part of our reinsurance products from Ethiopian Reinsurance using local currency, which is not the case in the past. Before, we entirely depend on foreign based reinsurance companies, which require hard currency. So, Ethiopian Reinsurance is helping the country to save its scarce foreign currency.
Is it only local insurers that deals with Ethiopian Reinsurance?
Reinsurance businesses should not be limited to the local market. Just as we send risk to abroad, Ethiopian Reinsurance has to take risks from insurers in other countries. It was established just a year ago and as time goes by it will expand gradually to the foreign market by developing risk absorbing capacity. But for now its business relation is limited to local insurers.
6th Year . December 2017 . No.56