Breaking Down Barriers

Reforming Leadership Criteria in Ethiopia’s Insurance Sector

This analysis is penned sincerely to support the Ethiopian insurance sector, particularly in light of the existing deficiencies and the absence of a comprehensive policy and legislative framework for leadership development. This framework is essential for establishing and enforcing appropriate, non-discriminatory fit and proper criteria for selecting and appointing key personnel in leadership roles, even when compared to standards set by other financial institutions in Ethiopia.

In 2024, the National Bank of Ethiopia (NBE) revised leadership criteria for banks to align with international best practices and improve governance and risk management. Fundamental changes include requiring one-third of a bank’s board to be independent directors without ties to the bank and stricter qualifications for board members and senior management. Additionally, the election procedures for board members have been updated, along with changes to their compensation structure, though concerns still need to be addressed about attracting qualified professionals. These reforms aim to enhance Ethiopia’s banking sector’s governance and stability, while similar changes in the insurance industry are still pending.

The Regulator plays a crucial role in setting fit and proper standards for insurance sector leaders. These standards require individuals in critical positions to maintain the necessary competence. Failure to uphold qualifications may lead to a review by the proposing entity and the regulator. The Regulator’s criteria include character, competence, and experience, assessing skills, knowledge, diligence, and judgment for effective leadership.

These standards ensure that insurance companies are managed by qualified individuals, promoting sound practices, stability, and growth. They aim to foster public confidence, appoint capable, integrity-minded leaders, and enhance governance effectiveness.

Probity needs to be a key criterion, relevant at appointment. Industry leaders should engage in continuous professional development (CPD) programmes to stay updated on the sector and comply with internal ethical codes and professional standards. This commitment to continuous learning and ethical conduct ensures that the industry is always striving for excellence. In misconduct cases, institutions needs to take reasonable steps for disciplinary action and report issues to the Regulator.

NBE’s initiative to update these requirements is commendable. However, the proposed amendments should not only promote a transparent, non-discriminatory regulatory environment but also enhance succession planning and leadership development in Ethiopia’s emerging insurance industry. This reassures the audience about the fairness and transparency of the industry’s future, especially with the expected entry of foreign competitors.

The stipulated requirements regarding years of experience, age, and academic qualifications are appropriate as they accurately represent the unique demands of the insurance sector. However, the exclusive focus on operational background is deemed discriminatory and should be revised to encompass other senior executive roles. The draft directive specifies that the CEO of a composite insurance company should possess experience in general insurance operations, with a preference for additional expertise in insurance operations.

For the life insurance sector, the CEO must have experience in life insurance operations. As indicated, the proposed criteria are overly restrictive, limiting candidates for leadership roles to those with operational backgrounds and constraining succession planning and leadership development within the industry. Drawing from the experiences of the banking sector in Ethiopia and global best practices, it is essential to broaden the criteria to include all senior executive positions within insurance companies without bias. Furthermore, the directive should incorporate provisions that mandate insurance companies to cultivate and prepare successors for leadership roles.

It is important to emphasize that, in response to industry requests and an acknowledgement of existing challenges, the requirements for banks and microfinance institutions can be used as a lesson for the insurance industry.

These sectors have changed their stringent criteria with more comprehensive directives. Although it was narrow compared to other directives, the insurance sector’s policy had a definition for core areas with a wider scope than the newly proposed requirement. Core areas include operations, underwriting, claims, reinsurance, finance, internal audit, and risk management. The policy was discriminatory since it excluded marketing, IT, and other core functions of the insurance business from aspiring to the top leadership positions.

The insurance sector’s standards are rigorous, leaving little room for effective succession planning. A significant concern arises regarding the rationale behind the Regulator imposing such strict and potentially discriminatory requirements solely on insurance companies, in contrast to other financial institutions both in Ethiopia and globally.

The insurance sector needs to establish rigorous fit and proper criteria for selecting its leaders, who should possess high competence and comprehensive knowledge of regulated activities. These leaders need strategic insights and an understanding of insurance product structures, objectives, and risks. Importantly, expertise is not limited to operational personnel; other senior staff can also provide the necessary leadership. The insurance industry’s future should be shaped by capable individuals meeting academic and behavioural standards and welcoming candidates from diverse fields like marketing, finance, risk management, and IT.

The current requirements for CEO roles in the insurance sector are overly rigid and discriminatory, focusing mainly on operational positions. In contrast, many Ethiopian banking and financial institutions have updated their criteria for greater inclusivity. To promote growth in the insurance industry, these criteria need to be revised to attract leaders with the necessary expertise. The Regulator should establish comprehensive, non-discriminatory selection criteria and incorporate international best practices, especially with the expected entry of global players. This approach will ensure effective governance and oversight, with competent authorities able to enforce regulations. The fit and proper assessment should be both an initial evaluation and a continuous review of compliance. Implementing these best practices will provide a framework for effective supervision as the market prepares for liberalization.

Best Practices may align with pertinent international agreements and national regulations. The industry ought to draw insights from the experiences of the banks and microfinance institutions, examining the reasons behind their development of more comprehensive and appropriate criteria compared to those of the insurance industry.

Indeed, the directive for the position of chief executive officer (CEO) for Ethiopian financial institutions needs amendments. The revised criteria should require a minimum of a bachelor’s degree or an advanced diploma in insurance, with a preference for candidates holding a certificate or Life Office Management Association (LOMA) in insurance. Candidates needs to have at least 12 years of experience in an insurance company, including six years in a senior executive role. “senior executive officer” consists of all titles reporting to the CEO or board. Additionally, the directive should broaden requirements for all senior executive roles and mandate insurance companies to develop leadership succession plans. This could involve job rotation, coaching, and mentoring to prepare future leaders. A more effective approach would be to require insurers to submit their succession planning policies instead of imposing potentially discriminatory directives.

The directive should include a whistleblowing section essential for preventing misconduct, fraud, and corruption. Insurers in Ethiopia must implement a policy to raise awareness of whistleblowing procedures for reporting concerns about Key Persons’ conduct. This allows individuals to report issues directly to the CEO or the Regulator, with protection against retaliation. The policy needs to outline protective measures for whistleblowers and strategies for managing reporting, accountability, and confidentiality. The Regulator should also develop guidelines on the suitability of Key Persons in ownership and management roles, informed by other markets.

12th Year • September 2024 • No. 133