Calls for Innovative Insurance Products
The novel coronavirus (COVID-19) was recounted to have arisen from Wuhan in China towards the end of December 2019, and the first case has been reported in Ethiopia by the Federal Ministry of Health effective from 13 March 2020. In a bid to curtail the spread of the virus, various preventive measures have been put in place by the government and insurers have also introduced some insurance products. The measures taken by the Government, among others, include declaring a state of emergency and working on urging the public to wash hands frequently, maintain social distancing, place reliance on reliable and up-to-date information about the pandemic, wear masks and ensure isolation after infection or when in suspicion of infection. In addition to social and health-related measures, the State-Owned Insurer has pledged to place life insurance for health professionals in direct contact with COVID-19 patients. During normal days, the insured public might not care much about insurance protection. However, in situations where pandemics like the COVID-19 cause pervasive fear and uncertainty, the focus of the uninsured public would shift towards available protection mechanisms such as insurance. Hence, the insurance industry has to evolve to meet these rising expectations.
In retort to these, private insurers, especially Nyala Insurance has officially commenced to offer insurance protection for its existing and potential customers, taking the COVID-19 as an insured peril. On the other hand, some insurers have also shown their concern by granting financial aid as part of their Corporate Social Responsibility (CSR). Provided the fast-paced nature of this pandemic around the country, however, the risk exposure and impact on Ethiopia’s economy, and the real purpose of insurance, which is returning the insured to the former financial position, one can conclude that the efforts are inadequate and the industry could use the opportunity to introduce new insurance products to meet the rising demand and significantly change the contribution of the insurance industry to the nation.
The COVID-19 pandemic has augmented the prominence of the insurance sectors’ role in development, and in the economic pliability of businesses and individuals. According to a report published by Deloitte in May 2020, the country’s real GDP growth in 2019 was 9.0% and was forecasted to be 6.2% in 2020 pre-COVID-19. This forecast has now been revised downwards to 3.2% in 2020. This is mostly due to disruption in supply chain and weakened global demand, which has affected the inflow of raw materials and finished products for manufacturing and trading, a sharp rise in inflation as domestic food prices rise steadily, a sharp decline in tourism as the Coronavirus pandemic deters travelers with hotel occupancy rate decreased to about 2% and cancellations on bookings for the next 3-6 months. The hotel and tourism sector represents 5% of Ethiopia’s GDP and supports 2.2 million jobs (about 8.3% of the total employment in the country.) Ethiopia’s hotel occupancy has gone down to about 2% from an average of 60% since the onset of the pandemic due to cancellations on bookings following increased travel restrictions globally. Estimates indicate that due to the sector’s strong linkage with the wider economy, most of the 2.2 million individuals employed in the sector are at risk of unemployment. Initial forecasts had suggested a 6% increase in arrivals from 1m in 2019 to 1.1m in 2020 and a 5.3% increase in receipts from USD 3.6bn in 2019 to 3.8bn in 2020. However, as the pandemic spreads further, fears of community spread through travel and group environments will continue to impede domestic and international tourism. As a result, these estimates will prove that the insurance sector’s protection to this industry needs to be increased to alleviate the potential impacts and economically manage the risks. The potential vulnerability of the sector opens the door for Hotel Comprehensive Insurance and Business Interruption Insurance as a panacea for the problem and to meet these and other emerging risks in the future.
On the other hand, Ethiopia’s Job Creation Commission has also estimated between 700,000-2 million jobs are likely to be lost in 2020 depending on the severity of the impact of the virus on Ethiopia’s economy. This also calls for the need to introde “Job loss insurance” in the future and the industry can take this as an opportunity to promote the product and hence support the labor market meaningfully.
Ethiopia’s manufacturing sector, which has been a key driver of growth in recent years, is expected to shrink by at least 50% amidst the COVID-19 pandemic. Further, with a partial lockdown in place, the manufacturing sector is estimated to experience a USD13.3m monthly decline in the income of workers. This would also pave the way for a significant promotion of Business Interruption Insurance.
Ethiopia’s economy is largely based on agriculture, which accounts for 33.3% of GDP. The sector contributed nearly 60% of the country’s exports, and 70% of total employment. Estimates have shown that a loss of agricultural output due to locust infestation and a slump in exports due to the COVID-19 pandemic is expected to see Ethiopia’s agricultural sector decline by 1.6% in 2020. However, Agricultural Insurance is almost non-existent in Ethiopia and the insurance industry should also use the existing opportunity to develop need-based and customized agricultural insurance products to protect and strengthen the backbone of the economy.
Similarly, the construction and real estate sectors contributed about 20.37% in aggregate to Ethiopia’s GDP in 2019. There are major construction projects currently underway and others are set to go ahead within the next five years. With industry growth estimated to contract at between 17% to 26% in light of the COVID-19 pandemic, the construction sector is anticipated to witness a 9.9% contraction on its contribution to Ethiopia’s GDP as the country battles to contain the spread of the virus. In line with this, the insurance industry should also dig deeper to find new ways to offer appropriate insurance products and services to this particular sector to tackle COVID-19 and to the inevitable crises of the future due to other pandemics.
The increasing hardship caused by COVID-19 on individuals, businesses, and economies has further highlighted the importance of insurance protection. In situations such as this outbreak, where events are rapidly changing, it is often difficult to continue with the conventional products. Insurers in Ethiopia need to guise at the specific terms of insurance and reinsurance agreements, the insurance policies, evolving government and legislative actions, and the unique facts and circumstances around, to twinset their products with the current situation and future expectations. The industry players, individually and collectively, need to play a forefront role in policy leadership with a clear mandate for the regulator, as well as effective synchronization amid government and the sector.
Insurers, in general, need to create space for responsive innovation for emerging risk exposures including pandemics, and trigger innovation rather than creating misplaced incentives that leave them swallowed by cannibalistic competition in the market. Most importantly, the insurance industry in Ethiopia should also remodel the way it manages risks and establishes “National Risk Pools” for catastrophic risks and/or pandemics to better manage the accumulated risk exposures. The industry has to evolve since the existing products can no longer meet the real expectations of customers. The real solidarity of the industry with its customers will be assessed and attested by its response to meet its words at times of pandemics and other risk exposures.
9th Year • August 1 – 15 2020 • No. 89