Investors Fail to React to Political Risks
During the political unrest that has plagued the country over the last three years, many businesses were burned, looted and damaged by protestors. Investors lost hundreds of millions of birr in property. Capitalizing on these opportunities, insurance companies have started introducing new policy known as political violence and terrorism insurance. At first, there was high demand for the new policies, but that was short lived. The renewal rate is low, while new investors are disinterested in the coverage. EBR’s Samson Berhane explores.
Girma Alemu (name changed upon request) is an agricultural investor, with farmlands located in Ataye, a special woreda in the state of Oromia. Two years ago, as political unrest swept through the country, many investment properties were damaged, looted and burned by protestors, leaving Girma concerned about the security of his farm.
Girma was terrified by accounts of the damage sustained by businesspeople, who lost hundreds of millions of birr in properties. A year ago, he learned of insurance coverage offered by some companies which covered potential losses resulting from political violence, terrorism, sabotage, riots and strikes, among other things. But in spite of the risk that still exist in his area, he was not willing to buy insurance coverage. “When I discovered that this kind of coverage was available, the country was already in a more stable situation,” Girma recalls.
But three months ago, his farmland, which was covered in fruits ready for harvest, was looted and burned by protestors. “I regret my decision,” he told EBR. “Because I neglected to buy the product offered by the insurance companies, I lost my property.”
Just like Girma, many investors have overlooked the importance of political violence and terrorism insurance. Although many investors were luckier than Girma, most of them have neglected the benefits of buying insurance coverage protecting their assets from political riots, demonstrations, civil disturbance, insurrections, and terrorism.
Many of the investors provide the same justifications. Most of them, including Mohammed Adem, a businessman who owns a plastic factory, think there is no reason to buy political and terrorism insurance coverage when the country is stable. “Although I know it’s important, I don’t think it is a priority over other essential needs,” he says.
Ethiopia has gone through momentous political transformations over the last 12 months. The country showed improvement in terms of stability as indicated by the Fragile States Index (FSI), a report released by the Fund for Peace. Ethiopia is the most-improved country on the 2019 FSI, improving by 5.3 points to a score of 94.2. Significant political changes, which have seen a peaceful transition of power and a new Prime Minister who implemented bold reforms to boost economic and social inclusiveness, appear to be the main drivers behind this dramatic shift, according to the report.
The risk of political violence, on the other hand, increased from high to severe, according to a risk mapping published by Aon, a leading global professional services firm which provides a broad range of risk, reinsurance, retirement and health solutions. According to the report, this means the likelihood and impact of business exposure to politically violent events in the country has increased.
“Businesses should be alert and must buy insurance covering damage that could potentially result from political violence and internal conflicts,” says Habtamu Debela, Country Director of African Re. “But awareness is still low amongst investors.”
Nyala Insurance was the first company to offer political violence and terrorism insurance. “Before we launched the product, our clients and other investors requested it many times,” recalls Yalemaya Hailemariam, Underwriting Manager at Nyala Insurance. Bearing this in mind, Nyala started providing coverage to its clients, but it has only sold less than five million birr in premiums annually. It also collected four million birr in premiums on political violence coverage in the first three quarters of the current financial year.
“We have not promoted the product as much as the others because of its unique nature,” says Yalemaya.
Terrorism and political violence insurance, although it differs across countries depending on the political situation, involves coverage against physical loss and damage, as well as business interruption costs, as a result of terrorist acts or acts of political violence. After the terrorist attack on the World Trade Center in New York on September 11, 2001, the penetration rate of the insurance policy dramatically increased worldwide.
Despite gaining more acceptance across the world, including in sub-Saharan Africa, over the past 18 years, the growth of this type of insurance policy in Ethiopia is still below expectations. Only eight of the 18 insurance companies in the country provide such coverage, which accounts for less than two percent of their total premiums in the past nine months, which stood at ETB6.8 billion.
One of the major reasons stated by insurers for the low penetration of this kind of coverage is low awareness amongst investors. “Since insurance firms are not allowed, and don’t have the willingness, to promote the product, many investors don’t understand the benefits,” says Tigistu Shiferaw, Underwriting Manager at Oromia Insurance Company. “This, coupled with the tendency not to prioritize insurance needs during the inception of investments, has lowered the growth and expansion of this particular coverage.”
Mesfin Eyasu, marketing manager of United Insurance, agrees. “While the regulatory body [the National Bank of Ethiopia] has instructed that this product should not be promoted, we sell it to corporate customers and others after seeing how stable and secure their environment is,” says Mesfin.
United collected ETB385 million in premiums over the past nine months, of which 2.4Pct was from political violence and terrorism insurance. “Although we could raise that number by providing coverage to vehicle owners, there are concerns that the risks are high,” he adds.
Almost all insurance companies have low customer bases, particularly for political violence and insurance coverage. The lower the customer base, the riskier the business is, according to industry insiders. As a result, insurance companies, all of which have reinsurance agreements with African Re, only sell the product to a few customers. “There is no pool or loss sharing arrangement between the insurance companies for this particular product, which expose them to high risks,” says Habtamu.
Fikru Tsegaye, Marketing and Strategic Team Leader of Ethiopian Re, supports this view. “Only one reinsurance company shares the risks of insurers. Since the reinsurance pool is small, the environment doesn’t enable insurers, which pushes them to charge discouraging prices.”
Many agree that price is also a major factor in the low growth rate of this particular insurance policy. Many businesses complain that the premiums charged by the insurance companies, which are between one and two percent of the value of the insured property, are expensive. “Besides paying that amount of money, if we suffer a loss, we are expected to surrender five percent of the amount we have lost. This discourages people from buying the product,” an owner of a leather factory in Dukem told EBR. “The fact that the price is higher for non-movable items makes it more expensive too.”
Insurance companies admit that this is a problem. “In the current political climate, the price is cheap considering the risk that we are taking,” the owner says. “Be that as it may, the product is like no other. We don’t make adjustments easily as it exposes us to higher risk. In order to sell the product at a large scale, peace and stability must be ensured across the country.”
Fikru, for his part, thinks that insurance companies should have a risk map, which is a data visualization tool for communicating specific risks an organization faces, in order to boost the premium production of this particular product. “The risk map will ease the risks faced by insurers and increase their confidence in selling the product to any potential customer.”
8th Year • Jun.16 – July.15 2019 • No. 75