Cut throat Price Competitions, Low Capital Base, & Poor Policy Threaten their Growth
Insurance is one of the key pillars of a modern economy. It contributes to mobilize savings, transfer risks and reduce financial losses.
The history of modern insurance in Ethiopia, especially the private sector driven one, is at its early stage. However, the sector is crippled with lack of innovative products and services. As a result, the industry lags far behind several African countries. The sector’s growth, especially in recent years, is marred with rising claims and declining premium rates. The stiff price based competition in the market contributed to this situation. EBR’s Ashenafi Endale explores the issue to offer this report.
On October 07, 2017, 380 shareholders of Awash Insurance Company (AIC) assembled at Hilton Addis Ababa for the company’s 23rd annual general assembly meeting. They convened to discuss on the company’s annual report of the 2016/17 fiscal year, presented by Hambissa Wakwaya, board chairman of the company. Many of the shareholders were delighted to hear about their company’s performance measured in almost all financial indicators.
“In 2016/17, the gross written non-life insurance premium grew to ETB544.65 million, which showed 14Pct growth compared to the previous yeaar,” Hambissa told shareholders with excitement. “All the classes of non-life business showed growth with the exception of engineering class. The highest growth rates were registered in fire class with 29Pct increment compared with the previous year.”
Although many financial performance indicators point to a positive direction, it was the reverse when it comes to profit, which is the most important performance measurement in the eyes of shareholders. The net profit after tax of the company stood at ETB88.8 million, which is 4Pct (ETB3.5 million) below the profit registered in the previous fiscal year.
The shareholders’ cheer and handclapping eventually faded away when the Board Chairman told them about declined earning per share of the company for the year from 47.8Pct to 35.6Pct.
After hearing AIC did not perform well in profit, shareholders started to voice their concerns. “The profit is too small compared to the income generated from premium,” complained one of the shareholders.
For the unbalanced growth of premium income and profit, stakeholders point their fingers on the increasing amount of claims paid for insurers especially in the Motor class. For instance, the main reason for profit decline at AIC is due to the overwhelming net claims paid in this class, which increased to ETB264 million in the year from ETB224.8 million in the previous year, a 17.44Pct surge. “Almost half of the income generated in the form of premium is paid as a claim.” said Hambissa.
To make things worse, out of the total gross written premium of the company, close to 60Pct comes from the Motor class. The Motor class also dominates the different portfolio mix when it comes to net incurred claims. In 2016/17, out of the ETB238.6 million net claims incurred, the motor class accounted for ETB212.4 million (89Pct).
Of course, the main contributor for the increasing claims from Motor class for Awash and many other private insurance companies in Ethiopia is the ever increasing traffic accidents and fatalities that are growing at an average of 10Pct annually. On top of the pressure on insurers, road traffic deaths and injuries have been the key public health and development challenges for the country.
AIC is among the early few established private insurers in Ethiopia after the partial liberalization of the financial sector in 1994. The Company provides general and long-term (Life) insurance services. Until June, 2017, its current assets reached at ETB718.7 million while it has more than 1,280 individual and corporate shareholders. According to its annual report, Awash follows the giant state owned, Ethiopian Insurance Company (EIC) in terms of market share with 7.65Pct and 15.3Pct in Non-life and life insurance businesses, respectively.
The profit of Africa Insurance that was established in the same year as Awash also decreased by ETB2 million in 2016/17 despite 30Pct growth of premium collection. The premium collection of Africa Insurance stood at ETB524 million last year, while its earnings per share decreased to 21Pct from 23.9Pct a year ago. “In Africa Insurance, more than 65Pct of the premium income is generated from motor insurance.” Kiros Jiranie, Managing Director of Africa Insurance told EBR. “On the other hand, out of the total claims paid, motor’s share was around 90Pct.”
On top of the increasing claims paid by insurers especially in Motor class, the decreasing rate of premium, which is the cost of insurance broken down to a per unit cost, is hurting the industry. “The rate of premium has kept falling, contrary to the highly increasing claims and associated costs.” explains Meseret Bezabih, CEO of the United Insurance Company (UNIC) and President of the Ethiopian Insurers Association (EIA). “There is no economic explanation for the problem currently happening in the industry. Premium rate should be a reflection of the risk and the economy.” she added.
United’s non life gross written premium has shown a record growth of 23Pct in 2016/17 and reached ETB387.2 million while the life premium generated ETB29.8 million growing by 10Pct. The combined written premium has gone up to the tune of ETB417 million. However, its profit before tax has fallen in the year to ETB70 million from ETB72 million in the previous year.
The United Insurance was established by 87 individuals and enterprises in 1994 with a paid up capital of ETB 8.073 million. Following the merger with Lion Insurance Company in 2002, United is currently owned by more than 431 shareholders. Its paid up capital is now ETB245 million.
Meseret stresses that the rate of premium is calculated by considering risks as well as associated costs like management expenses and expenses for intermediary brokers, which are increasing at rapid pace. For instance, United’s total expense such as employees salary and benefits as well as office rent and commission payment climbed from ETB53 million a year earlier to ETB59 million last year. Awash’s total expense also increased from ETB62.7 million to ETB78.9 million in the same period.
One of the main factors that contribute to the decline in the premium rate is the nature of the competition in the industry. “There is unfair competition in the industry, based only on price rather than products,” argues Kiros. “This is highly affecting the profitability of insurance companies and the growth of the industry.”
Zafu Eyessuswork Zafu, an insurance mogul with global experience in the business and adviser at United Insurance argues the way insurance companies were established from the beginning contributes to the unfair and price based competition in the industry. “Some insurance companies were established along political, religious and ethnic lines,” he said. “Those clients’ that have attachments with similar political, religious and ethnic background will go to insurers that have similar attachment with them.” he complains.
Zafu stresses that insurance companies are not established in a professional way. “Even the government has its own insurance company that handles its affairs. “Since government institutions are likely to use EIC, private insurance companies are affected. The late entreats also cut premium rates massively to snatch clients from older insurance companies.”
However, EIA is currently conducting a study to identify factors that contribute to the declining rate of premium. “The study is expected to identify factors in addition to verifying the mismatch between the current premium collections and claims. It will also determine whether the rate of premium decline is spread across all insurance policies or limited to few ones.” says Haddush Hintsa, secretary general of EIA.
The possible solution will be setting minimum premium rate, among other options, according to Haddush. “The study is delayed because of lack of reliable data. It is expected to be finalized in [few weeks].”
Kiros, on the other hand, sees the unjustified price based competition in the industry associated with the limited range of insurance products offered by insurers. “Since insurers cannot compete on products, price based competition becomes the rule of the game.” He underlines.
Stakeholders argue that the limited capital of insurance companies hindered them from investing on innovative ideas to offer a range of insurance products that can fetch bigger premium. “The economy is expanding; investment and business activities are also rapidly growing. Since these activities are not risk free, the insurance industry should have grown in rates that match the momentum of the economic growth.” stress Haddush.
The minimum paid up capital requirement set by the NBE more than two decades ago, was ETB3 million for life insurance and ETB4 million for non –life insurance. It was increased to ETB15 million and ETB60 million for life insurance and non- life insurance respectively, just four years ago. This small capital of the insurance companies limits them from diversifying the range of their products.
Awash’s paid up capital currently stood at ETB246.6 million while Africa’s reached ETB173.3 million. The paid up capital of each of the late entrants such as Bunna, Lucy and Tsehay insurances remains below ETB100 million.
“Four years ago, the minimum paid up capital requirement for establishing non-life insurance business was ETB4 million, which is equal to the price of a couple of brand new vehicles,” stresses Meseret. “This clearly tells to what extent the sector was ignored.”
Despite capital limitation, few insurance companies are trying to introduce new and innovative insurance products. United pioneered the introduction of funeral insurance in 2014, after studying the weakening of Idirs, local welfare associations. “However, the penetration rate of the insurance policy has not been as expected.” says Meseret.
United also launched health evacuation insurance product four months ago, after long negotiation with East African Aviation, which provides air medical services. “Introducing this insurance policy requires putting aside additional reserve on top of meeting tough requirements of reinsurance companies.” Meseret underscores.
The low penetration rate of these newly introduced insurance policies led Meseret to conclude that the market appetite for new insurance products is low, mainly due to the lack of awareness, absence of legal frameworks, and limited disposable income as well as lack of government attention for the industry.
One area that needs government attention and improvement in the legal framework is the requirement levied on insurance companies on their investment of the general insurance funds. According to the directive issued by NBE in 1994, investments of insurance companies in company shares should not exceeding 15Pct of the total admitted assets while in real estate it should be below 10Pct of total admitted assets. Insurance companies are also allowed to invest 10Pct of their admitted assets in investments of their choice. They can also use not less than 65Pct of admitted assets to deposit in bank or spend on treasury bills.
Admitted assets is defined by the NBE as any property, security, item or interest of an insurance company recorded in the financial statements of the insurance company excluding premiums due to the insurer but remaining unpaid for more than 90 days except in so far as provisions are held against the premiums.
“Although investments in real estate need huge capital, because of NBE’s requirement insurers can not invest in the sector in massive scale,” argues Meseret. “This restricts us from compensating the losses occurred while executing our core activity. It also restricts insurers’ ability to boost profit and invest on innovative insurance products.”
The total income of United from investment increased from ETB37.9 million in 2015/16 to ETB39 million last year. On the other hand, investment income reached ETB82.3 million at Awash last year up from ETB64.9 million in the previous year.
Haddush says the 17Pct growth rate of the insurance industry is not a simple progress. But, a lot has to be done to achieve concrete growth that goes with the expansion of the economy.” Currently, 17 insurance companies operate in the industry with a total of 482 branches. In addition, a reinsurance company was also established in 2015/16. Out of the 17 insurance companies, seven of them provide general insurance services while the rest provide both general and life insurance services. Currently, 2,230 insurance agents, 54 brokers, 96 claim assessors and two insurance investigators operate in the industry.
Despite such progress, Zafu argues that insurance companies are performing like in their initial years of operations. “It has been 23 years since private insurers’ commenced operation. But, they are still infant.” he argues. “As a result, they are not playing their [due] role in the economy.”
Studies conducted on the issue indicate that insurance companies play a critical role in a given economy through risk mitigation and intermediation. As a risk transfer mechanism, insurance companies support economic actors to protect their economic and social assets accumulated while deploying long term capital in the real economy. They support economic growth directly and indirectly contributing their part in the capital market development.
According to a report published by Centre for Financial Regulation and Inclusion, a non-profit think-tank based in Cape Town in March 2017, insurance industries in Sub Saharan Africa can be plotted along four different stages of market development based on their average income and insurance penetration stage. The first stage is where enabling environment for the operation of insurance business is established but local skills and capacity are limited while in the second stage, the insurance market starts to expand on the back of existing client bases through group and compulsory product lines such as third party vehicle insurance.
In third and fourth stages voluntary sales of life insurance policies takes off at scale. In addition, the insurance industry matures and offer more sophisticated products with diversified providers and distribution channels. This leads to large client base.
The insurance industry in Ethiopia can be plotted in the first and second stages, according to the report. “When we compare the performance of the insurance industry with neighbouring countries, it is staggeringly low,” explains Zafu. “For instance, Kenya’s population is less than half of Ethiopia’s. But, the premium collected by insurers in Kenya is five times higher than the collection in Ethiopia.”
Non-life insurance penetration levels in almost all African countries are lower than the global average of 2.7Pct, according to Africa Insurance Barometer 2017 market survey, a publication of the African Insurance Organization. While only South Africa is on par with the global average, Kenya and Morocco follow with 1.9Pct and 2Pct, respectively. The non-life insurance penetration rate in Ethiopia stood below 1Pct.
The non-life insurance market size in South Africa and Kenya also stood at USD8.4 billion and USD1.1 billion respectively. These market size is much larger than that of Ethiopia’s, which stood at USD300 million.
Therefore, while addressing the debilitating factors in the insurance industry in Ethiopia is the bottom-line, policy barriers and lack of innovative services are the surfacing external and internal limiting factors respectively.
6th Year . December 2017 . No.56