How Insurance Works

Insuring Ethiopia’s Future: How Digitisation Can Disrupt the Insurance Industry

Globally, the insurance industry is a critical component of the financial services sector, providing risk management and protection to individuals and businesses, funding capital-intensive infrastructure projects and long-term shareholders of listed firms, to name but a few of the activities they are involved in. Long-term contracts and a wide range of products characterise the industry, including life, health, property, and liability insurance. It is highly regulated, with specific rules and requirements for insurers to operate and manage risk. Like all other industries, the global insurance industry is undergoing significant transformation, driven by digitisation, and this represents, for Ethiopia, a window of opportunity to radically re-design its insurance industry, further driving the changes experienced in the banking sector.

The Ethiopian insurance market has been growing steadily over the past decade. National Bank of Ethiopia (NBE) figures show that the insurance industry’s total assets increased from ETB6.1 billion in 2010 to ETB28.2 billion in 2019, representing a compound annual growth rate (CAGR) of 18.8Pct. In 2019 alone, the sector grew by 10.4Pct, with a total premium of ETB7.9 billion (USD210 million). Licensed insurance companies increased from 16 in 2010 to 18 in 2019, indicating a growing interest in the sector.

The market is relatively small and nascent, dominated by a few players with a low insurance penetration rate estimated at 0.7Pct of GDP in 2019, compared to the African average of 2.8Pct. This figure indicates a significant untapped potential for the insurance market in Ethiopia. But importantly, a more evenly balanced and structured financial services industry will form the bedrock of the government’s broader economic liberalisation programme.

Digitisation, in the context of this article, refers to the transformation of manual or paper-based processes into electronic or digital formats. This intervention is a crucial differentiator because we advocate a two-step process for adopting Artificial intelligence (AI) and large language models (LLMs) – the ultimate goal. Firstly, the industry must evolve, further drive through, or adopt, lean management methodologies that create a systemic and process-driven environment enabling smoother and quicker adoption of advanced digitisation tools. Lean management, a business methodology that increases quality and efficiency by eliminating wasted resources like time, money, and effort, will streamline existing activities, wring out cost inefficiencies, increase productivity, and identify knowledge gaps for remediation and waste that will translate to the digitisation of processes such as underwriting, policy issuance, claims management, and customer service.

The industry has yet to stand still, and credit goes where it’s due. It has been slowly digitising its processes over the past few years. NBE figures show that the percentage of insurance companies offering online services increased from 56Pct in 2018 to 67Pct in 2019. Additionally, the number of insurance policies sold online jumped from 5,603 in 2018 to 23,272 in 2019. The continued adoption of digital technologies in the insurance industry has the potential to disrupt traditional business models by reducing costs, increasing efficiency, and improving customer experience. A McKinsey report noted that digital distribution channels could minimise customer acquisition costs by up to 90 Pct. For Ethiopia, more is better – further digitisation has the potential to address some of the challenges faced by the Ethiopian insurance industry to grow market and product reach.

One of the reasons for the low penetration rate is the high cost of premiums, which makes insurance unaffordable for many people, particularly those in rural areas. The potential to provide low-cost insurance products to the rural population should be one of the critical goals of financial inclusion. By adopting digital technologies, insurers can reach a broader customer base, particularly those in rural areas, where access to insurance products is limited and where 70Pct of the population lives.

Innovative products can solve low penetration issues related to the absence of an adequate distribution network; it could also shorten the lengthy claims settlement process. Products like weather-indexed insurance, which pays out based on predetermined weather conditions and helps protect farmers from weather-related risks, are intelligent solutions. An International Finance Corporation (IFC) report states that agriculture accounts for 40Pct of Ethiopia’s GDP and employs 80Pct of the population, so this should, at the least, focus minds on such product offerings.

Furthermore, digital channels such as mobile apps, online platforms, and social media can help insurance companies overcome geographical barriers and reach customers in remote areas, allowing them to create awareness of insurance products and provide customers with easy access. Another IFC study noted that only 12Pct of Ethiopians have access to formal financial services, with rural areas severely underserved. It means a massive opportunity awaits the financial services industry (banks and insurers) to collaborate and bring inventive products that support the broader economy to market.

Further advancements from digitisation include the accuracy of risk assessments. Insurance companies traditionally rely on actuarial tables to determine premiums. However, these tables may need to be more accurate for rural populations with different risks and needs than urban populations. By digitising, companies can gather more data on rural people and develop more accurate risk assessments. Digitisation is cost-effective, allowing firms even to be more competitive in their premiums and direct investment where it matters to optimising customer engagement and bringing to market innovative right-cost products to the masses.

Development or business success is never a straight line, and challenges present themselves. Whilst the opportunities are vast, one of the biggest challenges is the need for more infrastructure in rural areas. Many rural areas in Ethiopia do not have reliable electricity or internet access, which can make it difficult to use specific digitisation tools such as AI and MLM effectively hence why we advocate the adoption of lean management tools such as robotic process automation (RPA), a cost-effective and quick-win interim solution.

Another area of focus is the regulatory environment. Whilst the government has brought in a raft of changes and new regulatory regimes to the insurance industry, efforts here must continue in the same vein as that experienced in the banking sector. The recent announcement of moves to establish a new independent insurance regulator is a step in the right direction. Finally, there may be cultural barriers to overcome. Technology and insurance need to be more widely understood and trusted in rural areas, and convincing people to purchase insurance products may be challenging.

To conclude, there is significant potential for the insurance market in Ethiopia. The country’s growing population and rising middle class allow insurance companies to tap into a vast market. Additionally, governmental efforts to improve the regulatory environment for the insurance industry, with the introduction of new laws and regulations aimed at promoting growth, are having an effect and will, in time, create a competitive environment enabling new market entrants. Challenges, including a lack of awareness and understanding of insurance products among the general population, limited distribution channels, and the high cost of insurance premiums, do not distract from the significant potential for growth. The government and industry stakeholders should work together to improve awareness and education about insurance products and to develop innovative distribution channels that make insurance products more accessible and affordable to the general population. A vibrant and competitive insurance industry is vital to Ethiopia’s long-term economic prosperity.

11th Year • August 2023 • No. 120 EBR


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