Microinsurance: The Long Laboring

Microinsurance is insurance that can be accessed by the low-income segment of the population and small businesses. Despite its business potential and instrumental role in averting social and economic risks, the penetration of microinsurance remains very low in Ethiopia, a country with 80Pct of the population engaged in smallholder, rural, and rain fed agriculture, and where crop and livestock failure is frequent. EBR’s Ashenafi Endale explores why microinsurance could not capitalize on the rising demand and takeoff as a new business front.

Due to reform implemented following the appointment of Prime Minister Abiy Ahmed (PhD), new players are joining the financial industry. More than 15 commerical banks are now under establishment while close to ten full-fledged interest free banks requested license, in a year after the National Bank of Ethiopia (NBE) allowed full-fledged interest free banking.

In sharp contrast, no single business requested license to open micro insurance business, five years after the central bank introduced a law that allow the establishment of micro insurance firms. Confused by the dis-interest, NBE ordered mainstream insurance companies operating in Ethiopia to mandatorily allocate resources for micro insurance.

To upsurge interest towards micro insurance business further, the central bank recently introduced regulation that allow establishment of Takaful businesses, sharia complying insurance companies. The minimum paid up capital required to establish a new specialized micro insurance firm is ETB10 million.

Micro insurance companies are financial institutions that provide protection for low-income people against specific risks. The main characteristics of micro insurance is it is designed to benefit and protect the lower section of the population by charging premium proportionate to risk involved. Despite the fact that 80Pct of the population is engaged in backward rainfed agriculture in which crop and livestock failure are serious risks, the penetration of micro insurance is very low in Ethiopia.

Of course, the penetration rate of the mainstream insurance itself is utterly shallow. The total premium of the 18 insurance companies stood at ETB9.1 billion in 2019 while the contribution of the insurance sector to GDP is 0.02Pct. This is the lowest even by Africa standard.

Even few micro insurance products such as index-based crop and livestock insurances existing in Ethiopia, are subsidized by donors. Over 40,000 farmers and pastoralists benefited from numerous donors driven micro insurance pilot projects, between 2009 and 2020.

Currently, Nyala, Oromia and Africa insurance companies as well as state owned Ethiopia Insurance Corporation (EIC) provides micro insurance, under Satellite Index Insurance for Pastoralists in Ethiopia (SIIPE) project. The scheme, which started in 2018 and expected to end 2022, is funded by WFP and focus mainly on the state of Somali. So far, claims for 19,000 pastoralists amounting ETB12 million has been paid. Of this, 70Pct was addressed by Re-insurers, while the 30Pct by the four insurance companies. “The subsidized micro finance scheme could not scale up from pilot projects to full scale micro insurance business, in Ethiopia,” says Fikru Tsegaye, manager of Business Development and Corporate Affairs at Ethiopian Reinsurance.

Although insurance companies carry the risks, in many developing countries, micro insurance is subsidized by the government and donors initially. But after some time, it must shift from poverty cycle management by donors to risk management by insurers. “Insurance companies have better experience in managing risks. But this is not happening in Ethiopia,” explains Fikru.

The primary factor for this is the interests of donors, reinsurer and regulatory bodies could not converge, according to insiders. Numerous micro insurance projects started in Ethiopia but none continued after the project period is ended because of lack of exit strategy.

Experts recommends that micro insurance must be a business model totally conducted by insurance companies. “But this cannot happen under the current fragmented situation,” says Solomon Zegeye, director of Micro Insurance Business Division at Nyala Insurance.

“The country needs specialized insurance companies. Since damages are increasing in Ethiopia the need for micro insurance is undisputable,” says Belay Tulu, director of Micro Insurance Supervision at NBE. “Micro insurance is a bulk business by nature. We must start bundling micro insurance with other products like health insurance.”

Solomon agrees. “Claims are exponentially increasing in recent years,” explains Solomon “But it is difficult to undertake micro insurance as a business. We survived only because of donors support.”

Nyala and Oromia insurances are the only companies that provide micro insurance as a business. “When insurance companies provide micro insurance by themselves, the coverage would be 300Pct of the premium,” explains Solomon. “Claim from livestock is between 20Pct and 30Pct while crop insurance claim is even higher.”

The cost of providing micro insurance is high due to the absence of distribution channels. “Most clients reside in remote areas while financial institutions are located in urban,” says Solomon. “With the existing channels it is difficult to reach the low-income population.”

To reduce the distribution and delivery costs, Zufan Abebe, CEO of Nib Insurance, proposes partnering with other stakeholders operating in different modalities. “For instance, we can use formal and informal channels like Eddir, community-based risk management institutions. But, NBE must introduce legal framework that allows partnership with different formal and informal distribution channels, besides using insurance brokers and agents.”

Solomon stress the government’s current move to privatize the telecom sector, holds a huge opportunity to revolutionize the micro insurance sector. “Kenyan farmers access their insurers using their mobile phones. If the telecom infrastructure in Ethiopia improves, the delivery channel will be solved and micro insurance will thrive.”

On the other hand, insurance gurus like Eyesuswork Zafu, argues insurance industry cannot grow unless the insurance supervision is freed from NBE. “Both insurance and banking industries started at the same time in Ethiopia. But insurance industry stunted, while the banking industry grew significantly.”

“This is partly because the NBE has no experts or policy options to supervise and nurture the insurance sector,” argues Eyesuswork. “Recently the NBE allowed regional states to have 70Pct share in banks, but not in insurance companies.”

After trying for many years, insurance companies under their association finally manage to present the issue to the Office of the Prime Minister recently. The Association sited the experience of the Kenyan Insurance Regulatory Authority, as an example for successful regulatory body and requested to establish similar public institution in Ethiopia.

The government says it is trying to uplift micro insurance business by taking different initiatives. For instance, Rural Financial Policy and Strategy is at its final stage. The strategy focuses on curving agricultural risks arising from multidimensional factors like climate change and price fluctuations. EBR

9th Year • Nov 16 – Dec 15 2020 • No. 92