The need for an Independent Insurance Regulatory and Development Authority of Ethiopia (IRDAE)

Independent Regulatory Authority:
The What and Why
The necessity for regulation and supervision of the insurance sector is deeply rooted in the legal, sociological, and economic importance of insurance. Regulators are deemed as reactors, makers, and breakers of the insurance industry since they control and or facilitate the operations of insurers and related parties from their establishment up to their liquidation. This makes them highly responsible for the success or failure of the insurance market.

From the outset, before deciding where to place the insurance regulatory organ, the government should understand the unique nature of the insurance business and avoid the “one size fits all” approach which jampacks banks, insurers, reinsurers, microfinance institutions, capital lease financing firms, and many others under a single umbrella. Unfortunately, in the Ethiopian case, there are also dangers in applying the bank regulatory model to insurance, and there is a notion that whatever comes for the banks, the insurers must wear. It is apparent that regulators intentionally ignore the legal/ intrinsic separateness of these different entities which is demonstrated in their separate functions, business models, risk exposure, regulatory mindset, and required expertise, among others.

Experience has shown that a separate regulator understands the functional distinctions between financial institutions and gives the required due focus to each sector and provides equal opportunity for private and public sectors and plays a meaningful role in private sector development. It also limits the role of political engagement in the process and legitimizes the institutions in a democratic context whereby officials are not political appointees but deemed to be technocrats/ professionals recruited based on merit/ expertise. Moreover, setting up a separate regulator avoids having a single point of failure, avoids confusion, and builds public trust. Here it has to be noted that when banks and insurances are regulated by the same regulator, consumers may fail to differentiate the very different risks in these two markets. Similarly, all institutions licensed by a single regulator may be assumed by the public to be receiving equal protection.

According to the International Association of Insurance Supervisors (IAIS), an insurance supervisor is an institution(s) that is responsible for monitoring the (re)insurer and its intermediary behavior and implementing insurance rules and other applicable laws, including legislation and regulation.

Historically, regulation of insurance can be traced as far back as early 15th and 16th centuries. Today, in most countries, if not all, there are independently institutionalized regulators and specific regulations concerning the insurance business, and the regulation of the insurance industry has entered a new era of development and facilitation of innovation, on top of control, to meet the everchanging demand and market dynamism and hence, the regulatory body in Ethiopia should jump on the bandwagon.

Largely, the responsibility of the regulatory and supervisory bodies was thought only for consumer protection, stability of the financial system, and to maximize efficiency. However, through time, the evolving mandates of such institutions have started to include a nurturing and enabling environment, supporting the development of the insurance market through financial inclusion, promoting private-public partnerships, upholding the maintenance of a fair, safe and stable insurance market, ensuring a level playing field for fair and free competition of financial markets for all players, stimulating the private sector development, supporting technology and innovation in the market, working for the common goal of creating a matured insurance industry through coordination and consultation with relevant insurance authorities and stakeholders.

Moreover, sources indicate that two views on regulation put the perspectives on industry failure. The private interest view of regulation states that the governments regulate financial institutions to make government expenditure financing easy, direct credit to politically desirable ends, and maximize the benefit and the decision power of politicians and bureaucrats on the economy. Whereas the market failure perspective dictates that markets fail due to anti-competitive behavior, market misconduct, information asymmetries, and systemic instability. Moreover, to consider a certain regulatory environment independent, the day-to-day operation of the institution must be run by technocrats who have the necessary knowledge and experience and the appointment of the leaders should be merit-based and independent from political interference.

However, when we review the case in Ethiopia, the appointees at the regulatory house and the central bank are directly responsible to the executive body, especially to the prime minister and hence it is not considered independent. Also, when one investigates the institutional independence from political interference and freedom from regulatory capture, it is easy to note that the governor of NBE is a political nominee where his/ her term is not decided by a predetermined rule. This avails the chance of being evaluated on political grounds and not upon performance.

Similarly, the independence of the regulatory house should enjoy the four pillars of regulatory and supervisory independence. First is supervisory independence, which is the legal protection of supervisors when executing their job, and a rules-based system of sanctions and interventions, etc to supervise without undue influence. Secondly, there should also be institutional independence whereby the status of the agency is separate and free from the influences of the executive and legislative branches of the government. Thirdly it should also be structured with budgetary independence whereby the size of the budget and its use can be decided by the agency and not subjected to political domination. Finally, the institution should also enjoy regulatory independence where there is a high degree of autonomy in setting independent prudential rules to foster the growth of the industry.

The experience of other markets: comparisons with African countries.
When we look at the experience of countries and the incorporation of institutions responsible for insurance supervision, we can understand that most countries with successful or matured insurance markets have independent regulatory authority. Some have gone to incorporate at the state-level an independent insurance regulator/ supervisor that reports to parliament or participates in hearings and regulates the insurance, pensions securities, and social health insurance businesses under a strong institutional framework. Weak markets have incorporated the supervision under the ministries of economy or industry or finance or other setups. Some even have separate regulations at the federal and state levels. Here it has to be noted that one of the limitations that arises from a financial supervisor being part of a ministry or being a government agency is that motivational benefit levels have to adhere to the general civil servant scale. This may not enable insurance regulators to attract those with the appropriate skills and knowledge necessary to regulate and supervise the insurance market sufficiently.

For example, without going far, when we see the regulatory authority set up and governance structure of the neighboring Kenyan Insurance Regulatory Authority (IRA Kenya), we can understand that the board of the authority comprises representatives from the Central Bank of Kenya, Retirement Benefits Authority, the Capital Markets Authority, Association of Kenya Insurers (AKI), Association of Insurance Brokers of Kenya (AIBK), to represent all relevant stakeholders of the insurance industry. Whereas in the Ethiopian context the board members of the central bank are entirely government appointees representing government ministries. The IRA Kenya is also a member of the IAIS and, as a result, has been issuing various guidelines that align with several International Core Principles (ICPs). And the institution is also providing customer-friendly services using IRA’s online portal by which the customers of the regulator can get a new license or renew virtually. This structure has also made the Kenyan financial sector the tiger of the East African region. To better understand the growth status of the two countries let’s draw some comparisons using the following parameters that show the low level of development of the insurance industry in Ethiopia.

Insurance regulation supervision in Ethiopia: brief historic review
Insurance regulation in its modern form started in Ethiopia during the imperial regime. During the time, the market was characterized by foreign ownership and liberalization. There were many players in the market and their numbers reached 13. Records show that the year 1970 was a milestone and until this period there was no regulatory and supervisory body. However, pursuant to Proclamation No. 281/1970 an Insurance Council was formed which was to be chaired by the Minister of Commerce and Industry, which would then later be transferred over to the state bank. Additionally, an Office of the Controller of Insurance was set up.

During the Dergue regime, Ethiopian Insurance Corporation (EIC) was established in 1976 by proclamation No.68/1975. The period was characterized by confiscation since the assets and liabilities of those companies alive at the end of the imperial regime were nationalized to form a state monopoly. The market was closed for foreigners and domestic private players and the insurance supervision was structured under the National Bank of Ethiopia. EIC functioned as a monopoly for nearly two decades until 1994.

In 1994, EIC was re-established as a public enterprise under proclamation number 201/94 as a state-owned enterprise. However, insurance supervision remained under NBE. The government also allowed space for local private investors and since then, privately-owned insurance companies have penetrated the financial market to slice EIC’s market share to 40 to 50Pct in June 2021 from its previous 100Pct share.

Currently, NBE is responsible for the regulating and supervising of the financial sectors as a whole and the Insurance Supervision Directorate is structured within.
The central bank is responsible for all insurance policy, regulation, and supervision activities. This implies that the insurance supervisor is not independent of the central bank as required by the International Association of Insurance Supervisors (IAIS). As a result, membership to IAIS has not been open to NBE.

Moreover, relative to the banking sector, the insurance industry is given reduced emphasis by the government as demonstrated by the government’s policies and strategies. The sector is oftentimes ignored and the government’s policy to institutionalize certain forms of compulsory insurance is minimal. However, there is a long-standing cry for an independent insurance supervisory authority from all stakeholders including the Association of Ethiopian Insurers (AEI) which has formally filed a request to NBE for the setting-up of an independent regulatory authority by taking due consideration of the experiences of other nations. The proposed independent supervisory entity is expected to fully understand and respond to the demand of the insurance industry, promote free and fair competetion, and reform the corporate governance framework of the industry, including rules of free-market competiton, directives on investment of insurance funds, innovate and improve the method of regulation, and identify associated problems through research and development. Most importantly, the independent regulator would work on improving the discriminatory directives on requirements for persons with significant influence on insurers, whose criteria are obsolete and non-existent in other countries and suffer from a discriminatory standard that states only the operation function is core and leaders must come from the technical department. This criterion is identified by scholars as a killer to the career progression of young professionals with multiple capacities and its inconsistent application between public to private insurers is also expected to be improved with the independent regulatory authority.

To conclude, the Ethiopian insurance Industry is under a low level of development as exemplified by the sector’s meager contribution to the nation’s GDP, low level of penetration, density, branch to population ratio…etc. The industry is about a century old but it has barely developed to play a significant role in the economy. The primary reason for such low-rate growth is mainly related to the institutional framework for the regulatory organ of the industry, among others. Records show that the industry is not getting the attention it deserves from the Government of Ethiopia in general, and the National Bank of Ethiopia in particular. Globally, the role of supervisory organs has evolved to include development, support, promotion, and innovation, and the Ethiopian insurance sector is expected to have a dedicated and independent owner’ that could give the necessary emphasis to the industry. Several developing countries have already introduced state-of-the-art insurance legislation and regulations in an environment governed by market principles. The independence of the supervisory organ must be looked at from four related angles which include regulatory, supervisory, institutional, and budgetary independence to meet its intended purpose. Finally, I strongly recommend that before eying to liberalize the market, the necessary preparations from the regulator’s side should also be made, which among others, include building instutional capacity and setting up independent and capable regulatory authority to meet everchanging needs.

10th Year • May 2022 • No. 107