“There Is No Rationale Why the Insurance Sector Is Closed to Foreign Operators.”

Fikru Tsegaye Wordofa is a certified insurance and reinsurance professional with two decades of experience in the industry. Fikru has studied and completed three master’s degrees – business administration, human resources and organizational development, and journalism and communications. He also has two bachelor’s degrees, about a dozen certificates, and several high-level specialized trainings in finance, insurance, business and management. At the moment, he is pursuing a Ph.D.

Fikru is the executive officer of strategy and business development and secretary to the board of directors at the Ethiopian Reinsurance (Ethio-RE). He was an acting chief executive officer (A/CEO) of Ethio-Re between September 2020 to March 2021. He also worked as a business development and corporate affairs manager in Ethio-Re. Before joining Ethio-Re, he served as marketing and strategic management director, head of microinsurance, strategic management team leader, principal researcher, and principal customer care and underwriting and claims section supervisor at the state-owned Ethiopian Insurance Corporation (EIC). 

Fikru writes regularly for several magazines and Journals. He has contributed extensively to the world of insurance and reinsurance, and his publications appeared in various Business, insurance, and reinsurance Journals, magazines, and newspapers, including the Journal of African Insurance Organization (AIO), Organization of Eastern and Southern Africa Insurers (OESAI) and African reinsurance publications. 

Fikru is the recipient of various international and national awards and recognitions, including the 2020 Global “Emerging Professional in Takaful and Retakaful of the Year Award” at the African Interest-Free Banking and Takaful Awards, and the AIO Best Book Author, First Rank Award (2023) for his book entitled Islamic Insurance (Takaful) In Ethiopia. EBR has the privilege of discussing with Fikru the state of the insurance business in Ethiopia and how the worsening political instability, war, drought, accident, and COVID made life more uncertain than before and affected the insurance business in Ethiopia. 

Can you reflect on the Ethiopian insurance market’s current status, challenges, and opportunities, particularly in promoting innovation and expanding insurance coverage?

Ethiopia’s insurance sector is untapped and at the infant stage when measured in major insurance growth indicators. Leaving the bubbles and looking at the facts and figures, for example, the insurance penetration rate is less than 0.5Pct, and the sector’s contribution to the GDP is less than one per cent. This figure sharply contrasts the world’s average insurance penetration, above 6.1Pct, and the African average, above 3.5Pct. This figure goes above 16Pct in South Africa, and in our neighbouring Kenya, it ranges between 2-3Pc.

When we look at the insurance density in Ethiopia, it accounts for less than USD 3.5, while the world’s average density is above USD 800. On the other hand, when we know the service accessibility rate, the branch-to-population ratio is one branch to 175,000 people in Ethiopia. Addis Ababa and other major cities are home to more than 55Pct of the insurance branches. The insurance agent-to-population ratio is one agent to 49,200 people. In this regard, Kenya has a ratio of one insurance agent to 4,745 people, and India has a ratio of one agent to 513 people. Even when we see the industry’s gross written premium as of June 30, 2023, it is about USD 408 million, while the figure in Kenya is above USD 2.5 billion, and global insurance premiums have already surpassed seven trillion dollars in 2022. So, one can see where the Ethiopian insurance industry is now.

Regarding the competition landscape, in terms of premium share as of June 30, 2023, the percentage of the state-owned insurer is about 30Pct. Including the other top nine insurers, the figure has reached 82Pct, which shows high market concentration. The sector needs visionary leaders who can comprehend the strategic problems and bottlenecks and develop strategic responses to curb these structural problems.

The Ethiopian insurance industry still needs to be tapped. The flip side of this untouched market is still a considerable growth potential. Hence, visionary insurers who can position themselves well in the sector by creating the right mix of insurance products would smile if they could offer innovative products and deploy intelligent marketing strategies.

You wrote a book on Islamic Insurance in Ethiopia; what inspired you to explore this specific area?

As a practitioner and insider of the insurance industry, I understand that the financial services market in Ethiopia has predominantly been conventional. I was struggling in every possible way to create awareness and, of course, challenge the status quo and wake up and convince the insurance industry players and the regulator to perceive the potential of the takaful insurance business since 2008. The sector needs specialized products that align with the public’s needs, culture, and religion. Takaful (Islamic insurance) is a feasible alternative for countries like Ethiopia to attract the most uninsured and convince them to turn their face towards consuming insurance services.

By the way, Takaful is also suitable for non-muslim customers because it provides an attractive ethical alternative insurance protection with different investment objectives that give the option of surplus distribution.

Moreover, to make the Takaful services readily accessible, it requires a blended model to incorporate Micro-takaful (with microfinance institutions) and bancatakaful (with Islamic and non-Islamic banks that operate with Islamic windows), and the delivery channel should also be supported by telecom companies.

Tell us about the critical interventions you recommend that would streamline the growth and development of the insurance industry in Ethiopia.

The government should put the insurance industry as one of its policy agenda. One can witness that the existing and previous governments repeatedly ignore the insurance sector. You can only find insurance issues in up to two or three lines in significant government policy and strategy documents. The official regulatory reports could cover up to half a page about the insurance sector. This less-than-a-half-page report only tells you about the number of insurers in Ethiopia, their branch outlets and contact information.

The prospects in the sector should also complement Ethiopia’s general investment climate. In this regard, the government should open the global operator market. With all the structural bottlenecks, low-risk appetite for innovative insurance products, and undeveloped technology, the current local insurance and reinsurance capacity cannot meet the needs of the millions and millions of uninsured Ethiopians. Most importantly, the government should liberalize the domestic market for all domestic players. For instance, all government and public institutions should choose their insurers based on open tender; this is not happening now.

How do you perceive the role of technology and digital transformation in shaping the future of the insurance industry in Ethiopia, and what steps should companies take to embrace these advancements effectively?

I have presented numerous papers on the need for adopting information technology and “Insuretech” and the necessary policy interventions to develop the sector on forums organized by the I-capital Africa Institute. Although it’s late, the National Bank of Ethiopia has finally issued a directive to compel the insurance industry to deploy the necessary infrastructure and embrace technology as of April 2022. However, the initiative should have come from the insurance industry to make the insurance services readily accessible to the insured public.

Insuretech is a new disruption in the insurance world, and reinsurance and innovation are driving Insurtech. Hence, the insurance industry should evolve to embrace these changes. Technology will play in availing insurance products to the broad masses including health and life insurance, agricultural insurance, and takaful insurance with cost-effective but convenient delivery channels. Hence, companies should allocate the necessary resources to diversify their services either by using their capacity or by outsourcing their services to partner with capable fintech companies.

What led Ethiopia to implement the minimum premium floor for vehicle insurance coverage? How will this affect the pricing and competitiveness of insurance companies?

The primary reason behind setting the minimum premium rate is to enable insurers to charge commensurate premiums proportional to the risk brought to the pool. The regulator is responsible for protecting the policyholder’s interest, which could be affected due to cut-throat price undercutting that went to the level of “price war” in the insurance industry.

The National Bank of Ethiopia used the “File and Use” approach. Insurance companies are still adopting old rate charts and mortality tables inherited from the imperial or Dergue regimes since the industry has a chronic actuarial knowledge gap.

The fear was that, in the absence of rational thinkers who believed in free market competition and self-regulation, insurance services were becoming “cheap commodities”. Here, the intervention came from the Association of Ethiopian Insurers, and they gave the weapon to the regulator to dictate the price and play its “watchdog” role, which is commendable.

Countries regulate premium rates in various forms. It is common for Ethiopia to put minimum rates or introduce tariffs. The premium regulation can also be indirect by giving tax relief to insurers to charge lower insurance premiums to foster the growth of underdeveloped insurance products with lower prices, such as micro-insurance, agricultural insurance, and life insurance products.

Low insurance rates also create a shrinking and underdeveloped insurance market. Insurers would need more incentive to develop new products or improve their service when rates are low. In other countries, regulators go to the extent of setting “Anti-discrimination regulations”. It is not uncommon for some regulations to prohibit insurers from charging discriminatory prices on old age people or HIV-infected people or discriminating against some professions from having insurance. We have to look at the purpose from a broader perspective. In the future, we expect actuarial-based rate revision in other classes of insurance because this is important for a sound and stable insurance industry.

What advice would you give aspiring professionals looking to enter the Ethiopian insurance market?

I started my professional career in Insurance nearly two decades ago. I have truly loved and enjoyed the profession; it is deeply rooted and instilled in me since it focuses on reaching out to people at times of misfortune. The sector always offers opportunities for learning and growth.

I also have a solid ambition to advance my career in the future and considering my burning desire, slowly but surely, I contribute meaningfully to the industry’s growth because I constantly engage in research and knowledge sharing.

I also see the prospects and gaps in the industry and strongly recommend aspiring professionals to join the industry and consider a career in Insurance and never decide to settle in any other industry before tasting the waters of Insurance. The industry needs young and energetic professionals, especially in actuarial science. Hence, I want to draw the attention of qualified mathematicians and statisticians to join the industry and fill this substantial professional gap. On the other hand, medical practitioners should also enter the life and health insurance market to make the industry play a meaningful role in adding value to society.

The past several years have witnessed a surge in political instability, war, drought, accidents, and COVID-19, making life more uncertain. How does this affect the insurance business in Ethiopia?

Undoubtedly, these challenges had enormous direct and indirect challenges to the insurance industry.

War, political instability, strikes, riots, and civil commotion traditionally fall under the “exclusion” section from most standard insurance policies due to the severe damages and impacts they may inflict. However, political violence and terrorism, including war, have been incorporated under insurance coverage in recent years. It’s known that the internal conflict in Ethiopia has impacted the insurance industry in many ways, starting from loss of income and business interruption due to the closure of insurance operations and branches in war and conflict zones. Moreover, the impact is noticeable in the increased claim cost associated with lives and properties. Unless stakeholders take prudent measures to end the public unrest and war, the nation and the insurance industry will suffer greatly.

Moreover, the internal conflict is also drawing the attention of the international insurance and reinsurance community, and it would directly impact increasing the reinsurance premium rates. It could go to the extent of putting strict underwriting measures and denying acceptance of risks if the situations aggravate further. In this regard, the other feasible option would be establishing “national catastrophe pools” to manage huge risks that individual efforts cannot handle.

COVID-19 has also had an undisputable effect on almost everything, and the insurance industry cannot be an exception. The past five years have been principally a bumpy ride for the insurance industry due to the rise in claim costs and forcing them to develop new products to offer the market.

One of the issues you have been commenting on for years is the need to establish a different regulatory Agency for the insurance industry. Now that the government is going in the same direction, what will be the benefit of this to the industry?

Ethiopia needs an independent insurance supervisory and regulatory authority. Insurers aren’t banks. However, regulators often intentionally ignore these different entities’ legal /intrinsic separateness and try to tie both sectors using one rope.

Regulation of the insurance industry is entering a new era, and our regulators should jump on the bandwagon. Regulators are creators and “makers/breakers” of insurance industries, and they should also be held accountable for the success or failure of the insurance market. However, the practice is that they tend to focus on the control aspect, neglecting the considerable role that could play in nurturing the growth and development of the sector.

I’m not a fortune teller, but I fear that even after the recent expression of the government to establish independent regulatory authority, it may fall prey to the hands of people without the proper qualifications. Insurance is a profession that needs qualified human resources, even in the regulatory house.

Another distress is that the government regulates 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. Creating a regulatory authority that could provide an enabling insurance environment is far from changing office locations; it needs a qualified workforce and technology to run the administration successfully.

The other core issue is that, like all other developed and matured insurance industries, the insurance industry in Ethiopia requires an independent and comprehensive “Insurance Act”. To everybody’s wonder, the industry is working with fragmented policies and directives, and this is also hampering the sector’s growth.

And to avoid the arm-twisting practice, the institution should be independent. It needs full-scale, supervisory, institutional, budgetary, and regulatory independence. Unless professionals lead the authority with all the necessary resources and institutional autonomy, its impact will continue to be the same – – telling the same old stories. It may end up becoming “a lion without teeth”.

Ethiopia is now liberalizing the finance sector; already, the government has decided to license five foreign banks in five years. A similar approach might follow in the insurance industry. Is the sector ready for full-scale liberalization?

The sector should have liberalized even before the banking sector. I don’t know, and there is no rationale for why the industry is closed to foreign operators. I wish to see the sector fully open to global competition.

Insurance is a global risk management tool that warrants risk diversification and sharing. I don’t think telling the “infant industry” argument year in and year out would work for the sector anymore. The uninsured public needs new faces and operators with better terms and conditions; we should not deprive the people of such a huge advantage. Insurance is about settling claims and helping the insured public at times of loss, and this service needs capable insurers regardless of their country of origin.

You received an award at the African CEO’s forum a few months ago. Can we talk about it? 

The African Insurance Organisation (AIO) has a continental Book Award programme annually. It recognises the best literary works written in the African continent every year. We have witnessed other African brothers and sisters winning these awards in the previous years. However, this year, my Book “Islamic Insurance (Takaful) in Ethiopia” won the first rank in the AIO- BOOK Award 2023 edition as the best literary work. According to the panel of judges, the work must be written in English or French languages only.

The Award was presented at the 49th AIO Conference Algeria last May in the presence of Chief Executive Officers, leaders of insurance and reinsurance companies and other stakeholders and practitioners in the continent. The Award motivates and recognises my efforts in all these years. It has also paved the way for me to voice my views and opinions on many reputable platforms in the insurance and reinsurance world.

You have been writing extensively about the insurance industry and deserve recognition. What will you do further to contribute to the sector’s growth?

For over a decade, I’ve contributed articles about the insurance industry in many magazines, including EBR, journals, and newspapers in Ethiopia and at the continental level. I will continue with the same energy because I enjoy doing that. I want to contribute to a prosperous and advanced insurance industry in Ethiopia. I have already prepared three additional books on the field and will publish them soon.

Let’s talk about leadership, human resources development, capacity building, and awareness creation to take the industry to the next level.

In Ethiopia, financial education should include the insurance sector. And it needs to be appropriately handled. The existing fragmented effort and broad-brush approach need to bring the desired result. There should also be more emphasis on educating the general public about insurance.

The Association of Ethiopian Insurers (AEI) and other industry players can join hands to create awareness about insurance benefits. The industry could partner with educational institutions to incorporate insurance into the academic curriculum. Partnerships with the media will help in creating awareness.

On the other hand, regarding leadership development, the insurance supervision should lift its discriminatory directive on persons with significant influence on an insurer in selecting the insurance industry leaders. The policy must be revised even by the standard used by the domestic banking industry and international best practices. To your surprise, the directive is discriminatory in its content and implementation in selecting insurance industry leaders. It has ignored the strategic contributors of the industry from assuming leadership positions, and this has to be amended without further delay since the banking sector has already addressed the issue. Moreover, the industry needs training and capacity-building institutions with a strategic interest to nurture future professionals and play a meaningful role in research and development.

11th Year • September 2023 • No. 121 EBR