Harnessing the Insurance Industry for Economic Development

insurance industry in Ethiopia — PHOTO: Awash Insurance Company

The insurance industry’s aggregate contribution to national GDP (penetration) is around 0.5 percent and the status depicts the low level of insurance development in Ethiopia

By Bilal Derso (The Ethiopian Herald)

According to various sources, the emergence of modern insurance in Ethiopia is traced to the Bank of Abyssinia which was established in 1905 as the first Ethiopian Bank.

The Bank had been acting as agent for a foreign insurance company to underwrite fire and marine policies. Besides, during this period no local insurers or domestic investors were involved.

Hence, no local rules and regulations governing insurance business were thought of or envisaged. The first domestic insurance company was The Imperial Insurance Company of Ethiopia Limited and it was established in 1951, as a research paper written by Hailu Zeleke (2007) under the title ‘Insurance in Ethiopia’ stated.

Overall, prior to the nationalization of insurance companies in 1975, the Ethiopian insurance industry had been managed by a mix of expatriates and Ethiopian nationals.

The Provisional Military Administrative Council (PMAC) nationalized all the then existing 13 insurance companies and all banking and insurance business came directly under the exclusive and monopolistic ownership of the government. In December 1975, PMAC issued proclamation No. 68/1975 to establish the Ethiopian Insurance Corporation (EIC) and the assets, liabilities and the operating capital of all the nationalized 13 insurers were transferred to the new entity, according to the aforementioned source.

EIC was entrusted with power and responsibility to manage, administer and underwrite all insurance businesses to be transacted in Ethiopia and to supplement its functions with re-insurance contracts EIC deemed fit and no other competitor existed during the Derg command economy.

Ethiopia’s insurance industry in the post-1991 period

After the military government ousted in 1991, EIC restructured and re-established as a public enterprise with a view to re-align its operations to the demands of the new market oriented economic policies of the Federal Democratic Republic of Ethiopia (FDRE). Effective in 1994, EIC ceased to be the only monopoly in the insurance industry in Ethiopia because other domestic private insurers entered the market. The Insurance Proclamation number 86/ 1994 opened the opportunity for establishing domestic private insurers and entitled the National Bank of Ethiopia to oversee the activities of both the state-owned and private insurance companies.

International insurers are still, however, not allowed to conduct business in Ethiopia and the prohibition remains to this day.

Supported by the ever-expanding financial sector, Ethiopia has registered significant economic progress for a decade and plus time and the International Monetary Fund (IMF) estimated its real Gross Domestic Product (GDP) is increased by nine percent in the 2016/17 fiscal year.

Similarly, following country’s socio-economic growth, the insurance business has witnessed rapid expansion as the opening of the sector to domestic private investors and currently the state-owned EIC and 16 private insurance companies continued their fierce competition for better market share.

Ethiopia’s insurance industry has been playing a growing role in long term economic progress and improving living standards by channeling household savings from a large portion of the population into productive investments. The sector also promotes economic advancement through its unique funding channels and investments as well as providing sizable job opportunities.

Insurers are contributing directly to urban development by investing huge sums on various infrastructural projects such as new headquarters that would enhance their capacity and make the industry an asset for future investments. Information obtained from EIC’s 2016/17 annual report indicated that currently the total of 492 insurance branches distributed throughout the country and through the intermediation of 54 insurance brokers and 1,438 agents, the industry able to underwrite gross written premium of 7.5 billion Birr of which 7.1 billion (95 percent) is general insurance and the remaining 400 million Birr is life business.

During the past budget year, the insurance industry has registered a total of 1.1 billion Birr profit after tax and EIC and Nyala Insurance Company have the lion’s share in making 700 and 122 million Birr profit respectively. Both EIC and Nyala recorded a massive profit margin in the history of the respective companies.

As of June 30, 2017, the industry’s total asset and capital reached to 13.6 billion Birr and 4.3 billion Birr respectively. Compared to 2015/16, industry’s profit after tax, assets and combined capital increased by 30 percent, 18 percent and 21 percent respectively, as the EIC’s report stated.

Despite this, insurance penetration and density are still low in Ethiopia. The industry’s aggregate contribution to national GDP (penetration) is around 0.5 percent and the status depicts the low level of insurance development in Ethiopia, even by East African standards.

Read the complete story at The Ethiopian Herald
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