Thursday, February 9, 2023
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BusinessPolitical insurance mandatory to access loans on moveable assets

Political insurance mandatory to access loans on moveable assets

Borrowers are now required to present their Political Violence and Terrorism Insurance Policy, also known as PVT, to access loans from some commercial banks if their collateral is a moveable asset.

An outcome of the tense political situation in the country, which has forced commercial banks to be vigilant against risks; the banks begun to demand customers buy the policy coverage as a mandatory rule to access credit.

The move comes in light of banks facing a surge in Non-Performing Loans (NPL) due to conflicts in different parts of the country, particularly in Northern Ethiopia and West Oromia.

Although banks have continued to provide loans for customers who have a non-moveable asset without the insurance coverage, almost all financial institutions are requesting the policy in case of borrowers presenting moveable assets, including trucks, as collateral.

“Moveable properties are exposed to risks. So, we request borrowers with such collaterals to buy the policy coverage,” said Dereje Zebene, president of Zemen Bank.

A source working at one of the insurance firms also confirmed to The Reporter that there has been a growing demand for the policy coverage since the central bank lifted the suspension on loans.

“All banks are requesting their customers buy the policy if they think the borrowers’ assets, whether it is movable or not, is exposed to political risks,” the source said.

A policy that gives coverage to customers against losses due to riots, strikes, protests, and unexpected outcomes driven by political volatilities, accounts to less than five percent of the gross premium of insurance companies, which reached 14 billion birr during the last fiscal year.

Despite its low contribution to the portfolio of insurance firms, the demand for PVT grew significantly in the last three years, due to the political unrest and the war in Tigray, Afar and Amhara regions.

However, due to warnings issued by reinsurance firms, particularly by African Re, the industry leader, to apply precautionary measures while selling the policy, meant that its growth was much lower than other policies.

“We offer the policy for only those who meet our requirements, because of the higher risk it carries. The rate is also determined by the level of risk,” said Nigus Anteneh, chief executive officer of Nile Insurance.

Habtamu Debella, country director of African Re, is among those who have commended the new rule introduced by the commercial banks.

“I recommend the banks to apply the same thing for all of their borrowers to avoid accumulation of risks. Political risks are unpredictable and it is possible to avoid it by buying the policy to protect all actors involved from possible losses due to the risk,” said Habtamu.

Nyala and United insurance companies are the first to introduce PVT in Ethiopia. Currently, it is being sold by more than half of the insurance firms in the country, with African Re and Munich Re handling the reinsurance business for this particular policy.

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