Few knew about Ethiopia’s insurance industry. It is not only an industry ignored by citizens but also by officials who are tasked with regulating it. It starts with the National Bank of Ethiopia (NBE). Players in the industry usually blame its officials for not paying attention to the problems they face and needed reforms to be undertaken to boost their coverage across the country. It is also frequently left out of discussions about the financial industry.
The same thing happened during the recent policy shift introduced by the government. Initially, insurance executives hoped that their industry would be included in the recent policy approved by the Council of Ministers allowing foreigners to invest in the financial sector. However, once the truth was revealed, it became clear that the policy does not apply to insurance companies, which many industry insiders found disappointing.
“It looks like we are being ignored again,” said Nigus Anteneh, chief executive officer of Nile Insurance, which has been in the industry for over two decades with a gross written premium of 700 million birr up until the end of last year.
Though Ethiopia’s insurance industry is over half a century old, it is still in its infancy. After the introduction of the mixed economic system three decades ago by the defunct EPRDF-led government, over 16 insurance firms have joined the industry.
The private insurance firms together managed to lower the market share of the dominant market player, the state-owned Ethiopian Insurance Corporation (EIC), to below 50 percent, an achievement made just last year.
Last year, they accounted for nearly 57 percent of the 15.6 billion birr gross industry premium.
But that is just a figure and it is insignificant how far insurers in neighboring Kenya have gone in this regard. Kenyan insurers make over USD two billion annually from the sale of insurance policies, five times more than what Ethiopian firms wrote in the same period.
Insurance executives believe this is an outcome of a lack of skilled manpower, a shortage of capital, and a low level of technological progress.
“I believe foreign expertise and more capital inflow could have helped the insurance industry show great progress,” Adefris Wesene, Chief Executive Officer of Lucy Insurance, said, urging authorities to liberalize the industry in exactly the same fashion as they did in the banking industry.
The new policy approved by the Council of Ministers allows foreign banks to acquire up to a 40 percent stake in local banks, while the maximum amount of shares a multinational lender can buy is 10 percentage points less. Other modalities are opening a subsidiary, or a branch, if not, a representative office, a practice that was already permitted before the new policy came into force. Insurance companies want the same reform in the industry in which they operate.
“We have already garnered experience working with foreign companies, as we closely work with foreign reinsurance companies, which also want to invest in local firms. So liberalizing the insurance industry would have brought a big turnaround in the sector,” Meseret Bezabih, a long-serving CEO of United Insurance and one of the industry leaders with a gross written premium of almost one billion birr up until the end of last year, said.
Industry players also expect more portfolio diversification if foreign firms are allowed to join the industry.
Currently, over a third of the industry’s premium is contributed by motor insurance, whose share skyrocketed after the government made it mandatory to acquire a third-person insurance policy. But this has exposed the industry to huge claims and prevented insurers from growing.
With stiff competition to acquire customers, price is the main competition factor among insurers, a trend that executives of insurance firms hope to fade if the sector is open to foreign competition.
“Lack of product differentiation is one of the reasons that has prevented the sector from growing. And that comes with more capital, which the foreign investors could bring if they are allowed to join,” Nigus explained.
But he does not want the sector to be fully liberalized.
“It should be gradual,” added Nigus, who fears local firms will be swallowed if it is going to be full liberalization.
It is a sentiment shared by Getachew Beshahwured, a financial expert.
“Local firms are not ready for foreign competition. An attempt to open up the sector would paralyze existing firms,” he said.
Though authorities remained silent on why the insurance industry was excluded from the recent liberalization of the financial sector, it appears they want to make the industry ready for the eventual open-up.
Last week, an amendment was made to the minimum capital requirement needed to establish an insurance firm. Based on the adjustment, half a billion birr in paid-up capital is required to secure a license for both general and life insurance lines of business, a big jump from the 75-million-birr minimum requirement that was applicable for over a decade. The same measure was taken a year ago in the banking industry. The paid-up capital requirement to open a bank was increased from half a billion birr to five billion birr, a reform made a year before the recent policy change in the sector.
Time will tell whether the same change made in the insurance industry, even though it seems to prepare the firms for any kind of competition, is being made with the same goal as the banking sector, which is for the opening of the sector to multinationals.