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    CommentaryUnderstanding third party insurance policy in Ethiopia

    Understanding third party insurance policy in Ethiopia

    Date:

    There is an increasing moral, ethical and cultural decline, decay and deterioration within the Ethiopian society itself nowhere seen before. The social problems related to car accidents is an integral part of a much wider problem, writes Fisseaha-Tsion Menghistu (PhD, Prof.).

    Insurance is generally defined as an undertaking by an insurer (a person that  issues or agrees  to issue an insurance policy or undertakes or agrees to undertake the obligations of an insurance policy)  to indemnify another person, in exchange of consideration called premium, against damage, destruction, loss or liability in respect of certain risk or peril to which the object of the insurance may be exposed or to pay a sum of money or other things of value depending  upon the happening of  a certain event.

    The Ethiopian Insurance Business Proclamation defines insurance policy to mean  “a document evidencing a contract of insurance whereby an insurer undertakes, against   payment of premiums, to pay indemnity, or the benefits specified in the policy to the insured  where condition specified  in the policy fulfilled or risk materialized, and includes a certificate, interim receipt, renewal receipt, or any other document evidencing a contract of insurance” The Ethiopian Commercial Code, however, defines insurance policy as “a contract whereby a person, called the insurer, undertakes against payment of one or more premiums to pay to a person, called  the beneficiary, a sum of money where a specified  risk materializes”. Under the Ethiopian insurance laws, there are at least two main classes of insurance business, namely, long term insurance business and general insurance business as the case may be. An insurance policyholder is thus a person who owns an insurance policy or any other person who has legal right to claim the benefits of an insurance policy.

    Hence, where persons are insured, the insurance policy extends to risk arising out of death or life, or to risks arising out of injury to the person or illness. Under the Ethiopian insurance law, long term insurance business means, “life insurance, annuity, pension, permanent health insurance, personal accident or sickness insurance underwritten by the insurer as incidental to any of the business referred to the above types or to any other class of business as may be determined by directive”. Life insurance is also defined as “a contract whereby the insurer undertakes, against the payment of premium, to pay to the insured, or to any beneficiary a specified sum on certain conditions dependent upon the life or death of the insured”. Whether there is substantial or material difference between the aforementioned definitions, the 2012 Ethiopian Insurance Business Proclamation is left to the readers and lawyers to judge and interpret.

    The role of the general business insurance in the economy

    The Preamble of the Ethiopian Insurance Business Proclamation states that the insurance sector plays an important role in the economic development of the country. By providing   insurance coverage against risks related to all types of property and assets, it provides alternative means of savings and helps to mobilize financial resources from within and outside the country.

    As the name and title explains third party insurance mainly covers risks that occurs to third parties by an insured individual. The Preamble also states that the insurance sector plays an important role in economic development through providing insurance coverage against risks, the provision for alternative means for savings and mobilization of financial resources from within and outside the country. The Proclamation to insure the reliability and stability of the financial sector it has become necessary to put in place a comprehensive legal framework in the country.

    Third party is defined to mean “any person other than the insured person, member of the insured person’s family, the driver or employee of the insured person to whom an insurance policy applies at the time when vehicle accident occur giving rise to liability under such insurance policy”.

    Insurance policy for purposes of the third party insurance means a contract whereby an insurer undertakes to pay compensation and cost of emergency medical treatment to any third party for death, bodily injury (i.e. any bodily injury or functional disorder on any part of the body’s natural order sustained by a victim of vehicle accident and includes temporary, partially permanent or fully permanent bodily injury) or damage to property caused by the vehicle of an insured person. Emergency medical treatment is in turn defined as a medical service provided to any person who have sustained injury as a result of vehicle accident at the site of the incident, while on the route to a medical institution and in the emergency ward of the medical institution.

    The premium tariff applicable to vehicle insurance policy against third party risks is determined by the Council of Ministers based on the study carried out and submitted by the Insurance Fund Administration Agency.  Under the law, the Ministry of Transport is mandated to issue directive applicable to insured persons and drivers with repetitive vehicle accidents.

    Why has third party insurance become necessary and mandatory?

    One of the main reasons why there is a mandatory third party insurance is because as stated in the preamble of Vehicle Insurance Against Third Party Risks, the occurrence of accidents caused by vehicles are escalating from time to time and the loss of lives, bodily injuries and damages to properties caused by vehicle accidents are creating many social problems. 

    It is important to stress that about 11,000 persons died, and suffered serious and light injuries in Ethiopia in the last five years. The amount of claims and compensation given by the Fund for victims of non-insured drivers since 2013 was 4,022,426.00 excluding those paid to the Ethiopian Defense Forces.  The amount of money spent to cover for death and various bodily injuries, emergency and damage to property from 2013 till to date amount to 380,760,361.71 birr. In 2015 alone about 3,300 persons died due to motor accidents in Ethiopia with a vehicle population of 600,000. The same number of people die in Italy but with 40 million vehicles. This implies that the risks of motor accidents in Ethiopia are very high. Motor accidents causes between 46 percent to 50 percent of the total risks and constitute nearly 2/3 risks to insurers. In Addis Ababa, for example, there are no less than 10,000 taxis and 40 percent of the accidents are said to be caused by taxis. The reasons why the risk and accidents are very high related to motor accidents are many. Among them include bad, reckless and irresponsible driving, bad roads and streets as well as bad road and town planning, bad manners and behaviors of drivers, alcohol related  accidents etc. Lack of having separate lane for taxis and busses is also a major cause of accidents.

    Although the law specifically provides that no person is allowed to drive without a valid vehicle insurance coverage against third party risks in relation to such vehicle, it is also said that 37 percent of the driving license issued in Ethiopia are fake driving licenses or driving licenses issued without  proper examination and notwithstanding that no person may, for the purpose of obtaining a vehicle insurance policy, make any false statements resulting in the non-applicability of such policy or commit any act which disentitles him to claim under such policy. Why drivers commit such crimes is not clear. However, in as much as thieves continue to commit crimes if they think and believe that they will not be likely caught, similarly, the same logic applies to car and taxi drivers as well as to tax payers although there may be other personal reasons and circumstances why they do so? According to the author’s observation, the Federal and Addis Ababa Traffic Police staff are understaffed and underpaid. Moral is not as high as anticipated. It appears that the relationship between taxi drivers and traffic police tend to be like that of a cat and a mouse and it is widely alleged that there are some corrupt practices in their relationships. In some developed countries, it does not matter whether traffic police are physically present or not on the street or around the traffic light. Drivers do not generally violate traffic lights even if there are no CCTV cameras. The desire to promote rule of law is generally within their norm, values and systems. This was even the case more than 40 years ago within the Ethiopian society where rule of law was more respected than now. In the old days, if one even said “Be Haile Sellassie Amlak” i.e. in the name of Emperor, people never moved an inch. The author appears to observe that many car drivers are seen either making or receiving telephone calls on places where they are no traffic police officer in the immediate vicinity where they are driving. While the author understands and finds it reasonable for drivers to make or receive emergency telephone calls, generally, however, there is no self-discipline among many car drivers and even among the general public who walk on the road.

    There is an increasing moral, ethical and cultural decline, decay and deterioration within the Ethiopian society itself nowhere seen before. The social problems related to car accidents is an integral part of a much wider problem. The concept of “me” and once own survival has become the predominant ideology and ethos. The philosophy of “I am what I am because of you and the society” has been eroded. One can see and observe in Addis where many car drivers and motorists are in a hurry or in a rush to outsmart and pass another car drivers thereby causing even accidents and huge traffic congestions. It is also said that many people are reluctant to have third party insurance for their cars in Ethiopia. There is no wonder why risks occurring from motorists are very high in Ethiopia and why there is a need to undertake a serious and independent research why motorists do not like to have third party insurance despite many awareness raising efforts and initiatives by all parties concerned.

    In a society where money has become a new religion and once own survival has taken precedence over the interest of society’s survival, and where the gap between rich and poor is widening, and where some rich people get their way for crimes they commit or for corruption they practice in general, there is nothing or very little the traffic police can do to find a solution to a much chronic problem which has already become a chronic social cancer. It appears that many things are going out of control and there is no or little harmony and cooperation between the drivers, the police, the insurance companies, the media outlets and the society at large. There is not even a series of high-level debate between them to resolve such issues. This is a dangerous development for the country and its future.

    Coverage and non-coverage for liabilities under third party insurance policy

    It is important to stress that in third party insurance the insured must secure insurance coverage for liabilities arising from a) collision, fire or explosion caused by the insured vehicle; b) the fall of objects carried by the vehicle, its accessories or tools being used in connection with the vehicle, and c) any damage resulting from the movement of the vehicle. However, the following are not covered: a) death or bodily injury or damage to property of the insured person or members of the insured person’s family; b) collision or death or bodily injury or damage to property caused to a person hired by the insured person and occurred in the course of such employment; c) damage to the insured vehicle; d) liability in respect of damage to goods carried on the insured vehicle on the basis of rent or payment; e) liability in respect of damage to the personal property of insured person covered by insurance policy or damage to property under the control or responsibility or custody of the insured person and f) liability in respect of vehicle accident occurred outside the territory of Ethiopia.

    There is little general awareness on the part of the insured what his/her benefits are and what the policy includes and excludes?  Thus, vehicle insurance policy against third party risks covers the compensation payable for death, bodily injury, damage to property and the expenses of emergency medical treatment arising from the injured vehicle. The insured must secure insurance coverage for liabilities arising from a) collision, fire or explosion caused by the insured  vehicle; b) the fall of objects carried by the vehicle, its accessories or tools being used in connection with the vehicle; and c) any damage resulting from the movement of the vehicle.

    How much is the amount of compensation for life and loss or damage to property under third party insurance policy?

    The amount of compensation to be covered by vehicle insurance policy against third party risks must  a) not be less than 5,000 birr and a maximum of 40,000 birr  in respect of the death of one person (although in some developed countries it reaches 1 million euros); b) an amount not exceeding 40,000 birr in respect of bodily injury of one person which also includes medical expenses incurred for the injured person and costs related to other compensations etc); or c) an amount not exceeding 100,000 birr in respect of damage to property although the law is not clear what kind of property is worth what? It is also important to stress that the  person who is entitled to compensation above the limit stated above also have the right to claim same from the insured person or from other having legal liability in accordance with the relevant law. The Council of Ministers is also empowered to amend the extent of liability limit provided above.

    Certainly, there is a dire need to drastically change the amount of claim that can be made for death of human beings. It does not make sense that the value of human life is less than one half of that paid to damage to property. It is a disgrace to state that the life value of an Ethiopian is between 5,000 and 40,000 birr with respect to third party insurance. The amount is so low that an enemy can crush his car against another enemy and get away by authorizing his insurer to pay 40,000 birr. Such amount does not encourage auto drivers to insure their cars because most probably they think they are careful enough that they will not have an accident worth 40,000 or even if they do they can afford to pay it cash. A person who has a car is relatively rich enough to pay that amount without a great deal of difficulty.

    However, insurance policy against third party risks may not be applicable to a) death or bodily injury or damage to property of the insured person or member of the insured person’s family; b) collision or death or bodily injury or damage to property caused to a person hired by the  insured person and occurred in the course of such employment; c) damage to the insured vehicle; d) liability in respect of damage to the personal property of insured person covered by insurance policy or damage to property under the control or responsibility or custody of the insured person and e) liability in respect of vehicle accident occurred outside the territory of Ethiopia.

    The premium tariff applicable to vehicle insurance policy against third party risks are determined by the Council of Ministers based on the study carried out and submitted by the Insurance Fund Administration Agency (IFAA) which is also directly responsible to the Ministry of Transport. The Ministry is also mandated to issue a directive with respect to such a tariff with regard to insured persons and drivers with repetitive vehicle accidents.

    What is interesting is that an Insurance Fund has been established as a permanent source of finance to be deposited in a special bank account to be opened at the National Bank of Ethiopia to cover accident caused by uninsured or untraced vehicle that will cover a) the cost of emergency medical treatment to a person who has sustained bodily injury amounting to 2000 birr; b) compensation to a person who has sustained bodily injury; and c) compensation to family members of a deceased person. The amount of compensation to be paid by IFAA is equivalent to the extent of liability to be covered by vehicle insurance policy against third party risks. However, IFAA is also entitled to claim its costs incurred related to the above from the person responsible for the accident. Medical institutions have the duty to provide emergency medical treatment to any victim of a vehicle accident. Such medical institutions are entitled to claim their cost and expenses for the emergency directly from the IFAA which in turn gets its funds from the government and contributions made by policyholders and insurers.

    The 2015 data shows that the distributions of insurance certificates were 468,300 birr and the first quarter distribution of such insurance certificates for the first quarter of 2016 amounts to 278,000 birr. It is also stated that in 2015, the Fund received 54,679,244 Birr from the insurance companies.

    It is important to stress that Addis is a big city where everyone from the countryside with very little understanding of traffic rules converge almost every day. Hence, cars, donkeys, sheep, horses and human beings are competing to use the same roads. It goes without saying that traffic police officers have a hard life managing such chaos. One major problem is that there are no different lanes for cars, busses and taxis and motorcycles like other countries. Now even bicycle riders are inter mingling with cars and taxis on the same road. There is a dire need to pass a law where busses and taxis etc should only use the right lane. Pass ways whether underground or otherwise for even the light railways and big circular road are very limited. All of the above are bound to increase accidents on the road. There is no systematic and effective cooperation and synergy between the relevant stakeholders such as between the traffic police, Road Transport Authority, the insurance companies, medical institutions, tax authorities and many other stakeholders. For example, it is widely argued that communication between the traffic police and the insurance companies is not as smooth as desired. Moreover, it is said that there is not much accurate data compiled by many insurance companies as to the how many motor and other accidents take place per year? The real causes of such accidents and how much has been paid out per year?  Without such accurate and up-to-date data it is even difficult to calculate the magnitude and extent of risks as well as that of premium by what is called actuary which is defined by the Proclamation as a person who provide advice on financial questions and contingencies involving insurance in general and life insurance and pension schemes in particular.

    This is to say minimizing accidents is not simply a matter of deploying many traffic police on the streets. It is a complex matter that depends on many other factors. The synergy and cooperation and joint planning of all the institutions that directly or indirectly affect road congestions including  all the institutions that  are engaged in urban planning, and those that provide power, water and many other public services involving installation and construction around road sides is very crucial. Above all, awareness raising among the general public by both the insurance companies and the traffic police in reducing accidents is absolutely crucial.

    Since the relationship between taxi owners and drivers blows hot and cold, there is a need to regulate such relationship. This is because, the criteria of which class of driving license a taxi driver should hold to drive a taxi  and under which circumstances different taxi drivers can drive one taxi need to be clearly stated. It is said that allowing three different drivers holding different classes of driving licenses and different years of experiences for one taxi in 24 hours and for one taxi owner is said to be enhancing accidents too.

    Accidents might be reduced if the following actions are taken:

    1. Taxis and busses should be confined to the first right lane of the road. This will considerably minimize accidents caused by taxis.
    2. Road construction should be planned that will take into account that even allow motorcycles and all two wheels to have a separate lane.
    3. Massive awareness raising should be done to empower the people feel a sense of ownership regarding the use of public property from roads to cars etc. But government leaders and officials must take the lead to be role models. Drastic measures must be taken by the government to reverse the alleged decline of confidence between the people and the government.
    4. The criteria used to fix premiums should  also  be based on sound, equitable and fair principles that is not too low for insurers that discourages them to make a decent profit and too expensive for insurance policyholders. Striking a balance remains a very big challenge.
    5. The need for a high-level dialogue between the relevant government institutions; the insurance companies, (including insurance consultants and brokers); independent minded scholars interested on the subject; associations of transport companies and taxi owners and drivers etc is absolutely crucial. Although there are more options, these are some of the first steps in the right direction.

    Ed.’s Note: This is the first part of two articles by Fisseaha-Tsion Menghistu (PhD, Prof.). The views expressed in this article do not necessarily reflect the views of The Reporter. The writer can be reached at fissehatsionm@gmail.com.

     

    Contributed by Fisseaha-Tsion Menghistu (PhD, Prof.)

     

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