INSURANCE IN ETHIOPIA Historical Development, Present Status and Future Challenges Hailu Zeleke August 2007
TABLE OF CONTENTS PAGE ACKNOWLEDGEMENTS vi ACRONYMS vii INTRODUCTION viif CHARTER 1: RISK - MEANING AND ITS IMPACT 1 Introduction 1 1.1. Basic Concepts 2 1.2. Economic Impact of Risk 12 1.3. Risk Management 19 CHARTER 2: INSURANCE 23 2.1. Insurance - Defined 23 2.2. How the Insurance System Works 24 2.3. Functions and Benefits of Insurance 32 2.4. Development of Insurance 33 2.4.1. Early Practices 33 2.4.2. Towards a Modern Insurance Business 36 CHARTER 3: THE EMERGENCE AND DEVELOPMENT OF INSURANCE IN ETHIOPIA UP TO 1960 41 3.1. The Emergence of Modern Insurance in Ethiopia 41 3.2. The Period of Agents of Foreign Insurance Companies, 1920s - 1950s 42 3.3. Establishment of the First Domestic Insurance Company 44 3.4. The Commercial Code and the Maritme Code of Ethiopia, Insurance 46 Provisions -1960 CHARTER 4: THE RISE OF DOMESTIC INSURANCE COMPANIES, the 1960s 49 CHARTER 5: THE FIRST INSURANCE PROCLAMATION - 1970 53 5.1. Insurance Companies Prior to the Issuance of the First Insurance Proclamation 53 5.2. The First Insurance Proclamation, Proclamtion No. 281/70 54 5.3. Analysis of Insurance Operations, 1967-1972 59 5.3.1. Gross Premiums and Gross Claims - Overall 59 5.3.2. Non- Life Insurance 61 5.3.3. Life Insurance 64 5.3.4. Investment 68
5.3.5. Financial Position 5.3.6. Human Resource CHARTER 6: THE INSURANCE INDUSTRY DÜRING THE COMMAND ECONOMY AND TRANSITION TO A MARKET ECONOMY (1976-1994) 6.1. Nationalization of Insurance Companies 6.2. Establishment of the Ethiopian Insurance Corporation 6.3. Organizing the Ethiopian Insurance Corporation 6.4. Financial Performance of the Insurance Sector Düring the Penods of Command Economy and Transition to Market Economy CHARTER 7: THE INSURANCE INDUSTRY DÜRING THE MARKET ECONOMY- Re-emergence of Private Insurance Companies 7.1. Insurance Proclamation No. 86/1994 7.1.1. Functions of the Supervisory Authority with regard to Insurance Business 7.1.2. Conditions to Be Fulfilled to Establish an Insurance Company 7.1.3. Branch Opening 7.1.4. Shares 7.1.5. Licensing and Cancellation of Licenses 7.1.6. Statutory Deposit and Legal Reserve Requirements 7.1.7. Reserve Accounts (Provisions) 7.1.8. Actuarial Investigation and Report 7.1.9. Margin of Solvency 7.1.10. Insurance Auxiliaries 7.1.11. Restriction on Loansand Advances 7.1.12. Re-insurance 7.1.13. Amalgamation of Insurers 7.2. The Ethiopian Insurance Industry after Proclamation 86/1994 7.2.1. Structure of the Ethiopian Insurance Industry 7.2.2. Insurance Policies Marketed 7.2.3. Policies in Force and Insured Value 7.2.4. Other Products/Services Provided by Insurance Companies 7.2.5. Financial Position of the Insurance Industry 7.2.6. Paid up Capital 7.2.7. Branches 7.2.7.1. Branch Expansion 69 70 73 73 74 75 77 85 86 86 87 87 87 88 88 89 89 89 90 90 90 91 91 91 93 93 96 96 109 111 111 ii
7.2.7.2. Regional Distribution of Branches 113 7.2.8. Insurance Auxiliaries and Actuary 115 7.2.9. Reinsurance 118 7.2.10. Investment Aspect of the Ethiopian Insurance Industry 126 7.2.11. Workforce Profile of the Insurance Industry 1 35 7.2.12. Financial Performance of the Insurance Industry (2000/01-2004/05 137 7.2.12.1. Gross Premiums 1^7 7.2.12.2. Underwriting Surplus 142 7.2.12.3. Net Claims and Net Claims Ratio 1^6 7.2.12.4. Management Expense Ratio and Combined Ratio 1^ 7.2.12.5. Profits 162 7.2.12.6. Technical Provisions (Reserves) 1 7.2.12.7. Solvency Status of the Ethiopian Insurance Industry 173 7.2.12.8. Long-term Insurance 1 77 7.2.13. Human Resource Development 7.2.13.1. The Ethiopian Institute of Banking and Insurance (EIBI) 181 184 CHPATER 8: COMPETITION IN THE ETHIOPIAN INSURANCE MARKET 189 8.1. Competition and its Benefits 189 8.2. Competition in the Ethiopian Insurance Market 190 8.2.1. Developments in the Ethiopian Insurance Sector 190 8.2.2. Competition Prior to Nationalization (1965-1974) 193 8.2.3. Competition in the Ethiopian Insurance Market Düring 2000/01-2004/05 195 8.2.3.1. Barriers to Market Entry 195 8.2.3.2. Market Shares 197 8.2.3.3. Preliminary Survey on Competition in the Insurance Market 197 8.2.3.4. Assessing Market Concentration 200 8.2.3.5. Competition Variables 203 8.2.3.6. The Future and Competitiveness of the Ethiopian Insurance Industry 205 in
CHARTER 9: REGULATION AND SUPERVISION OF THE INSURANCE INDUSTRY 211 9.1. Conceptual Framework 211 9.2. Insurance Regulation and Supervision in Ethiopia 214 9.2.1. The Insurance Supervision Department 215 9.2.1.1. The Monitoring and Supervision Process 217 9.2.1.2. Intervention by the Supervisory Body 219 9.2.1.3. Problems Encountered in Insurance Supervision 219 9.2.1.4. Future Challenges of Insurance Monitoring and Supervision 220 CHARTER 10: PROBLEMS OFTHE ETHIOPIAN INSURANCE INDUSTRY 223 CHARTER 11: PRESENT STATUS AND CHALLENGES OF THE INSURANCE INDUSTRY IN ETHIOPIA 233 11.1. Present Status of the Ethiopian Insurance Sector 233 11.2. Future Challenges 238 CHARTER 12: INSURANCE ASSOCIATIONS IN ETHIOPIA 241 12.1. Association of Ethiopian Insurers 241 12.2. Society of Insurance Professionals 242 CHARTER 13: RECAPITULATION 245 REFERENCES 257 ANNEX 265 I. Foreign Insurance Companies Operating Insurance Business in Ethiopia through Agents in 1954 265 II. Foreign Insurance Companies Operating Insurance Business in Ethiopia Prior to the Enactment of the 1970 Insurance Proclamation 267 III. Profile of Insurance Companies in Ethiopia - June 30, 2005 268 IV. Insurance Policies Marketed in the Ethiopian Insurance Industry 269 IV
V. Reinsurance - Summary 273 VI. Comparison of the Ethiopian Insurance Industry with Selected African Countries - 2005 275 VII. Statistics of Insurance Companies, Reinsurers, and Brokers - Ethiopia Vs African Countries - 2005 277 VIII. Share of Motor Insurance in Gross Written Premiums - Ethiopian Insurers Vs Other African Insurance Companies - 2004 278 IX. NBE Insurance Directives in Force as of June 30, 2005 280 X. Population, Exchange Rates and GDP - Ethiopia - (1999/2000-2004/05) 280 XI. Shareholders of Imperial Insurance Company of Ethiopia - June 1953 281 XII. Minutes of the Ist Annual General Meeting of Shareholders of Imperial Insurance Company of Ethiopia - June 1953 282 XIII. Organizational Structure of the Imperial Insurance Company 283 XIV. Specimen of Stock Certificate of the Imperial Insurance Company 285 XV. Head Office Building of Imperial Insurance Company 287 XVI. One of the Many Advertisements of Imperial Insurance Company 288 XVII.Directory of Ethiopian Insurance Companies and Insurance Associations - June 30, 2006 289 XVIII. Licensed Insurance Brokers - June 30, 2007 299 XIX. Insurance Organizations in Africa 300 GLOSSARY 305 v