The Case for Insurance Sector Liberalization in Ethiopia: Prospects and Challenges”, Fikru Tsegaye

The Case for Insurance Sector Liberalization
in Ethiopia: prospects and challenges
By Fikru Tsegaye W.

Objective of the study
Scope of the Study
Methodology
Brief Historical Background
Liberalizing the insurance sector- Prospects and challenges-Ethiopian case
The Road Ahead
Outline

Objectives of the study
 Generally, the objective of the study is to review the prospects
and challenges of Liberalizing the insurance sector in Ethiopia.
However, the specific objectives of the study are:
 To characterize Ethiopia's insurance industry
 To assess the prospects and potentials
 To draw comparative analysis vis-à-vis other markets
 To evaluate the key challenges ;and
 To recommend on Qualifications to Liberalization

Significance of the study
 This research will be of significance to various stakeholders surrounding the insurance
industry including, regulators since it sheds lights on regulatory landscape and other
requirements policies and guideline
 Interested Academicians, researchers, investors and students will also benefit from the study
as it would serve as source of reference and in particular on The Case for Insurance Sector
Liberalization in Ethiopia: prospects and challenges and encourage further research in depth.
 Finally, Insurers in the Ethiopian insurance industry will also benefit from the findings of this
study in understanding the prospects and challenges of Insurance Sector Liberalization in
Ethiopia.

Scope of the study
 This analytical review only
covers the Insurance Sector
Liberalization in Ethiopia:
prospects and challenges.

The data/information for the study was gathered from primary and secondary data sources, via
structured interview and reviewing secondary data sources.
 The primary sources used for data gathering include:
 Interviews and discussions with relevant management group of representatives of regulatory
body, insurance companies, and others.
 Likewise, the secondary source of data gathering encompasses:
 Reviewing various global, continental and national reports , publications, economic
assessment and analysis reports ,etc .
 Industry data from National Bank of Ethiopia
 Various reports from different government sources in Ethiopia.
 Browsing various pertinent websites and;
 Other relevant articles and previous research reports on the subject.
 Finally, the data gathered through the above articulated methods and source was assessed, analyzed and
presented using appropriate standardized formats.
Methodology

Ethiopia appears unique compared to
its East African neighbors (namely Kenya,
Tanzania, and Uganda) and other
developing countries in Sub Saharan
Africa (SSA) region in that it has not yet
opened its insurance sector to foreign
participation.
The country follows “Closed Door”
policy .
The effort isolated the country from
the rest of the world and the impact of
“globalization” is not felt to date
Opening

Origins of insurance
Ethiopia's formal financial
system is underdeveloped
and for the most part
confined to cities and larger
towns.
The traditional systems of
iqub and idir are perhaps
centuries old, yet continue
to play a vital role in
Ethiopia's finance.

Ethiopians are known for cooperation, risk
sharing ,mutual support at times of grief or
work;
We have traditional(informal) community
based insurance services/mechanisms such as
Edir-Funeral society and others
'Edirs' –EVOLVED TO SERVE for the living as
well as the dead.
We also have financing and jointly working
schemes like Equb and Debo, Wonfel and
Meredaja mahber others...though the naming
differs in different parts of the country
Quantifying the magnitude of funds
held in these systems,
particularly Edir/Iqub, is difficult- widest
coverage than banks and insurers

The essence of insurance is not
new;
History of modern insurance in
Ethiopia dates back to 100+years
For simplicity let’s divide it
under three regimes and
characterize each:
Imperial Regime (--1976)
Dergue Regime(1976-1991)
Post 1991 Regime

Imperial Regime
DURING THE IMPERIAL REGIME-
Although the Ethiopian economy has
been state controlled through a series of
industrial development plans during the
Imperial Government of Haile Selassie,
The insurance sector was DOMINATED
by foreigners (the leadership, ownership
and even service consumption).
Foreign ownership was allowed.
Many players up to 13 insures at the
end of the regime .
Supervision- Ministry of Commerce
and industry/later -state bank/National
Bank

Dergue Regime
(1976-1991)
The regime was known for a “Soviet-
style” centrally planned economy under a
socialist government from 1976-1991;
The assets and liabilities of those
companies alive at the end of the
imperial regime were nationalized to
form a State monopoly;
Only Ethiopian Insurance Corporation
was a sole player-One man show
Limited insurance coverage;
Closed for foreigners and domestic
private players
Supervision: Under National Bank of
Ethiopia

The Post-1991 government:
 Ethiopia’s financial sector remains closed and is much less developed than
its neighbors.
 Allowed For Local Private Investors: The privately owned insurance
companies have penetrated the financial market and sliced the market
share of Ethiopian Insurance Corporation from 100 % to 35 %
 Characterized by Prohibitions: NBE’s Proclamation No. 746/2012, a
proclamation to provide for insurance business states “foreign nationals or
organizations fully or partially owned by foreign nationals may not be
allowed to own insurance company or carry on insurance business or
operate branch offices or subsidiaries of foreign insurers in Ethiopia or
acquire the shares of Ethiopian insurers.

The post-1991 government:
While this was the case, the RELINQUISHING, effort on
November 10, 2016 has witnessed another issue
 In a policy reversal, the National Bank of Ethiopia (NBE) has issued a new
directive to all financial institutions instructing that all shareholders with
foreign citizenship should return their share certificates. The reason for this
new directive is unknown and has totally shackled the sector
 This has limited the “Ethiopian Diaspora community” that has been and
continues to be a major source of foreign revenue for the country.
 Now the companies have to verify their shareholders' citizenship and enforce
the NBE's directive.

The post-1991 government:
Supervision – Insurance Directorate under National Bank
of Ethiopia (reactive not proactive);
The government is not paying much attention to the
sector;
Under Growth and Transformation Plans (GTP I-2010/11-
2014/15) and (GTP II), (2015/16-2019/20) the focus
given for the insurance sector remains very weak;
No clear plan (insurance sector strategy) and no green
light regarding liberalizing the sector.

The good sides
 ALTHOUGH, Ethiopia’s financial sector remains closed and is much less
developed than its neighbors.
 CURRENT performance has witnessed that the dominance of
private players is increasing and the share of state owned
insurer is gradually decreasing showing the increasing trend of
the public trust for the private sector.
 The sector still attracts new entrants due to low entry barriers,
low capital requirement,untapped potential market, annual
growth and profitability;

3%
7%
4%
8%
1%
2%
35%
2%
1%
2%
6%
9%
3%
5%
5%
5%
3%
GWP share, 2018
Abay Africa Lion Awash Berhan Bunna EIC Ethio-life Global Lucy NIB Nyala NICE Nile Oromiya United Tsehay

Market Concentration (GWP)
Characterized by high market concentration
GWP of Ethiopian Insurance Industry as at 30th June, 2018
‘000
SN Name of Insurer Gross Written Premium (GWP)
GWP LTI Share (%) GWP GI Share (%) Total Share
(%)
1EIC 116.3 26.9 2,857 35.1 2,973.30 35
2Nyala Insurance 69.5 16 696 8.5 766.00 9
3Awash Insurance 69.3 16 605 7.4 674.30 8
Top Three 255.1 59 4,158 51 4,413.60 52
Combined Top 8 80
Combined Top 10 85

Impact of market concentration
High market concentration indicates a lack of competition in
Ethiopia’s insurance sector.
Foreign insurers are not permitted to enter the market in any
form, and the Ethiopian Government maintains strong control.
There is a positive relationship between financial sector
openness and economic growth.
The key elements of financial openness are domestic market
competition, foreign ownership, and limited capital controls, all of
which are lacking in Ethiopia.

State vs. private insurers
The performance of private insurers is typically better than state-
owned insurer in serving the retail market.
The share of EIC from private sector business is less than 20% and
share of life business is 27% (2018)
Though a detail research is required, to determine whether the
state-owned insurer is underperforming relative to private insurers,
the market share is showing decline
EIC’s major portfolio is coming from government/mega projects /
where real competition can not be insured;

Insurance market summarized
Where do OUR insurers fit in
an evolving economy and
society?

 The 17 licensed insurance companies compete for a limited
market characterized by low penetration and density.
 8 specialists –Non life
 10 composite ( transacting both life and non life)
 ETHIOPIAS' uptake of insurance cover, both at corporate
and personal level, remains predominantly in the motor,
marine, engineering and other covers for Mega
Government projects and institutions.
 This illustrates a poor attitude and less appetite towards
personal /retail insurance cover in general (from the supply
side)
Market Characteristics

• Low penetration of insurance in the Ethiopian
market, relative to other more
developed/developing markets is attributable to
Low disposable incomes for the majority of the
population, with close to 29.6% (2017 est.) of
Ethiopians living below the poverty line;
Market characteristics

Density: 57.02 Birr (USD
2.2)
Penetration:
less than 1%
(0.43%)
Branch to
population ratio:
….. 1:206,928.
Density: 57.02 Birr (USD 2.2)
Insurance density in Ethiopia is calculated as
the ratio of total insurance premiums (in Birr)
to total population.
Insurance penetration in Ethiopia is
calculated as the ratio of the
percentage of total insurance
premiums (in Birr) to gross domestic
product (GDP). Penetration rate
indicates the level of development of
insurance sector in a country.
Penetration rate is measured as the
ratio of premium underwritten in a
particular year to the GDP
About, 55 percent of insurance branches are
located in Addis Ababa. The share of private
insurance companies in total branches stood at
81.3 percent

• Inadequate tax incentives that could encourage the
middle classes to purchase life insurance products;
and
• A perceived credibility crisis of the industry in the
eyes of the public particularly with regard to
settlement of claims.
• Overdependence on traditional products and
distribution channels;
Market Characteristics

The total number of branches =532 of
which about 53.9% were located in Addis
Ababa.
Total capital of insurance companies = Birr
5.5
Gross written premiums =Birr 8.4 billion
Industry performance(June 30, 2018)
Source: NBE June 30, 2018

 General insurance (GI) dominates the sector claiming Birr
7.9 Billion or 94.5% total premiums, with motor vehicle
insurance continuing to claim the largest share –
constituting 51.8% of total insurance premiums and 54.8%
of the GWP under GI class of insurance.
 The industry wide loss ratio in respect of GI has reached
63%.
 The sector’s penetration to agricultural insurance
and micro insurance is still at embryonic stage.
Insurance industry

Share of life=Birr 460 million or
merely 5.5%
The total asset =Birr 16 billion
Insurance industry

Industry data
JUNE30,2018
EMPLOYEES 6,352
BRANCHES 532
SALES AGENTS 1,226
BROKERS 57
LOSS ASSESSORS 45
National Bank of Ethiopia, Annual Report/ own analysis

The insurance industry faces a number of
challenges, among them;
• Price wars (cut throat)and unethical
competition in the bloody “Red Ocean”
• Battle for soul and Poor Corporate
governance;
• Inadequate legislative and regulatory
framework and inability of players to be
abide my agreed norms and regulations;
Existing challenges/sector players complain/

Overdependence on traditional products
and distribution channels-Identical-Urban
centered service;
Lack of innovation and less utilization of
ICT
Scarce man power are said to be the
major culprits for the dismal growth.
Challenges /Industry players complain/

Challenges
Insurers in Ethiopia, including the state owned EIC,
target mainly the group insurance market and the upper
few economic strata.
This has to change and insurers must start to target the
bottom of the pyramid with microinsurance/agricultural
insurance products and partnering with retailers and
telecom firms/mobile technology to distribute cheaper
and simpler products to the underserved and younger
customers.

• Financially weak insurance organizations;
• Poor public perception and awareness of
insurance;
• High cost of insurance and low switching cost
for customers;
• Lack of the necessary data from insurers ,
their association, and NBE to conduct detailed
analysis;
Challenges

Brief Comparison (Based
on some factors)

Comparison: GWP, NL/L ratio, Penetration, density
• The insurance density, measured at GDP per capita is
only at $10.5, relative to $67.0 in Africa, and $30 in
Kenya, according to the World Bank.
Source: A comparison of global insurance markets ,Swiss Re sigma No. 04/2015

Top 10 Countries By Total Insurance Premiums Per Capita and Percent of Gross Domestic Product (GDP), 2017 (1)
Rank Country Total premiums per capita Rank Country Total premiums as a percent of GDP
1 Cayman Islands $12,122 1 Taiwan 21.32%
2 Hong Kong 8,313 2 Cayman Islands 19.61
3 Switzerland 6,811 3 Hong Kong 17.94
4 Denmark 5,772 4 South Africa 13.75
5 Luxembourg 5,011 5 South Korea (2) 11.57
6 Taiwan 4,997 6 Finland 10.65
7 Singapore 4,749 7 Denmark 10.21
8 Finland 4,737 8 United Kingdom 9.58
9 Ireland 4,687 9 Netherlands 9.56
10 Netherlands 4,631 10 France 8.95
Total world $650 Total world 6.13%
(1) Includes nonlife and life insurance and cross-border business. (2) April 1, 2017 to March 31, 2018. Source: Swiss Re, sigma, No. 3/2018.

Rate of insurance penetration in Sub-Saharan
Africa in 2017, by country
SN Country %
1South Africa 16.99
2Namibia 6.69
3Lesotho 4.76
4Mauritius 4.18
5Zimbabwe 4.09
6Kenya 2.83
7Swaziland 2.44
8Togo 1.98
9Seychelles 1.82
10Rwanda 1.74
11Ethiopia 0.43
12Eritrea 0.38
SSA AVERAGE 1.8
GLOBAL AVERAGE 6
The Statistics Portal Statistics and Studies from more than 22,500 Sources (2018)

Accessed: WILLIS TOWERS WATSON, December, 2018
0.43

Insurance Penetration/Density
Insurance penetration and Insurance density- Both -
Used as an indicator for the development of
insurance within a country.
Ethiopia is by far lower than regional, continental and
global average

World Life And Nonlife Insurance Direct Premiums Written, 2017
(US$ billions)
Source: Swiss Re, sigma, No. 3/2018.

China remains the major source of emerging
markets growth
• In emerging markets, life and non-life premiums increased 14% and 6.1%
respectively in 2017. In the non-life sector, growth in 2017 slowed but still
remained robust. The slowdown in emerging markets was largely driven by
China, where the speed of expansion fell to a still solid 10%. The insurance
markets in emerging countries have outperformed the corresponding
economies for decades, given the current low levels of insurance
penetration.
• China continued to be the main growth engine in emerging markets. The
Chinese life market grew by 21% in 2017, well above its ten year average
of 14%. China is now the second largest life market globally after the US
and accounts for more than half of emerging market life insurance
premiums written, or 11% of the world total.

Gross Written Premium(GWP), 2017
Country GWP(USD) Population Insurance/Reinsuran
ce Brokers
Ethiopia 280 million >100 million 57/0
Kenya 2 billion 48 million 214
Uganda 35.6 million 35
South Africa 56.5 million 8069 Life/6490 NL
Tanzania 52 million 136
Ghana 28.2 million
Africa
AIO annual Review, 2018, Atlas Magazine, Global Insurance, 2017

Table 1: Developments in the major insurance markets in 2017
Ranking by premium
volume
Life Premiums Non-life premiums Total premiums
Insurance density
(USD) Insurance penetrationUSD bn Change* USD bn Change* USD bn Change*
2017 vs 2016 vs 2016 2017 vs 2016 2017 2017
Advanced markets 2,059 -2.7% 1,760 1.9% 3,820 -0.6% 3,517 7.8%
United States 1 547 -4.0% 830 2.6% 1,377 -0.1% 4,216 7.1%
Japan 3 307 -6.1% 115 0.0% 422 -4.5% 3,312 8.6%
United Kingdom 4 190 -0.7% 93 0.5% 283 -0.3% 3,810 9.6%
France 5 154 -2.7% 88 1.1% 242 -1.3% 3,446 8.9%
Germany 6 97 -1.8% 126 1.3% 223 -0.1% 2,687 6.0%
South Korea 7 103 -6.5% 78 2.3% 181 -2.9% 3,522 11.6%
Italy 8 114 -7.5% 42 -0.5% 156 -5.7% 2,660 8.3%
Emerging markets 598 13.8% 474 6.1% 1,072 10.3% 166 3.3%
Latin America and Caribbean 78 1.1% 90 -0.9% 168 0.1% 262 3.1%
Brazil 12 47 1.2% 36 1.6% 83 1.4% 398 4.1%
Mexico 25 12 1.0% 13 0.9% 25 1.0% 196 2.2%
Central and Eastern Europe 19 12.2% 44 3.3% 63 5.8% 198 1.9%
Russia 28 6 48.2% 16 -5.4% 22 4.4% 152 1.4%
Emerging Asia 448 17.7% 272 10.1% 720 14.7% 188 4.1%
China 2 318 21.1% 224 10.2% 541 16.4% 384 4.6%
India 11 73 8.0% 25 16.7% 98 10.1% 73 3.7%
Middle East and Central Asia 15 7.0% 45 4.1% 60 5.0% 163 2.1%
United Arab Emirates 35 3 3.3% 10 13.5% 14 11.0% 1,436 3.7%
Africa 45 0.3% 22 1.0% 67 0.5% 54 3.0%
South Africa 38 -0.3% 10 1.3% 48 0.1% 842 13.8%
World 2,657 0.5% 2,234 2.8% 4,892 1.5% 650 6.1%

Year Country Non life Life
2017
kenya 60.4 39.6
2017 Ethiopia 94.5 5.5
South Africa 22.2 77.8
Rwanda 78.9 21.1
Tanzania 79.7 20.3
Egypt 41.9 58.1
Zimbabwe 61.6 38.4
Uganda 75 25
Life to
Non Life ratio
Sources: Reports by Regulators. NB: With 100+ million population, the
share of life is still undermined, AIO publication

Utilization of technology-very low
The level of ICT utilization (at company and industry)
is minimal;
Most insures operate manually or computed
assisted;
Characterized by Unavailability of Data/information.
No information exchange platforms among insurers

HR development
Country Insurance institute
Ethiopian EIFS (short term courses)-
walking backward
Kenya Insurance institute of
kenya/college of insurance
Uganda The insurance institute of
Uganda(IIU)
Tanzania The Insurance Institute of
Tanzania
SA IISA- Insurance Institute of SA
It is very difficult to find
adequate talent, qualified
manpower – almost no actuaries
available – or historic data.
Very few professionals with CII,
ACII, FLMI and other insurance
related qualifications-finger count
Almost no academic institute to
develop insurance professionals
targeting the future of the sector.

Global Rating
Global rating companies; Global:
A.M. Best. A.M., Standard and poor's,
Fitch, moody's..etc
Continental: Global Credit Rating
agency (GCR) , Africa’s no.1 rating
agency..etc
provide rating standards with a unique
focus on the insurance industry, these
companies provide credit ratings, as a
recognized indicator of insurer’s financial
strength and Creditworthiness.
No insurer in Ethiopia, ever tried passing
through such ratings.(except EIC’s effort in
2004 GC)-with the support of AIO

Lowest financial literacy- low awareness creation
effort- individually/severally
The sector Is performing poor- in most
measures/KPIs
The society is not benefiting and the insurance cover
is at low stage- considering the potential
Existing reality

Existing reality
No need based Products to serve the agrarian
economy: Considering the existing economic status
and population one can grossly propose (agricultural
insurance , micro insurance, household insurance,
life insurance and others insurance services to access
the low earners and predominantly agrarian
economy) more relevant to Ethiopian market than
continually crying over motor insurance.

Existing reality
Weak insurance cover for other sectors: Apart from
the agriculture sector All of us understand that the
Ethiopian insurance industry is not properly serving
the other sectors also( the service and the
manufacturing )are also not getting the right
products they deserve.

Population and economy
 With the existing population and growing economy the insurance
sector should have contributed much more than its current state
 Up from 2015's estimate of 98.9 million, Ethiopia has an estimated
2018 population of 107.53 million, ,
 The most populous landlocked country in the continent of Africa
and the second-most populous country of Africa after Nigeria, the
14th most populous country in the world. If Ethiopia follows its
current rate of growth, its population will double in the next 30
years, hitting 210 million by 2060.
 (http://worldpopulationreview.com/countries/ethiopia-population/2018)

Geographic
Ethiopia’s location gives it strategic dominance as a
jumping off point in the Horn of Africa, close to the
Middle East and its markets.
This would also give the sector to widen its presence
in the neighboring markets

Demographic
 Ethiopia has close ties with all three major Abrahamic
religions, and it was the first in the region to officially adopt
Christianity in the 4th century. Christians account for 63% of
the country's population, with 44% belonging to the Ethiopian
Orthodox Church.
 Ethiopia has the first Hijra in Islamic history and the oldest
Muslim settlement on the continent. Muslims account for 34%
of the population.
 All these provide potentials to broaden insurance coverage

Economy
Ethiopia’s economy experienced strong, broad-based
growth averaging 10.3% a year from 2006/07 to 2016/17,
compared to a regional average of 5.4%.
Private consumption and public investment explain
demand-side growth, the latter assuming an increasingly
important role.
All these developments would create prospects for the
growth insurance sector

Insurance
Sector
Liberalization

What I mean by Liberalization
 The term financial liberalization is used to cover a whole set of measures,
such as the autonomy of the Central Bank from the government; the
complete freedom of finance to move into and out of the economy, which
implies the full convertibility of the currency; the abandonment of all
“priority sector” lending targets; an end to government-imposed
differential interest rate schemes; a freeing of interest rates; the complete
freedom of banks to pursue profits unhindered by government directives;
the removal of restrictions on the ownership of insurance companies,
which means de-nationalization, full freedom for foreign ownership, and
an end to “voting caps”; and so on.
 These measures are not necessarily presented as a package, and not
always in their maximal form.

What
Liberalization/privatization is an eclectic subject.
Economists, political scientists, sociologists,
management, finance and accounting scholars have
written about it.
Pressure groups argue for or against privatization.
all of the schemes have advantages and pitfalls. Overall,
privatization without changing the institutional
framework would not bring about improvement on the
performance of SOEs or attract new investment

Market/regulatory structure
Country Compulsory
Insurance
Tax
incentive
Foreign Ownership Market Access Mandatory
Reinsurance Cession
Ethiopia Yes No Zero Closed Yes
Kenya Yes Yes Allowed Liberal Yes
Uganda Yes Yes Allowed Liberal Yes
South
Africa
No Available Allowed Liberal No
Tanzania Yes Yes Allowed 66.6% Liberal Yes
Ghana Yes Yes Allowed Liberal No
Africa —AIO annual review, 2018

Potential Benefits and Qualifications to
Liberalization
While the Ethiopian government’s concerns about
liberalizing the insurance sector are not understandable,
there is a compelling case that can be made in my view to
pursue liberalization.
The following are some of the important potential
benefits that may be realized from
liberalization/privatization and some qualifications to be
taken into account

Prospects
 In theory, privatization has a number of benefits, including the
reduction of the burden on the state, improving efficiency, turning
loss-making SOEs into viable business entities, improving
government revenues from taxes, and serve as vehicles for
attracting new capital and technology into a country.
 A large body of the literature outlines the determinants of
successful privatizations in both developed and developing
countries.
 Literature and practice reveal that there is positive result in opening
the sector to foreign participation to register economic growth.

Liberalization- More players, more choice and perfect
Market/regulatory structure
Country Structure of supervisory organ Number of insurers /reinsurers
Ethiopia Under central Bank of Ethiopia 17/1
Kenya The Insurance Regulatory Authority 52/3
Uganda Insurance Regulatory Authority of
Uganda
30 insurers and 12 health membership
organizations (HMOs)
South Africa The Financial Services Board (FSB), 161/10
Tanzania The regulatory authority, Tanzania Insurance
Regulatory Authty (TIRA)
30/1
Ghana The National Insurance Commission (NIC) 49/3
Sub-Saharan Africa — the evolution of insurance regulation, EY, accessed on, December, 2018 /AIO annual review, 2018

Prospects
 Experience of neighboring countries and scholars that examined the
effects of financial liberalization on per-capita GNP growth in
countries found that openness in financial services had positive and
significant effects on economic growth.
 The experience of developing countries witnessed growth after
liberalization(we can take the case of our neighboring country
Kenya)
 Efficiency: Liberalization may have positive effects on the efficiency
of domestic insurers. This is because domestic insurers are forced to
compete with more efficient foreign operators and because skills
and technology levels improve.

Prospects
For the regulator: The entry of foreign insurers through
financial liberalization may improve the
supervisory/regulatory organ through regulatory spillover
Entry of foreign insures in emerging markets that are
healthier than domestic operators implicitly allows the
country to import stronger prudential regulation and may
awaken the regulator to asses new ways of doing the
business

Prospects
The entry of foreign insures may also contribute
towards introducing better insurance products and
services to the public with competitive premium rate.
We may witness introduction of “strategically
important insurance products and services”

Prospects
With liberalization there will be Skill, knowledge,
technology and improvement and will have positive
impact on labor market:
The entry of foreign insurers may have positive effects
on inbound skill , knowledge, and technology adoption.
Studies have confirmed that FDI generally had positive
effects on employment and wages in host countries,

Prospects
As a part of financial sector liberalization, the
privatization of state-owned insurer (EIC) or revising
its mission to provide strategically important
products relevant to the local requirements may be
an important option to further enhance the
efficiency of the insurance sector.

Prospects
The state owned insurer , unless provides
strategically important products to the industry
breeds inefficiency and market distortions.
The existing reality shows that the state owned EIC is
competing over existing conventional insurance
products than focusing on “strategically important”
products to the nation.

Why EIC?
 Thus, studies investigating the ownership
structure of financial institutions have found
that higher government ownership of financial
institutions resulted in lower per-capita GDP
growth, even when initial financial
intermediation development had a positive and
significant effect.
 They also found that higher government
ownership of financial institutions was
associated with slower subsequent financial
sector development and lower productivity
growth.

State owned EIC?
 It is also important for the Ethiopian
economy to expand insurance to the rural
areas through financial liberalization.
 It might be possible here to establish a
specialized rural/agricultural/micro
insurance financial institution that would
then provide research based insurance
products to the majority of Ethiopians.
 If the sate owned firm must survive that
must be its mission for existence

Challenges
By the same token, liberalizing
the sector carries certain
economic risks and
uncertainties, some of which
are consistent with the
stakeholders’ concerns

Challenges
Financial liberalization may cause
financial fragility rather than financial
stability unless the regulatory
framework/capacity is strengthened
This is especially true in developing
countries where the institutional
environment is weak

Challenges
Privatization in transition and
developing economies ended up
transferring public assets onto the
balance sheets of foreign companies
and into the coffers of politically
connected individuals (businesses)
under shoddy deals.
Under the pretext of liberalizing the
sectors, countries replaced state
monopoly with private monopoly.

Challenges
 Liberalizations succeed or fail depending on the
degree of investor protection, quality of laws and
their enforcements and the preexistence of deep
and functioning domestic capital markets.
 For a developing country, liberalization may include
taking a series of steps such as modernizing a
country’s commercial and security laws aimed at
improving the depth and breadths of its financial
markets, protecting savors/investors, and
establishing a settlement system that ensures
liquidity and credible reduction of information
asymmetry

Challenges
 It is also important to note that liberalization has its
own winners and losers as the market re-assesses
the risks and returns of companies and sectors.
 At a more general level, readiness is required to the
unique features of observed liberalization programs
include ownership rights rearrangements,
deregulation, trade liberalization, currency
adjustments, removal of foreign exchange
restrictions, rationalization of government
bureaucracy and finances, creation of an effective
social safety net, and lower spending in social
investments (education and health).

Challenges
Although liberalizing the insurance
sector itself may have positive
effects on economic growth, the
incomers may continue to provide
the existing products unless there is
proper regulatory guidance and
direction

Challenges
In undertaking liberalization, it may
be important to give particular
attention to the mode of entry and
time frame so that the Ethiopian
insurance sector can enhance the
quality of governance and develop its
institutional framework.

Challenges
For example, government may choose
to limit (set percentage cap)the degree
of foreign ownership for a specified
period of time in an effort to help
domestic firms to prepare for future
competition and enhance the quality of
governance.
Similarly, adjustment measures and
regulatory monitoring of foreign
insurers are essential

Challenges
For example, government may choose
to limit the degree (%ge) of foreign
ownership for a specified period of time
in an effort to help domestic firms to
prepare for future competition and
enhance the quality of governance.
Similarly, adjustment measures and
regulatory monitoring of foreign
insurers are essential

Government/Regulat
ory Concerns and
Opposition to
Liberalization

Concerns?
 The question thus arises as to whether and
how the Ethiopian authorities should
address issues of financial liberalization.
Interviews conducted with stakeholders
revealed widespread opposition to
liberalization on a number of grounds.
 But Most of the reasons relate to capacity
deficiencies, I presume.
 Most authorities are shackled by fear of
the unknown-My OBSERVATION;

Government/Regulatory Concerns and
Opposition to Liberalization
 It may be surprising that the Ethiopian
government remains so strongly opposed
to financial sector liberalization especially
the insurance sector.
 Per my observation, although Ethiopian
policy makers understand the potential
importance of financial liberalization, it is
widely believed that liberalization may
result in LOSS OF CONTROL over the
economy and may not be economically
beneficial.

Government/Regulatory Concerns and
Opposition to Liberalization
 They prefer to postpone the case under the
pretext of “strengthening national capacity,
preparation, building strong legal and
regulatory framework.....etc”
 The case not fully and adequately studied .
 Ethiopia’s financial sector has not been
studied to any great extent, the benefits of
financial sector liberalization for developing
countries should have been widely
investigated.

Arguments against
Liberalizing restrictions on foreign operators entry
will accelerate the efficiency of the domestic
insurance sector, and thereby contributed to long-
run economic growth.
There is no strong legal and regulatory framework
The local insurers are not ready to withstand global
competition...etc ...etc

Arguments against
The government believes that the development of a
viable domestic insurance sector will be threatened
by foreign players, because they have more capital,
more experience, and better reputations.
They argue that the Ethiopian financial sector is too
young and inexperienced to compete (THE INFANT
INDUSTRY ARGUMENT).

Arguments against
Furthermore, they contend that foreign insurers will
“cherry pick” the best companies and sectors.
How ever, the reality of Ethiopian insurance sector
reveals that local firms are focusing on only
commercial insurance products and their services are
highly concentrated in urban areas.

Arguments against
 There is also a fear that foreign players may engage in outward
flows of capital and FOREX. This may in turn cause foreign exchange
and/or liquidity shortages, with potentially have adverse effects.
 The concern becomes more pronounced in view of the limited
regulatory capacity of the central bank.
 However, the practices of Africa Re and ZEP Re can be adopted to
the primary market. (NB: ZEP RE, and Africa Re ,a regional and
continental reinsurance companies, respectively have opened their
offices as a window of opportunity in Ethiopia's closed financial
sector, to function /serve all insurance companies in local currency.

But why?
SPECIALLY at this time, when
privatization of renowned certain
state-owned enterprises (SOEs) is on
the desk of the government.
NB: Government is Rethinking on the
Ethiopian Privatization

So How long
will we continue
to deprive the society
from getting
the right insurance
products under the
pretext of
preparation?

Concluding Remark
& Recommendations

Conclusion
 The sector is at low level of development as
witnessed by
low penetration, density, product variety
and relevance, accessibility, knowledge
and skill
The market is not competitive and the
industry is strangled by structural
problems.
There are no encouraging efforts to
develop it from within
So why? We opt to close the sector?

Conclusion
After all these years:
 We are using old rate charts and we don’t
have any technology to assess risk;
 We don’t have a single actuary;
 Our insurance academy is almost inexistent;
 We don’t have prudent underwriters, qualified
practitioners;
 We are operating manually and the industry is
laggard to adopt technology- Most of the
insurers are operating manually
So why? We opt to close the sector?

Conclusion
 We are selling homogeneous traditional insurance
products and services offered by private domestic
and state insurance company.
 The closed market coupled with absence of
strategic insurance products and services that can
serve the local requirements,
 Unhealthy competition (non-competitive market
structure), has weaken the link between the
contribution of the sector to the national economy
and the public is poorly served by the insurance
sector witnessed by low penetration rate and
service coverage

Conclusion
My observations suggest that
The Ethiopian economy would benefit
from insurance sector liberalization,
especially from the entry of foreign
insurers
Insurance is a universal financial
service product and we can get better
services with the involvement of
foreign insurers, it is not endemic, for
that matter.

Conclusion
For me there is no answer that
could justify all these.
YES, as noted, Ethiopia has a
unique economic and
social/historical background, but it
is not clear how it is different from
other African countries in closing its
insurance market for this long.

Conclusion
Why is that the Government is
contemplating to liberalize/privatize
insurance industry whilst thinking of
privatizing its “crown jewels” like the
Ethiopian Airlines (EAL) and Ethiopian
telecom (ET), which relatively
contribute more to the government?

Conclusion
The practice and policies we
followed must be validated
Even with the interviews I conducted
with officials and decision makers ,I
couldn't get satisfactory answers to
justify the cause.

Recommendation
My recommendation is intended to
draw the attention of policy makers
towards privatization/liberalization
of the insurance sector;
Liberalization of the insurance
industry could be a panacea for
addressing structural problems of the
industry that hampered its growth
and development.

Recommendation
Ethiopia can improve the
environment for economic growth if
it develops policies that promote
successful financial development and
liberalization, instead of adamantly
resisting liberalization.

Recommendation
With liberalization, modern
insurance services can be
introduced, more jobs can be
created, and the sectors
contribution to the national
economy and GDP can be
enhanced.

Recommendation
We have repeatedly tried financial
and other reforms and we are not
registering the expected result.
Let’s stop singing the same song
over and over again. What is purely
left is liberalizing the sector.

Recommendation
Insurance service does not have
citizenship- the country is in need of
better , efficient and modern
services.
As a priority, Government can start
liberalizing the insurance industry
even prior to the banking sector.

Recommendation
The lessons and experiences
obtained from the insurance sector
can be later used for the banking
sector
There is nothing we can benefit by
closing the sector.

Entry Modes
Sector wise: Start from the life
and health, micro insurance
sector and or other specific class;
Partial ownership: start with
limiting the percentage of foreign
ownership
 Government should reduce its 100%
ownership on state owned (EIC);

In the immediate run, revalidating
the mission of the state owned
insurer (EIC) and ensure its
existence through providing
strategic insurance products is a
feasible option;
Recommendation-fate of EIC

EIC should walk away from
competing over Motor and
other urban based
Insurance “the red ocean”
and navigate on the
untapped side of the ocean;
EIC - see the blue ocean!

 I generally recommend (agricultural
insurance, micro insurance, takaful
insurance, social and community based
health insurance, life insurance...etc) and
other new/relevant insurance services for
the benefit of the society across Ethiopia;
 EIC should marshal its resources for the
development of LIFE INSURANCE in
Ethiopia
EIC - needs mission revalidation

Finally
First year-Takaful
Yester year- PVT
This year –
Liberalization.
Third Annual East Africa Finance Summit Dec 18-19, 2018 Addis Ababa , Ethiopia
For 3 years in a row –Call for
innovation

116
Fikru Tsegaye W.
(FLMI,ARA,ACS)
Fikru.tsegaye@yahoo.com
+251-913-03-51-68

References
 AIO annual review, 2018

The Case for Insurance Sector Liberalization in Ethiopia: Prospects and Challenges”, Fikru Tsegaye

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