With some investments affected by the political crisis the country had gone through over the last few years, the quest for investment insurance is now on the rise, insurers’ ability proves to be questionable though. Now that the country has enjoyed relative peace and stability, the need for expanding investment insurance make it mandatory for the country to pull more investments and increase investor’s confidence.
Having concentrated on providing conventional insurance products, insurance industry lags behind in expanding its products and managing investment risks mainly for financial constraint and tough restrictions, according to experts. According to sources, major concerns for potential investors in Africa are non-commercial risks, which related to political volatility and security issues.
Thus, countries are proposing insurance fund to reduce investment risks. In this regard, Ethiopian insurance industry for various reasons lags in expanding insurance services and eventually boosting investment. Particularly, for a country that sees upsurge in investments, nurturing efficient insurance industry is necessary task. Fikiru Tsegaye is an insurance expert. He argues that the contribution of the insurance industry to other sector is very low.
The insurance industry has gained a lot of benefit from huge infrastructural investments and consecutive economic progress with the industry registering annual 25 percent growth in premiums.
However, the insurance industry is not supplying major investment insurance products, he says. The available insurance products are too few to meet insurance demands. The insurance industry is not properly serving other sectors including the service and manufacturing ones. Investment companies do not have adequate access to the right products they need. “And expanding investments only without adequate insurance products is tantamount to businesses which are always at risk of financial hardship.”
“Insurers in Ethiopia, including the state owned company, target mainly the group insurance market and the upper few economic strata.” Apart from weak insurance cover for other sectors, there are no needbased products to serve the agrarian population as well. Insurers should be able to deliver relevant products than continually engaged in futile competition on motor insurance, Fikiru adds.
“Insurance companies supply homogenous traditional insurance. The market has been strangled by structural problems. Insurance academy is almost nonexistent with no adequate qualified practitioner,” he underscores.
Increasing investment activities will open up huge market opportunities for the insurance industry. Insurance has direct correlation with economic status of the country. It is thus up to the insurance industry to avail appropriate insurance package, according to him.
“There has to be change, and insurers must start to target the biggest foreign direct investments. At the bottom of the pyramid micro agricultural insurance products could be availed.”
Insurance companies mainly provide conventional engineering and motor related insurance products. However, almost all sectors require risk management mechanisms. One of the very insurance that insurers must be able to provide to investors is political instability and terrorism insurance. This will both help build up investor’s confidence and generate profit for the insurance industry as well, he argues.
Low per capita income, poor infrastructure and policy related challenges mean low insurance demand, he says.
Accordingly, policy adjustment, market liberalization, professionalizing the sector and others are the prescribed remedies to upscale the industry, according to Fikiru.
Eyesuswork Zafu is a development Economist and has long been critics of closed-door financial policy signaling the negative ramification in reducing competition.
For him there must be a paradigm shift to reform the financial sector. “The financial sector is lagging behind; especially the insurance industry is way behind mainly due restrictions and lack of professionals.
“In general, the financial sector is very weak and cannot be competitive enough at the international level,” he adds
The country maintains closed-door policy when it comes to financial sector; this despite some protection to local investments prevents the insurance products’ improvement.
The sector is steered by strong government intervention, which favors some groups and discriminate others. The country needs to gradually move to market-economy from the development state paradigm that allows stringent regulation by the government, as to Eyesuswork . Avoiding excess regulation, allowing increased private sector participation and ensuring better incentives are the prerequisites to improve the sector. The government should take the first step if any reform is to be carried out in relation to the sector.
While debates are ongoing, Eyesuswork urges the government must strike a balance between regulation and economic opening up.
Also, Yared Mola, Nyala Insurance Share Company CEO, argues that insurance penetration rate is below 0.5 percent.
To him, the rate is the lowest in the Sub-Saharan region.
The branch to population ratio also stands very few with contribution of the industry proving very small. All together, the industry is far from efficiency, he adds.
“The problems lie on the poor attitude towards the industry.”
Insurance is taken as ‘luxury’ product. But insurance is part and parcel of investment and business activities, he underlines.
Insurance governance is very poor, there is no an independent organ that coordinates and regulates the industry.
In fact, there seems to be a wind of change coming from the National Bank of Ethiopia. Insurance proclamation is up for revision and this helps ease policy restrictions, he adds.
There is a growing middleclass population who seek insurance services and for the industry to meet expectations, it should be working on diversifying insurance products and modernizing its services. Companies must be innovative. There is a contradiction between the need for adequate protection and companies’ ability to provide efficient insurance products, he indicates.
Healthy economic growth is achieved by the private sector. The government long exercised closed-door policy, he says, calling it a reprisal policy. Economic liberalization is inevitable and it behooves the local insurers to be strong enough.
Ethiopian Insurers Association General Secretary Hadush Hintsay for his part says: “The industry avails various insurance products. However, there are some risks which insurance companies cannot give protection to because of financial constraints.
Political unrest risk insurance requires huge finance which private insurers find hard to do it. There has not been demand from investor’s side as well. In fact, many investments were affected due to political crisis and instability, according to Hadush.
Insurers are not in the position to mange risks related to huge investments. Political violence and terrorism insurance can only be provided at state levels and joint ventures between the private and government. It is really beyond the companies’ capacity. Initial efforts are underway to push for mechanisms where joint ventures would be formed to expand insurance services for investment activities.
“It is true that the industry is at fledgling stage and faces multiple constraints ranging from regulation to financial capacity. Even compared to the east African countries, the industry is very weak.”
The fact that the industry has long been closed for foreign investments has affected competitiveness and progress. Talks are underway with regulation body to overcome policy related challenges.
Hadush expects reform in the industry, which may include opening up insurance academy, easing legislations and improving insurer’s capacity.
The Ethiopian Herald February 22/2019
BY DESTA GEBREHIWOT
