Since the recently introduced regulation by the Council of Ministers to allow foreign banks to locally operate did not comprise foreign insurance companies, the situation created some sort of confusion on insurance provision, as stated by the by the professionals association.
The association board discussed the matter and took resolution in this regard. The association assumed that if the government gave green light to foreign banks to operate here, foreign insurance companies would need to be allowed to operate here, too. However, it is clear that the government directives do not include insurance companies, which has created some sort of vagueness and doomed scenario.
The association board also agreed to discuss the matter with the governor of the national bank of Ethiopia to know whether the Ethiopian insurance market is open to international competition similar to the banking industry.
According to Ethiopian Insurance Provision Association President Yared Molla, until the Council of Ministers decision was heard, he did not think that the directive did not include the insurance industry.
The question of why the insurance sector is excluded in this regard has been amazing. The association is forced to discuss the matter with the pertinent government body because it is unable to find sufficient information along this line. The association believed that foreign insurance would be allowed to operate here but by now felt skepticism. He further said that months ago, the association forwarded questions to the government, and a positive response was obtained. It was also optimistic that foreign insurance companies would be allowed to run their businesses locally.
When a workshop took place in the recent past with regard to financial institutions with government officials on the occasion, among the three major questions raised by the association was whether the Ethiopian insurance market is allowed to foreign insurance companies. During the meeting, the Minister of Finance, Ahmed Shide, told that the question will have acceptance.
However, the recently introduced directives, which indicate that foreign banks are permitted to operate here, forwarded by the council of ministers did not mention the fate of the insurance industry. That is why the association is forwarded its plea to the governor of the National Bank of Ethiopia to thoroughly consider the issue.
According to the association explanation, the coming of foreign insurance companies here helps the Ethiopian insurance companies to be strong and competitive.
Therefore, the association called for the government policy makers that whenever they prepare policy with regard to the financial sector should pay attention to the insurance industry. On the other hand, though reform works are currently underway in many sectors, the insurance sector is still intact from the reform; therefore, the government should consider this. In fact, the reform reached a little bit of the banking industry but not the insurance sector.
As to the members of the association, the insurance industry has its own character and philosophy; hence, whenever measures are put in place to improve the sector beforehand, an insurance commission is established, which has the mandate to administer and supervise the sector. The association also demands that, the commission independently govern the sector from the National Bank of Ethiopia. Such a statement was approved by the Minister of Finance when a recent discussion took place with stakeholders.
‘‘We understand the value of insurance to the nation’s economy, and we will give you a response to the question concerning the insurance industry soon,” said Ahmed. Therefore, the government should pay attention to the plea of the sector, and the association believes that the government does not neglect the sector. As to observers, here in Ethiopia, a better enabling environment is being created to attract foreign insurance companies than foreign banks, and policymakers must recognize such a situation.
According to Yared, he does not believe the opening of the insurance market to foreign companies abruptly; rather, he suggests that their operation must be done step by step because, before the implementation of the directives, discussing the issue is vital. The policy with regard to allowing foreign insurance companies should be prepared by identifying the sectorial behavior and examining the experiences of the experiences of other countries. The involvement of foreign insurance companies in the Ethiopian insurance market should not harm the local companies, and to that end, studying the environment with the cooperation of pertinent stakeholders is essential.
As to Yared, the insurance sector has international character and the existing legal frame work of the insurance business connects the local insurance companies with that of the international insurance companies with high competitive capacity through re insuring system. Therefore, when thinking of inviting foreign financial companies to operate here, it is vital to prioritize the foreign insurance companies.
For example, 95 percent of the Great Ethiopian Renaissance Dam insurance is covered by foreign reinsurer companies. The share of the local insurance companies is only 5 percent.It should be also recognized that the insurance coverage of the Ethiopian airline and other mega projects is mostly comes from foreign reinsuring companies.
House or vehicles supplied for sell here in Addis Ababa obtain insurance coveragesimilar to houses and vehicles sold in London or New york and this indicate that the insurance law has international character. The insurance coverage task is not simply left to a given company rather it transfers the responsibility to the transnational companies which are foreign by their nature.
The involvement of foreign insurance companies is fundamental because, in addition to playing a key role in transferring knowledge and sharing experience, they can stimulate the life insurance business, which has not been boosted to date. Till now, in Ethiopia, life insurance coverage remains at its infancy level, and local insurance companies are unable to promote the sector; hence, if foreign insurance companies are involved in the business, they will upgrade the life insurance status. Moreover, they can reach the ordinary segment of society through their services and play a pivotal role in promoting saving culture. As to Yared, one country’s economy will be meaningful if the life insurance business flourishes; therefore, the current gap witnessed in the sector can be closed by foreign companies because Ethiopia can’t be intact to foreign financial institutions. If foreign companies start business here, they may not request collateral for the loan they provide, but to invest money, they may request a place and property guarantee.
Therefore, they need insurance which goes in line with their service provision and forward such request. Hence, the government must give green light to both foreign banks and insurance companies to operate here. In Ethiopia, there are about 18 insurance companies and in 2014 budget year they could collect 16.74 billion birr premiums.
As it is known, Ethiopia is an inhabitant of 100+ million and its economy is characterized by agrarian and underdevelopment. Currently, though the financial sector is growing from time to time, as compared to the population, there is a huge gap between supply and demand for financial services. Still, very few segments of society are in the financial sector. In fact, in the last 20 years, the expansion of microfinance institutions in the rural part of the country could enable them to reach the poorest segment of society. However, banking and insurance services still play an insignificant role in the rural part of Ethiopia.
Therefore, boosting the sector is essential. In the last three decades, the opening of the financial sector to the local private sector has boosted the economy. However, to create a viable economy that can be competent at the international level, inviting foreign financial companies such as banks and insurance companies is essential. The influx of foreign banks can shore up shortages of foreign currency, technology, and knowledge transfer; hence, similar to the banking sector, it is hoped that the government will soon open the insurance market to foreign companies.
BY ABEBE WOLDEGIORGIS
The Ethiopian Herald June 30/2024
