Long Way to Go

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Private insurance is still in its infancy in Ethiopia. Privately owned, Africa Insurance Company (AIC) was established in 1994 and was set up with a fully paid up capital of 30 million Birr. Its CEO Kiros Jiranie sat down with Capital to talk about private insurance in Ethiopia which is growing rapidly despite the challenges they face. Kiros, 52, who has been in the insurance business since 1996, has served Africa Insurance SC for the past five years. Kiros is also president of the Ethiopian Insurance Association that includes all insurance firms in the country. He discusses unhealthy competition in the industry, the establishment of a reinsurance company, market coverage and improving the insurance sector.

Capital: How is the insurance industry in Ethiopia?
Kiros Jiranie:
The insurance industry in Ethiopia is growing by 40 percent generally. When the economy grows the insurance industry will grow with it. The two are directly connected. This is because as economic conditions improve more properties need to be insured.  However when we compare it with other countries that have lower populations but similar economic development,  , their premium income is about 10 to 20 fold more than our collection. For example when we see Kenya, their population is about 40 million but the premium generated there is 10 times more than the premium generated here despite the population size. So the insurance penetration in our country is low and the its role in the GDP is very low. But the future is promising.
Urban areas are where insurance companies are concentrated. But the rural areas should be considered a viable market because farmers in these areas are seeing increased financial returns. As a result they are beginning to own properties that are insurable. The infrastructure being build around the country is another example of a part of the economy that could be insured but that is not currently.
In Ethiopia currently the dominant premium comes from motor insurance. The rate is much lower than neighboring countries but it is still dominant because third party insurance is mandatory for motorists. The reason the motor premium is  low is due to unhealthy competition from the insurance companies. The competition is based on price only, but the fact is that insurance is not selected by price only. When you buy insurance you will compare the company’s sustainability and financial capacity, the price is not necessarily the most important thing to look at.  The companies here are new so they concentrate on price but that will not last long.
Third party insurance is a great chance for companies to bring in more customers. We really will not know for a long time the true potential profits that insurance companies can bring in through third party insurance.
In developed countries life insurance premiums are the biggest contributor to insurance firms’ revenue. It can be as much as 60pct of their income. Even in Africa the premium generated from life insurance is big. But in our country the premium generated from life insurance is very low. We need to work hard to solve this problem.
Capital: Do you think the new health insurance scheme will affect the life insurance business?
Kiros:
Currently life insurance is not a very attractive business to get into here. I do not really expect it to affect business that much. I think, instead, insurance companies should take advantage of the new health insurance program. Companies should tap this opportunity and use it for their own benefit. Some are concerned that the new scheme will affect them. However,the major problem in the insurance industry that exists here in our country is that we all have a similar policy and product. There are no tailored, innovative products being introduced. We only sell what is already available which is basically a printed policy. We don’t design new policies and try to sell them for a specific market as per the need. We are backwards when compared to other African insurance markets let alone the world in designing new policies.
Capital: What are you doing to solve this problem?
Kiros:
We are now developing a five year strategic plan. This consists of product development. To develop new products we have to have a research and marketing team that will focus on developing products and policies to sell them to customers. We are also trying to work with re-insurers on developing new ideas. For instance, we introduced a new product called Weather Index Insurance and over 20,000 farmers are benefiting from buying this policy. We started this in Tigray Regional State by insuring inputs that are used for farming, and we are collaborating with other stakeholders to expand this scheme in other areas. This program is helping the farmers build their confidence as they will be insured for the next season’s harvest. We are also studying the daily lives and needs of farmers to meet their other insurance needs.
Capital: What do you say about a re-insurer company being set up in the country?
Kiros:
We all have different views. When you think of about a re-insurance company you don’t think only about your country, you have to think about re-insuring insurance firms in the region and the continent. It won’t be feasible if you think about your country only. There are many re-insurers in Kenya and they reinsure insurance firms in other countries. It is possible for Ethiopia to have a firm that is a global re-insurer.
The re-insurers should also be internationally competitive and build up their financial capacity. When setting up a re-insurer in the country every insurance firm cannot be re-insured by one company. So when we re-insure we can’t put all our eggs in one basket, we have to look other baskets that will share the risk, but if it is set up here, that company will have the potential for a good business. This re-insurer should be able to compete globally. This re-insurer cannot take more than 20 percent of the risk. For your information from the total revenue generated by insurance firms in the country, about 23 percent of it goes to re-insurers that are based outside Ethiopia. To minimize this percentage, insurance companies here should grow their financial capacity. These companies should be financially viable so that they can take more risks. If they do this they will minimize the payment to the re-insurers but will not totally eliminate it.
Risk should be distributed to everyone. When an earthquake shatters in one part of the world everyone will distribute the risk, this is why re-insurance is needed. The world will share the risk.
Capital:  What do you think about the contribution of insurance firms to the economy in the country?  
Kiros:
The government should focus more on developing the insurance industry. Currently the insurance market is protected and foreigners are not allowed to invest in insurance companies in the country like other financial sectors such as banks. There is a reason for this. Insurance firms should build their capacity financially and professionally before opening the market to others that are more experienced.  When we see the sector it is not capable of competition from outside. When we see the number of insurance firms there are about 17 companies but this is not a sign of growth. Numbers are tricky; the real financial capacity is not enough for the insurance firms to compete with others.
In other countries insurance firms are the major investors. Moreover the premium collected by insurance firms will be pumped directly to the economy, so this will help grow the economy. But when we see our industry it should be studied.
The other thing is that the government should focus on the unhealthy competition between insurance firms.