Move will save foreign currency
National Bank of Ethiopia (NBE), the supervisory body for financial institutions, will now allow Ethiopians to form reinsurance companies. The directive, based on the insurance business proclamation no. 746/2012 article 5(8) and 58(2) will take effect as of May 1, 2014. The reinsurance company establishment directive no. SRB/1/2014 states that the paid up capital of the reinsurer must be a half billion birr and a single shareholder can’t own more than 5 percent of share, which is similar to other rules governing financial institutions.
The 2012 proclamation article 5(8) states that the National Bank may grant a license to a reinsurer. According to the NBE directive, the establishment of national reinsurance companies promotes financial resource mobilization and reduces costs related to reinsurance across borders.
It also states that national reinsurance companies enhance underwriting capacity and solvency of direct insurers by promoting technical support and cover against accumulated and catastrophic losses, and the existence of national reinsurance companies simplifies treaty negotiations, settlement of claims and payment of ceded premiums in domestic currency within the shortest possible time.
According to officials, NBE will begin receiving the applications of interested people concerned with forming reinsurance companies based on the new edict.
The rule states, the reinsurance company must be established as a share company stipulated in the commercial code of Ethiopia and can offer non-life and life reinsurance.
Temesgen Zeleke, Director of the Insurance Supervision Directorate of the NBE, said that shareholdings of anyone, except the federal government of Ethiopia or public enterprises fully owned by the federal government of Ethiopia, in a reinsurer shall not exceed 5 percent of the total subscribed capital either on his/her own or jointly with a spouse or persons who are below the age of 18 and related to him/her by blood.
Ethiopian insurance firms have been using foreign reinsurance firms for their guarantees (insurance of insurance), but on several occasion the local private insurance firms have asked the government to explore the possibility of establishing locally owned reinsurance firms in the country.
According to Temesgen, the current economic growth means insurance is expanding and a local reinsurer to support the industry is needed.
The establishment of a reinsurance company will expand the insurance firms’ underwriting capacity. “It will also contribute technical support,” the director said at a press conference on Thursday April 3.
The premium and compensation payment have been in hard currency, when reinsurance firms are established here it will be possible to use local money. This will contribute to reducing the shortage of foreign exchange. Temesgen said that the local reinsurance will minimize the dependency of Ethiopian insurance companies on foreign reinsurers.
The sector experts said that the country is losing a lot of foreign currency by buying policies from re-insurers, as some of the business cannot be done by local insurance companies alone. According to experts, the new directive will save the expenses that the insurance firms pay to foreign firms.
From the total premiums collected by Ethiopian insurance firms, on average 30 percent goes to the reinsurers and another 30 percent is paid back to the insurance companies through compensation.
The director said that NBE will explain more about the new rule in the future. The current order does not mention the obligation that local insurance firms have to use the local reinsurers. “Detailed directives that will clarify the prudential requirements will be issued,” he added. According to other countries’ experience some policy products are embedded in their own reinsurer firms as opposed to allowing foreign based companies.
He said that the local reinsurers shall sell risk policies to other insurers, based in other countries, but in the short term Ethiopian reinsurers need to accommodate the local market. Currently 15 insurance firms including the state owned Ethiopian Insurance Corporation are operating in the country.
This type of company buys high risk policies from other insurance companies to manage risk. The re-insurer promises to cover the potential losses of the primary insurance company. In this way the re-insurer acts as an insurance company for the primary insurance firm receiving premiums from it. The primary insurance firm collects its premiums from the policyholders. This transfers risk from the insurer to the re-insurer