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A consortium of 13 insurance companies swung into action to establish a re-insurer following the issuance of a directive on May1, 2014 by the National Bank of Ethiopia, the supervisory body for financial institutions. Ethiopian Reinsurance Share Company is looking forward to commencing operation in the coming six months.
The Association of Ethiopian Insurers (AoEI), that have 13 insurance firm members from the total 17 insurers that are currently active, began forming the foundations for the reinsurance firm.
Diligence Consultancy Service Plc., the consulting firm who is entrusted to collect an initial subscribed capital of 660 million birr will also put the new share company in place, a binding contract signed on May 6, 2015. The consultant will undergo necessary formalities to obtain a license for the share company that is under formation. It will also oversee the sale of shares until a threshold of one billion birr subscribed capital is met.
According to NEB’s Directive No. SRB/1/2014, the minimum paid up capital of a reinsurer must be half a billion birr and a single shareholder cannot own more than 5 percent of the total shares, similar to the provision governing private banks. However, state enterprises are allowed to buy more than five percent of the total shares.
The majority of insurance companies that have membership in the reinsurance firm and other non-member insurance companies have expressed their interest to buy maximum shares they are entitled to buy, the reinsurance firm steering committee members had said. Following the provision s of the NEB directive, the maximum stake an individual insurance company can buy is 50 million birr.
The sale of shares of the reinsurance firm is also open for parties outside of the insurance business and to investors.
Currently, the association is raising funds to secure the establishment cost which takes up one percent of the initial subscription. An organizing committee that has 13 members and a steering committee that has four members carries the work of the new share company through the preliminary stage.
Diligence Consultancy Service is in charge of managing the project office, drawing the business plan for the reinsurance firm, and completing license applications. It will also prepare pre-application forms, descriptions of officials’ duties, fundamental preparation policies and manuals, underwriting procedures, and human resource manuals, according to Kiros Jirane, President of AoEI and CEO of Africa Insurance.
Members of the steering committee said that according to the international trend, insurance companies have to buy some percent of the policy from reinsurers.
Yewondwossen Etefa, member of steering committee and CEO of the state-owned insurer Ethiopian Insurance Corporation (EIC) which is the major actor in the insurance business, told Capital that the major shareholders on the new firm would be the insurance companies themselves as they will be required to buy the policy from the reinsurance firm.
“This shall make both the insurance companies and the reinsurer beneficiaries and it will also help to save hard currency [from the purchase of a policy from a foreign reinsurer],” Yewondwossen said. “For instance, from the total of 4.8 billion birr written premium EIC has paid in the past fiscal year, 30 percent goes to foreign reinsurers but our reclaim is very small. So the company will be beneficiary to buy policies from a reinsurance company on which it has shares,” he added.
National Bank experts remarked that the formation of a local reinsurance company will contribute to the setting up of a national risk management policy framework. Ethiopia does not have any national risk management policy that can salvage its financial industry from unprecedented bumps. “This is one of the government priorities and that’s why NBE issued the directive that allows formation of reinsurance service firms,” an expert said.
Ethiopian Insurance Company will buy the maximum amount of shares it can, although it awaits for a clearance from the board of Public Financial Institutions Supervising Agency, Yewondwossen said.
The upcoming reinsurance firm has plans to expand its business on the continent and globally. Yet, the firm needs to be rated by international rating companies to engage in international reinsurance markets on a competitive manner, industry experts have commented.
“In my opinion, the consultant firm has to be ready to get the company rated by international rating companies in three or four years to boost its competitiveness in the international market,” Yewondwossen told Capital.
Kiros said Diligence Consultancy Service will conduct a study that will cover wide spectrums of the business including an appraisal to cross check the several feasibility studies that were undertaken few years ago, including one by EIC.
Underwriting, claims handling and capital are some of the basic that will be rated to have international accreditation.
Several survey studies have indicated that the formation of the reinsurance company would bring in more money from abroad, and in the mean time it saves hard currency that has been paid for international reinsurers.
About 30 percent of the total premium of the local insurance companies is paid for international reinsurers, Kiros estimated.
Ethiopian insurance firms have been buying guarantee from foreign reinsurance firms for the past 20 years.