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Mandatory minimum premiums are expected to bet set for general insurance in relation to the growing loss ratio in the industry, particularly with auto insurance.
The Association of Ethiopian Insurers has assigned an actuarial firm to undertake a detailed study since the financial regulatory body National Bank of Ethiopia (NBE) advised insurance firms to find solutions to the problem.
Insurance firms claim that their business has been significantly affected by the increasing number of auto accidents. They say the premiums they charge are small when compared with the damage.
Car insurance has been a common problem for the profession. For instance in its latest annual conference Ethiopian Insurance Corporation (EIC) stated that from the total settled claims in the 2016/17 fiscal year, 61.5 percent went to auto insurance.
In his report Netsanet Lemessa, CEO of EIC, expressed his concern about the growing risk of auto insurance and he emphasized, during the closed session of the conference that the management of the insurance corporation had to take a strong stand.
Meanwhile insurance firms say that low premiums promote unfair competition and negatively affect their business.
Experts said that the current competition between insurance companies is not based on the service that they provide instead they are fighting by offering low premium payments.
“This has affected them,” an expert explained.
Experts said that even though they expressed their concern and agreed to improve the amount of the premiums during their meeting, it was not implemented.
The association members that have a quarterly meeting with NBE mentioned the issue and the regulatory body advised them to come up with detailed study.
After the consultation with NBE to alleviate the problem they hired the Kenyan based Actuarial Services (East Africa) Limited (actserv) to undertake the study and possible options to set the minimum premium rate.
Netsanet mentioned the issue in his report.
He told Capital that the actuarial firm was assigned about six months ago to undertake the study within three months but lack of organized information from some of the insurers delayed the operation.
“We expected to see some changes in the beginning of the current financial year, but the delay forced us to postpone it,” he added.
Kiros Jirane, CEO of Africa Insurance, told Capital that the preliminary study was evaluated by the association members recently.
Netsanet said that the final document of the study is expected to be finished this month.
In the last few years the insurance industry’s profit has decreased. The main reason for this is unfair competition between insurance companies.
The current study is aim to set a percentage on the premium collection. The claim expense also would determine the rate.
The study evaluates the activity of every insurance firm that includes the premium estimate, income, and expense and management experience of the financial firms.
The CEO of EIC said that the experience of others is related to the minimum premium rate. “For instance in Kenya the minimum insurance premium amount for motor vehicle insurance is set to three percent of the value of the vehicles but the actual premium amount has grown to 5 percent since the car compensation has risen,” he said.
He explained in Ethiopia the premium percentage in the motor sector has been declining due to unfair competition reaching less than one percent of the value.
“But the amount we compensate grows significantly every year. For instance compared with the preceding year compensation for motor vehicles has grown by 171 million birr,” he added.
From the total premium EIC collected for the 2016/17 financial year the vehicle insurance is about 40 percent but the compensation is over 60 percent of the total claim that EIC settled in the same period.
“This indicates that the vehicle insurance consumes the premiums collected from other policies,” the CEO explained.
According to experts, besides the fatalities and other human damage traffic accidents are bleeding the country’s economy and escalating the hard currency shortage.
The traffic accidents along the Djibouti corridor damage imported products, while maintenance for vehicles uses spare parts imported with foreign currency.
“On the other hand the higher compensation from insurance industries has affected the revenue not only shareholders but the general public as a whole,” an expert added.
Experts said that since the new system has been applied when traffic accidents increase so will premiums and that will force clients to be more vigilant.
Since the minimum premium was set insurance companies will have better revenue so they can invest more in saving expenses from vehicle accidents as issuers do in other countries.
“In other countries insurers take part in road designs, and even the production of vehicles which reduces traffic accidents,” one industry insider said.
“We can engage in such kind of involvement to tackle the problem,” they added.
The study included other general insurance businesses, according to Netsanet.
The insurance premiums for project insurance decreased in the past few years, according to experts.
Netsanet said that a few years back the project premiums were about 0.4 to 0.5 percent now they are less than 0.1 percent.
Since actserv finished the study this month the issue will be discussed with NBE and other stakeholders and is expected to be implemented by late 2017 if NBE give approval.