National Bank of Ethiopia (NBE) drafts its own minimum premium rate for motor class of business with by far a lower rate than the amount set and made effective by the Association of Ethiopian Insurers (AEI) as of November 1st last year.
It can be recalled that a minimum premium was a major issue for insurance companies because free market competition had hindered their profits and increased their risk, especially in motor and engineering coverage.
The case was also looked into by the regulatory body, National Bank of Ethiopia (NBE), which finally recommended insurers to come up with the necessary detailed study with implementing indications for the minimum premium.
Since 2017, insurers through the Association of Ethiopian Insurers have been comprehensively conducting the study. Initially they assigned Kenyan based Actuarial Services (East Africa) Limited, while the study was carried out by Zamara Actuaries, Administrators and Consultants Limited, a similar company from Kenya.
On the Insurance Business Proclamation 1163/2019 which was amended in 2019, the central bank has also taken the mandate to issue a directive to determine an economic (minimum) premium rate.
The AEI then finally issued a uniform minimum premium policy rate for the motor class of business, which was then applied by all insurance companies as of November 2022.
When the uniform minimum rate was applied the association filed the case to NBE to endorse the case, while until this week there was no formal information from the regulatory body, who this week dispatched a draft directive on a case for consultation.
On the draft directive, ‘motor insurance own damage minimum premium rate’, at its preamble stated that the directive is needed to ensure that premium rates are adequate, fair and sufficient.
It added that it becomes necessary to culminate the unwarranted premium undercutting, ensure the stability of the insurance industry and protect the interest of policyholders.
However the rate that was mentioned on the draft directive is lower than the amount that is applied by insurance companies.
For instance the minimum premium rate that set by AEI is from vehicles type and their service and set from 1.5 percent to 4 percent of the value of vehicles.
The NBE draft directive on the other hand put 1.02 percent as the least minimum rate and 2.86 percent as the highest rate.
The 2.86 percentage points is put on public service vehicle types that have up to 16 seats, while the AEI percentage for similar category is four percent.
On the draft directive 1.02 percent was proposed for private cars that was 1.5 percent on the AEI rate table.
Insurance company experts appreciated the initiative taken.
Ebsa Mohammed, General Manager of Alfa Certification Consultancy, told Capital understanding and accepting the need of setting a minimum rate by the regulatory body is a big move. With others like Endalkachew Zelekew, CEO of Zemen Insurance, sharing Ebsa’s view.
He told Capital that at least it is supposed to be appreciated.
“Proposing the directive is a big success now we are on the same page for the matter,” Endalkachew says, adding, “I understand that proposing such kind of directive is showing me that the regulatory body is accepting the concern of the sector problem.”
“In the global experience associations are raking this kind of responsibilities but NBE has taken the mandate by the amended proclamation so it is expected to come up with it,” he added.
Ebsa expressed that it is difficult to accept that NBE undertook further assessment by itself.
He reminded that the study that was carried out by AEI through actuaries was tabled for NBE more than a year ago, “At the time NBE promised that it will come up with a final decision in one month’s time since it received the study but was then delayed for more than a year.”
“I am not sure that the regulatory body took its own study. For instance in the first quarter of the current financial year, several insurance companies’ profit has highly dropped, while NBE proposed the rate that has at least reduced by 30 percent compared with the rate that was implemented by the association,” he elaborated by expressing his expectation that the draft will be reviewed.
Insurance leaders said that since the implementation of the association rate there were some challenges with even the consumer protection regulatory body being involved on the investigation. Due to that such kind of directive come from NBE is a good recognition for the sector challenge it faces in terms of a motor insurance policy.
They claimed the motor insurance premium is highly deteriorating particularly compared with the unfair market competition and frequent price hike on vehicle parts.
“Proposing the directive shall enable us to come up with our argument and to set acceptable minimum rate for the business, while the proposed percentage is small compared with the rate that our association set,” the sector actors said.
For instance Endalkachew showed one of the gaps on the draft directive is that the rate between one and the other was very narrow and that it was not considerate of the actual price of the covered property.
“I hope we will get to acceptable points before the implantation of the directive,” he expressed his expectation.
When Capital reported about the case in early November some experts argued that the move of the association is totally unacceptable.
For instance Assegid Gebremedhin, CEO of At Insurance Broker and Consultant, expressed the case as it will erode the sector dynamism and creativity. “It is like the concept of what the oil cartels did,” he argued.
He said that insurwers have to maximize their profit and competitiveness by introducing information technology, development of human capital, new policies, expanding on different sectors and different new market destinations rather than concentrating in Addis Ababa and motor class of business.
In the past several years insurers say the premiums they charge are small when compared to the damage. From the total claims insurers settle every year, motor vehicles make up the largest proportion. In their annual report they expressed concern about the growing risk of auto insurance.
Experts said that the competition between insurance companies is not based on the service that they provide instead they are pulling the rug out from each other in a race for loss by trying to offer the lowest premium payments.
NBE drafts lower rates for motor insurance
Currency outside banking constricts in 1st Quarter
In the first quarter of the 2022/23 fiscal year, the currency outside banking (COB) system narrows from its all-time high from the preceding quarter.
The National Bank of Ethiopia (NBE) quarter economic review indicated that in the first quarter of the fiscal year, the currency outside banks stood at 169.5 billion birr which is an 8.3 percent contribution of broad money supply (M2) growth in the quarter that ended on September 30, 2022.
With the previous fiscal year registering high growth speed of COB, the fourth quarter of the 2021/22 fiscal year‘s growth rate was a little bit slower when compared to its preceding quarter, nonetheless the COB amount reached an all-time high in the sector at the time at 173.3 billion birr.
However, the NBE 2022/23 first quarter evaluation indicated that in the stated period the COB has contracted by 2.2 percent compared with the preceding quarter or the fourth quarter of 2021/22 fiscal year. The COB in the first quarter of 2022/23 has also dropped by almost one percentage when compared to the third quarter of last fiscal year.
Similarly its contribution for M2 has contracted in contrast to the preceding quarter and is back to a single digit.
The COB drop which is a first since the country’s demonetization of birr in 2020 is cited as a rare occurrence.
On the first quarter of 2020/21 fiscal year, which is the period when the government started the currency change, the COB had stood at 64.6 billion birr that had contracted by 29.3 percent from 109 billion birr of the fourth quarter of 2019/20 fiscal year.
However, it has taken almost the previous highest position of the second quarter to reach 108 billion birr or 67.5 percent increment when compared with the first quarter.
Mamo Mihretu, Governor of NBE, who recently met with financial sectors actors, stated that in the first half year of the fiscal year that closed December 31st COB has increased by 27 percent to reach at 189 billion birr.
This will be the new highest amount as COB. He added that this figure shows that there is much resource in the market that financial institutions shall mobilize as deposit.
The 2022/23 first quarter review indicated that reserve money reached 374.4 billion birr at the end of the period that indicates a 30.4 percent annual and 3.3 percent quarterly growth, “This significant annual increase in reserve money was reflected by 39.3 percent rise in banks’ deposits at NBE that is 166.8 billion birr in the first quarter from 119.8 billion birr a year ago and 24.1 percent growth currency in circulation to reach 207.6 billion birr from 167 billion birr in the first quarter of last year.”
The quarterly report elaborates that NBE’s deposit liabilities that include banks’ deposits at NBE surged by 42.7 compared to the same quarter of last year. This was due to a monetary policy change on reserve requirement ratio.
However, currency in circulation climbed by significant points on year on year bases has slightly dropped in the reported period compared with the preceding quarter that closed June 30, 2022.
In the reported period the banking sector’s capital surpassed 200 billion birr to reach at 210.1 billion birr of this the state owned banks share stood at 42.4 percent.
It elaborated that as a result, excess reserve of commercial banks surged by 98.7 percent on annual basis. Thus, the money multiplier, measured by the ratio of M2 to reserve money, dropped to 4.8 from 4.9.
The M2 stood at birr 1.8 trillion at the end of the first quarter of 2022/23 reflecting a 29.2 percent annual growth mainly due to a 28.9 percent expansion in domestic credit, offsetting a 171.7 percent and 24.4 percent contraction in external asset (net) and other items net. Meanwhile, net claims on government grew by 57.1 percent and credit to non-government sector by 22.6 percent.
On its yearly report that covered the 2021/22 fiscal year NBE indicated that at the end of 2021/22, domestic liquidity, as measured by M2, reached 1.7 trillion birr reflecting a 27.2 percent annual growth mainly due to a 30.3 percent surge in domestic credit.
The higher growth in domestic credit was attributed to a 96.6 percent increase in credit to the central government 19.1 percent to non-central government, respectively.
All broad money components witnessed expansion where narrow money that includes COB and demand deposit rose by 34.4 percent due to higher demand deposits and COB, reflecting some improvements in money demand for transaction purposes. Similarly, quasimoney, that comprises savings and time deposits, rose 23.8 percent and reached 1.13 trillion birr owing to the increased deposit mobilization by commercial banks.
Electric vehicle charging stations across Addis in the horizon
Ethiopian Electric Power (EEP) and Cardinal Industrial plc agree on the establishment of electric vehicle (EV) charging stations in alignment with the infrastructure capabilities of the power producer.
During the launching ceremony held on Monday February 1, Cardinal Industrial announced that it is planning to build 500 electric vehicle (EV) charging stations within one year at the cost of USD 15 million.
Moges Mekonnen, Public Relations Head at EEP, said that EEP will provide the energy and infrastructure on the aim to provide sustainable power for charging stations.
As he explains, the charging station will be installed on the substation facilities that EEP is administering.
Moges further elaborated that the charging station will be connected on separate lines on the aim to keep sustainable power supply for the charging stations as well as electric supply for the public.
Liliya Hailu, CEO of Cardinal Industrial, said as a pilot, Addis Ababa will be the first to get the charging station, while the initiative will be expanded throughout the country.
According to Ashebir Balcha, EEP has over 180 substations throughout the country. He said that EEP is generating green energy thus, “it has the potential to expand the supply of energy for EV.”
He said that his enterprise has accomplished the precondition to install charging stations at its facilities.
Moges said as per the current potential, EEP has a capacity to provide up to 1,000 GWH of electric energy per annum for charging stations with the potential of generating up to one billion birr per year.
The number of electrical vehicles has been on the rise in the country following the government’s policy direction to expand environmentally friendly vehicles.
Millers express scare over market driven wheat shortages
Ethiopian Millers Association express concerns over shortage of wheat supply to their factories.
According to the association, which has more than 220 member factories, it usually buys wheat from different parts of the country based on the season and the type of wheat including from Bale, Awash, Arisi, and Gojam.
According to Muluneh Lema, president of the association, based on the season, factories had been expecting wheat supply from Bale, Oromia Region’s largest wheat producer, however, the wheat market has been rattled by interruptions for the past five or six weeks especially in the capital Addis Ababa.
“Beside wheat price increasing by more than one thousand birr per quintal it has been more than five weeks since the factories that produce flour and related products stopped getting wheat from the market,” said Muluneh, adding that, “A number of factories are cutting their production of flour.”
As the association indicated previously one quintal of wheat used to be sold for 4,700 birr which now has jumped to 5,700 birr.
“We have also confirmed through field observations that Ethiopia has increased its wheat production,” said the president explaining that he is confident that there will be no shortage of wheat production this season.
However, due to the interruption of the wheat market, the president alluded that factories are also buying smuggled wheat at high prices.
A week ago, Prime Minister Abiy Ahmed attended the national wheat export launch program in Bale Zone, Oromia Region as part of the government’s plan to halt import of wheat and embark on the export of its own wheat production.
According to the Ministry of Agriculture from this year’s autumn harvest season, 112 million quintals and 52 million quintal of wheat production from irrigation and summer season is expected to be reaped.
Therefore, the forecasted production rate indicates that there will be excess production in terms of domestic demand which is estimated at 97 million quintals with an additional 32 million quintals of wheat being projected for export.
Muluneh stated that although they are very supportive of Ethiopia starting to export wheat, they do not think that the export trade will create a problem for the domestic wheat market as this year a high level of production has been produced at the national level.
“Even those who were getting the supply in different ways or using from their stock may not continue for long if the situation is not solved quickly and it may affect the supply of bread and other products,” the president indicated.
Ever since the problem occurred, the association has been informing the Ministry of Trade and Regional Relations and the Ministry of Finance by letter, and they believe that the efforts they are making by going to the front will yield results.
It is said that one of the reasons of the unintended wheat trading problem is related to the inability to properly implement the Oromia region’s wheat trading guidelines.
According to Muluneh, in a meeting held in Adama with the relevant government, it was decided upon for unions to supply wheat to factories from farmers at rates of one quintal of wheat with 3,200 birr and to sell it to factories for 3,381 birr.
“When we follow up on which unions we are working with, the unions did not get enough financing, and after that it almost fell flat with unclear information,” said Muluneh.
Muluneh, emphasized that production in itself was not the thorn in the scenario but the way how the market process is run.
