INSURANCE IN

ETHIOPIA

Historical Development,

Present Status and Future

Challenges

Hailu Zeleke
August 2007
 TABLE OF CONTENTS

PAGE

ACKNOWLEDGEMENTS vi
ACRONYMS vii
INTRODUCTION viif
CHARTER 1: RISK - MEANING AND ITS IMPACT 1

Introduction 1
1.1. Basic Concepts 2
1.2. Economic Impact of Risk 12
1.3. Risk Management 19

CHARTER 2: INSURANCE 23

2.1. Insurance - Defined 23

2.2. How the Insurance System Works 24
2.3. Functions and Benefits of Insurance 32
2.4. Development of Insurance 33

2.4.1. Early Practices 33

2.4.2. Towards a Modern Insurance Business 36

CHARTER 3: THE EMERGENCE AND DEVELOPMENT OF INSURANCE IN

ETHIOPIA UP TO 1960 41

3.1. The Emergence of Modern Insurance in Ethiopia 41

3.2. The Period of Agents of Foreign Insurance Companies, 1920s - 1950s 42
3.3. Establishment of the First Domestic Insurance Company 44
3.4. The Commercial Code and the Maritme Code of Ethiopia, Insurance 46
Provisions -1960

CHARTER 4: THE RISE OF DOMESTIC INSURANCE COMPANIES, the 1960s 49

CHARTER 5: THE FIRST INSURANCE PROCLAMATION - 1970 53

5.1. Insurance Companies Prior to the Issuance of the First Insurance

Proclamation 53
5.2. The First Insurance Proclamation, Proclamtion No. 281/70 54
5.3. Analysis of Insurance Operations, 1967-1972 59

5.3.1. Gross Premiums and Gross Claims - Overall 59

5.3.2. Non- Life Insurance 61
5.3.3. Life Insurance 64
5.3.4. Investment 68
 5.3.5. Financial Position 69
5.3.6. Human Resource 70

CHARTER 6: THE INSURANCE INDUSTRY DÜRING THE COMMAND

ECONOMY AND TRANSITION TO A MARKET ECONOMY
(1976-1994) 73

6.1. Nationalization of Insurance Companies 73

6.2. Establishment of the Ethiopian Insurance Corporation 74
6.3. Organizing the Ethiopian Insurance Corporation 75
6.4. Financial Performance of the Insurance Sector Düring the Penods of
Command Economy and Transition to Market Economy 77

CHARTER 7: THE INSURANCE INDUSTRY DÜRING THE MARKET

ECONOMY- Re-emergence of Private Insurance Companies 85

7.1. Insurance Proclamation No. 86/1994 86

7.1.1. Functions of the Supervisory Authority with regard to

Insurance Business 86
7.1.2. Conditions to Be Fulfilled to Establish an Insurance Company 87
7.1.3. Branch Opening 87
7.1.4. Shares 87
7.1.5. Licensing and Cancellation of Licenses 88
7.1.6. Statutory Deposit and Legal Reserve Requirements 88
7.1.7. Reserve Accounts (Provisions) 89
7.1.8. Actuarial Investigation and Report 89
7.1.9. Margin of Solvency 89
7.1.10. Insurance Auxiliaries 90
7.1.11. Restriction on Loansand Advances 90
7.1.12. Re-insurance 90
7.1.13. Amalgamation of Insurers 91

7.2. The Ethiopian Insurance Industry after Proclamation 86/1994 91

7.2.1. Structure of the Ethiopian Insurance Industry 91

7.2.2. Insurance Policies Marketed 93
7.2.3. Policies in Force and Insured Value 93
7.2.4. Other Products/Services Provided by Insurance Companies 96
7.2.5. Financial Position of the Insurance Industry 96
7.2.6. Paid up Capital 109
7.2.7. Branches 111

7.2.7.1. Branch Expansion 111

ii
 7.2.7.2. Regional Distribution of Branches 113

7.2.8. Insurance Auxiliaries and Actuary 115

7.2.9. Reinsurance 118
7.2.10. Investment Aspect of the Ethiopian Insurance Industry 126
7.2.11. Workforce Profile of the Insurance Industry 135

7.2.12. Financial Performance of the Insurance Industry (2000/01 -

2004/05 137

7.2.12.1. Gross Premiums 1^7

7.2.12.2. Underwriting Surplus 142
7.2.12.3. Net Claims and Net Claims Ratio 1^6
7.2.12.4. Management Expense Ratio and Combined Ratio 1^
7.2.12.5. Profits 162

7.2.12.6. Technical Provisions (Reserves) 1®®

7.2.12.7. Solvency Status of the Ethiopian Insurance Industry 173
7.2.12.8. Long-term Insurance 177

7.2.13. Human Resource Development 181

7.2.13.1. The Ethiopian Institute of Banking and Insurance

184
(EIBI)

CHPATER 8: COMPETITION IN THE ETHIOPIAN INSURANCE MARKET 189

8.1. Competition and its Benefits 189

8.2. Competition in the Ethiopian Insurance Market 190

8.2.1. Developments in the Ethiopian Insurance Sector 190

8.2.2. Competition Prior to Nationalization (1965 -1974) 193
8.2.3. Competition in the Ethiopian Insurance Market Düring 2000/01
-2004/05 195

8.2.3.1. Barriers to Market Entry 195

8.2.3.2. Market Shares 197
8.2.3.3. Preliminary Survey on Competition in the Insurance
Market 197
8.2.3.4. Assessing Market Concentration 200
8.2.3.5. Competition Variables 203
8.2.3.6. The Future and Competitiveness of the Ethiopian
Insurance Industry 205

in
CHARTER 9: REGULATION AND SUPERVISION OF THE INSURANCE
INDUSTRY 211

9.1. Conceptual Framework 211

9.2. Insurance Regulation and Supervision in Ethiopia 214

9.2.1. The Insurance Supervision Department 215

9.2.1.1. The Monitoring and Supervision Process 217

9.2.1.2. Intervention by the Supervisory Body 219
9.2.1.3. Problems Encountered in Insurance Supervision 219
9.2.1.4. Future Challenges of Insurance Monitoring and
Supervision 220

CHARTER 10: PROBLEMS OFTHE ETHIOPIAN INSURANCE INDUSTRY 223

CHARTER 11: PRESENT STATUS AND CHALLENGES OF THE

INSURANCE INDUSTRY IN ETHIOPIA 233

11.1. Present Status of the Ethiopian Insurance Sector 233

11.2. Future Challenges 238

CHARTER 12: INSURANCE ASSOCIATIONS IN ETHIOPIA 241

12.1. Association of Ethiopian Insurers 241

12.2. Society of Insurance Professionals 242

CHARTER 13: RECAPITULATION 245

REFERENCES 257

ANNEX 265

I. Foreign Insurance Companies Operating Insurance Business in

Ethiopia through Agents in 1954 265

II. Foreign Insurance Companies Operating Insurance Business in

Ethiopia Prior to the Enactment of the 1970 Insurance Proclamation 267

III. Profile of Insurance Companies in Ethiopia - June 30, 2005 268

IV. Insurance Policies Marketed in the Ethiopian Insurance Industry 269

IV
V. Reinsurance - Summary 273

VI. Comparison of the Ethiopian Insurance Industry with Selected African

Countries - 2005 275

VII. Statistics of Insurance Companies, Reinsurers, and Brokers - Ethiopia

Vs African Countries - 2005 277

VIII. Share of Motor Insurance in Gross Written Premiums - Ethiopian

Insurers Vs Other African Insurance Companies - 2004 278

IX. NBE Insurance Directives in Force as of June 30, 2005 280

X. Population, Exchange Rates and GDP - Ethiopia - (1999/2000 -

2004/05) 280

XI. Shareholders of Imperial Insurance Company of Ethiopia - June 1953 281

XII. Minutes of the Ist Annual General Meeting of Shareholders of Imperial

Insurance Company of Ethiopia - June 1953 282

XIII. Organizational Structure of the Imperial Insurance Company 283

XIV. Specimen of Stock Certificate of the Imperial Insurance Company 285

XV. Head Office Building of Imperial Insurance Company 287

XVI. One of the Many Advertisements of Imperial Insurance Company 288

XVII.Directory of Ethiopian Insurance Companies and Insurance

Associations - June 30, 2006 289

XVIII. Licensed Insurance Brokers - June 30, 2007 299

XIX. Insurance Organizations in Africa 300

GLOSSARY 305