Revised Note on Insurance Law Reform: Scope and Policy related Issues and Opinions
August 2022
Introduction
The exercise to reform the Ethiopian insurance and banking laws is initiated after the
issuance of the Commercial Code of Ethiopia, 2021 (Proclamation Number 1243/2021).
The new Commercial Code stipulates under Article 3(3) of the above mentioned
Proclamation that Book 3 & 4 of the Commercial Code of 1960, which deals with the
Laws of Carriage and Insurance as well as Banking, will continue to be applicable until
the issuance of the Financial Services Code.
After conducting deliberation on the nature of the assignment on insurance law to be
drafted, the Drafting Team members on insurance law have submitted this advisory
opinion on some issues related to the drafting exercise.
An international expert, Mr. Craig W. Thorburn, is retained by World Bank – IFC as a
member of the Drafting Team on insurance law. The specific supports expected from the
international expert are clarified by the drafting team at the beginning of the engagement.
Accordingly, the international expert agreed to provide comments on scope and policy
specific issues as well as to provide feedback on market and legal diagnostic study. Also,
the international expert will make available the resources focusing on insurance laws of
selected jurisdictions from which their best experiences could be considered in the course
of drafting Ethiopia’s insurance contract law.
In line with the above brief introduction, the revised note1 on scope and policy related
issues associated with insurance law are presented upon incorporating the comments of
the international expert.
1. Regulatory Laws Vs. Laws on Transaction /Services
It is quite clear that the Commercial Code of 1960 was issued to govern various
commercial activities. Specifically, Book 3 of the Commercial Code of 1960 contained
provisions on carriage and insurance (Articles 561 to 714).
In Ethiopia, the public law aspect of carriage and insurance relates to licensing,
supervision and regulation of the entities which provide the mentioned services. Distinct
regulatory organs are given the regulatory mandates. For the financial institutions,
National Bank of Ethiopia2 is the regulatory organ, while the Ministry of Transport3 is the
1. This Revised Note is an edited version of the initial document submitted in May 2022. The Revised Note is
submitted after getting the comments of the international expert and subsequent discussion on the comments
2
National Bank of Ethiopia Establishment, Proclamation No. 591/2008
3
Powers and Duties of Federal Executive Organs Establishment Proclamation No. 916/2015 and subsequent
amendments
1
regulatory organ of those which provide transportation services. The extent of the
regulatory mandates is dealt with under specific proclamations and regulations.
In this connection, whether to contain public law or regulatory related provisions in the
insurance law to be drafted is an issue that should be resolved as early as possible.
Clarifying this issue at the beginning of the assignment is important as it determines the
scope of the law to be drafted. Attempt is made to obtain insight from the financial
services codes of other countries and it is noted that different approaches are followed.
Most jurisdictions have separate laws for insurance regulation and insurance transactions.
On the other hand, the experience of France4 shows that the regulatory provisions are
contained in the Insurance Code along with insurance transaction provisions. In France,
one can obtain both the regulatory and transaction specific laws consolidated in a code,
which makes certainty and access to the legal provisions quite easy.
Although it is rare, there are other jurisdictions where the one law applies to both
situations. The new law just implemented a couple of years ago in Madagascar does do
this also with some inspiration from the French approach.
However, the separation is more common as the relevant areas of policy are distinct. The
transactional issues are a concern for commerce whereas the supervision of insurance
companies has long transitioned from a contractual concern to a prudential concern and,
therefore, falls more in the government organ overseeing the financial sector in many
countries. Also, prudential regulation is somewhat more developed and developing than
contract laws so tends to be updated more recently and separated.
Conversely, Ethiopia’s codified laws5 which started from the 1960’s could evince that the
codes were meant for governing transactions or services. Public laws or regulatory
provisions were issued through separate proclamations6. The fact that codes were not
amenable to frequent amendments in response to the dynamism in the regulatory
environment might have been the rationale for the dominant approach. It can also be
implied that regulatory laws are highly influenced by changes in the socio-economic and
political arena. This special feature of the regulatory domain necessitates frequent
amendments thereby making it unfit for inclusion in codes.
It could easily be observed that the insurance service which a direct insurer provides to
policyholders is a contractual relationship between a direct insurer and policyholders. In
Ethiopia, only insurers licensed by the National Bank of Ethiopia can provide direct
insurance service to the risks located in Ethiopia7. There is no possibility for a direct
4
French Experience as indicated under French Insurance Code 2004.
5
Civil Code (1960) and Maritime Code (1960) are the two major business specific codes.
6
Insurance regulation laws include Proclamation No. 746/2012 and Proclamation No. 1163/2019
7
Article 3(3) of Insurance Business Proclamation mentioned above.
2
insurance service provision by non-admitted insurers. In light of the preparation
underway for the opening up of the financial sector for foreign participation, there should
not be any change to the position that only licensed entities can provide insurance in
Ethiopia and that non-admitted insurance should not be permitted. Foreign participation,
if advanced, would not be expected to allow foreign insurers to conduct business in
Ethiopia without a license from the National Bank.
In relation to a shareholding or investment in an insurance company, it is clear that only
Ethiopian nationals and legal persons formed by Ethiopians can invest in insurance
companies8. It is only under the amended Insurance Business Proclamation that foreign
nationals of Ethiopian origin are allowed to become shareholders or to form an insurance
company9. In connection with the ownership of shares of insurance companies, it would
be appropriate to clarify the legal position in consideration of opening up the insurance
industry for foreign participation.
Ethiopia’s code - based approach to govern insurance transactions, as compared with
insurance business regulatory laws10issued through other legislative instruments, appears
more pragmatic and logical.
Advisory Opinion
The drafting team proposes that only insurance transaction or service specific provisions
are better captured in the insurance contract law. Regarding regulatory laws, it appears
reasonable that insurance regulatory laws should, as usual, be issued through other
appropriate legal instruments. Furthermore, the alignment of insurance regulatory laws
with transaction or service specific insurance contract laws need to be given focus so that
the provisions in the regulatory legal regime could facilitate, but not hinder, the laws on
transaction or services.
2. On the inclusion of Takaful and other compulsory insurance Scheme
Insurance products provided by insurers in Ethiopia are grouped under general insurance
business and long-term insurance classes of business. Under general insurance business,
insurance covers are provided to motor, property and liability risks. Long – term
insurance11 class of business provides cover to risks associated with life insurance,
annuity, pension, permanent health insurance, personal accident or accident insurance.
It is observed from the insurance law of Ethiopia that the principles applicable to core
business classes are not specifically indicated. This has partly led to the absence of clarity
on the basic insurance principles applicable for a given type of insurance. In order to
8
Article 2(8) of Insurance Business Proclamation mentioned above
9
Article 4, Insurance Business Proclamation No. 1163/2019
10
Insurance Business Proclamation No. 746/2012 as amended by Insurance Business Proclamation No. 1163/2019
11
Ibid, Art. 2(24)
3
minimize or avoid such gaps in the law, it is appropriate that basic insurance principles
and rules as applicable to a given insurance class of business should be captured in the
law to be drafted. Each class of business has its own distinct features.
In this connection, the categorization of various insurance products for prudential or
regulatory purpose can be handled through regulatory laws. Therefore, in relation to
insurance transaction law, the principles and rules applicable to various insurance
products will be required to be addressed under the law to be drafted.
On the other hand, takaful transaction is a Sharia compliant insurance which is newly
introduced into the Ethiopian market. The business model used by insurers in the
provision of takaful service may be in the form of serving as an agent or as a joint
investor with the takaful participants. Regarding takaful, the key issues between the
takaful participants and the takaful providers should be clarified under the insurance
transaction law to be drafted. In terms of international experience, some jurisdictions
have recognition of Takaful at the level of the law but tend to replicate conventional
insurance articles. Others address Takaful at the level of subsidiary rules and instruments
where there can be appropriate levels of detail. The issue is one of relevance to the sector
especially as it is argued to support the development of Takaful by aiding its legitimacy
under the more generally applying legal system – but this is not a legal decision but a
policy and developmental one.
Regarding compulsory insurance schemes in Ethiopia, motor12 third party liability
insurance and professional indemnity13 insurance for insurance agents and brokers are
provided in the market.
Such mandatory insurance schemes are put in place by other laws, obviously regulatory
laws. Specific transaction rules for mandatory insurance schemes are also captured under
regulatory laws. It would be expected that additional mandatory insurance schemes may
be introduced upon consideration of the cost - benefits of such mandatory insurance
arrangements. . Regarding experiences of other countries on compulsory insurance, there
are a number of countries with different types of insurance made mandatory. The
policymaking motivation for such compulsion is varied and should be well understood in
each case before proceeding to ensure that the objective will, in fact, be achieved. As is
noted, other laws play a role as the issues also include the need for the product to serve
the objective in terms of the benefit provided and to address how premiums would be
established, overseen, and how risks would be accepted (automatically or otherwise) and
enforcement of non-observance. All of this suggests that the current review may consider
additional compulsory insurance schemes but should do so carefully and by engaging all
relevant stakeholders (not just insurance industry stakeholders who are, by definition,
invested in a different objective to the usual social policy objective).
12
Vehicle Insurance Against Third Party Risks Proclamation Number 799/2013. Yellow Card Scheme for COMESA
countries is another motor third party liability insurance scheme installed based on the Treaty of COMESA
Countries.
13
Directives issued by National Bank of Ethiopia. The requirement of mandatory professional indemnity insurance
for the licensing of law firms is another latest development.
4
Advisory Opinion
Unlike the conventional service of insurance companies as risk carriers, takaful services
are provided to takaful participants by insurance companies by serving as an agent or a
joint investor. The recognition of takaful transaction in the insurance contract law is
recommended in order to specifically define the contractual rules governing the
relationship between takaful participants and takaful service providing insurance
companies.
3. Nomenclature of the Code
Naming the code to be drafted as a financial services code commenced following the
promulgation of the Commercial Code Proclamation No. 1243/2021. It is indicated under
Proclamation Number 1243/2021 that Book 3 & 4 of Commercial Code of 1960 will
continue to be effective until replaced by a financial services code.
Book 3 of Commercial Code of 1960 deals with the laws on carriage and insurance,
while Book 4 focuses on banking and negotiable instruments. The issuance of Capital
Market Proclamation14 and the preparation to define the legal framework of Ethiopian
Stock Exchange15are among the new initiatives which are in the pipeline to join the
financial sector.
Advisory Opinion
Naming the code as a financial services code gives the impression that it will contain
provisions which govern all financial services. But, the approach put in place in Ethiopia
is different from the exhaustive consolidation of all financial services in a single code. On
the other hand, designating the code as a ‘Bank and Insurance Services Code’ based on
the expected content of the code may come in conflict with the position taken by the
legislature. Hence, the drafting of insurance and banking laws can proceed forward and
the name of the new code will be made a point of discussion as the assignment proceeds
forward.
4. Reinsurance Transactions
14
Capital Market Proclamation No. 1248/2021.
15
Draft Regulation on Ethiopian Stock Exchange has been under consideration.
5
It is a general practice and requirement that direct insurers enter into an agreement with
reinsurance companies so that part of the risk assumed by direct insurers could be
protected by reinsurance companies. In Ethiopia, there is one local reinsurer which is
licensed by the National Bank of Ethiopia, Ethiopian Reinsurance Company (Ethio Re).
In addition to placing risks with Ethio Re, insurers in Ethiopia can enter into a
reinsurance arrangement with foreign reinsurance companies16 which have the required
credit rating from international rating agencies. Under a reinsurance contract, the
financial service is between a direct insurer and a reinsurance company. Reinsurance
contracts contain detailed provisions on the rights and obligations of a direct insurer and
reinsurers.
Advisory Opinion
As insurance companies are required to obtain reinsurance cover, it appears reasonable
that the basic items to be captured in reinsurance contract could be defined through the
prudential rules. This will provide clarity to the reinsurance contract to be concluded with
foreign reinsurers. It will also be important to consider the ability to enforce requirements
that a transaction with a foreign entity must be subject to Ethiopian law if the contract
provides so.
5. Law of Carriage and Maritime Code
Book 3 of Commercial Code of 1960 has the part dedicated to the laws of carriage. It
contains provisions dealing with land and air transportation. Maritime Code of 1960 is
cross-referenced in the Commercial Code of 196017 as the law that governs marine
transportation.
In Ethiopia, marine insurance policy is one of the insurance products provided by
insurers. Marine cargo, marine hull as well as Goods in transit insurance products are
among the products offered by insurers under general insurance or nonlife insurance class
of Business18. Marine insurance products have been governed by the relevant provisions
of the Maritime Code of Ethiopia19.
While reforming Book 3 of the Commercial Code of 1960, the issues related to the law of
carriage and Maritime Code need to be addressed. Concerning the law of carriage, it
16
Manner and Criteria of Transacting Reinsurance Business, SIB/44/2016, Article 5(3)
17
Article 655 (2), Commercial Code of Ethiopia 1960
18
General Insurance class of business includes Property, Motor, Liability and Marine insurance. Under Article 2(14)
of Insurance Business Proclamation, General Insurance class of business is defined to include insurance products
other than those under long – term insurance class of business.
19
Maritime Code of Ethiopia, 1960 outlines transaction specific laws including maritime lien, mortgage, liability of
ship owners and managers, contracts based on bill of lading and charter party, maritime collision and salvage.
Furthermore, Title VII of the Code is fully dedicated to the rules on marine insurance.
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seems appropriate to resolve that it should not be treated along with the financial
services. Obviously, as the law of carriage is dedicated to govern transportation services
of a various type, it is sound to separately deal with it from other financial services.
Besides, the current insurance transaction law reform exercise needs to look into the
Maritime Code and related proclamations such as the Multimodal Transport
Proclamation. Such an exercise will make the reform complete in terms of crafting
legislative solutions to the marine insurance service provided by insurers. However,
leaving the Maritime Code out of the reform agenda will have adverse impact on marine
insurance service. It is clear that both export and import trades undertaken to and from
Ethiopia require marine insurance services and marine transport sector has strategic
significance to Ethiopia.
Advisory Opinion
The importance of reforming marine insurance specific provisions in the Maritime Code
in light of the prevailing international treaties is worth considering. It is relevant to
address this issue as it is related to one of the insurance products provided by insurers. It
is also appropriate to provide guidance on the treatment of the law of carriage, obviously
by its own.
Conclusion
Scope and policy related points on insurance contract law reform as outlined above
would better be appraised and given direction at the beginning of this law reform
exercise. The drafting team members and the international expert have considered the
existing insurance law and forwarded this note for further deliberation and guidance.
With kind regards,
S/N Name of Team Members Signature
1 Bekalu Tilahun
2 Yinebeb Efrem
3 Girmaw Amare
4 Solomon Getachew
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