COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF COMMERCE

RISK MANAGEMENT AND INSURANCE

NAME ID NUMBER SECTION

BINIYAM FIKRE UGR/2043/15 R2A4

YOSEF ALEM UGR/2369/15

BENYAM DEREJE UGR/0821/15

REDIET ADGO UGR/9540/15

NATNAEL KIROS UGR/5819/15

DAWIT DEREJE UGR/4911/15

SUBMITED TO

Instructor:- Eden

2016 E.C
 Development of insurance in Ethiopia

The history of insurance in Ethiopia is both rich and evolving.

 Early 20th Century: The modern sense of insurance business in

Ethiopia began in 1905 when the Bank of Abyssinia, under the
ownership of the Bank of Egypt, started transacting insurance as an
agent for a foreign insurance company, primarily dealing with fire
and marine insurance.

 Mid 20th Century: The first local insurance company was established
in 1951. This marked the beginning of domestic insurance services in
the country.

 Late 20th Century: The number of insurance companies grew,

reaching 15 by 1972, although two withdrew from the business that
year. The period also saw the introduction of the first insurance
proclamation, Proclamation No. 281/70, which laid the foundation for
the regulation of insurance operations.

Command Economy Period: During the command economy era (1976-

1994), the Ethiopian government nationalized insurance companies and
established the Ethiopian Insurance Corporation (EIC). The EIC organized
the insurance sector and was the sole provider during this period.

Market Economy Reforms: Following the transition to a market economy,

the insurance industry saw significant changes with the Insurance
Proclamation No. 86/1994. This proclamation allowed the re-emergence of
private insurance companies and set the stage for the current structure of
the industry.

The Ethiopian insurance industry has continued to develop, with efforts to

expand coverage and introduce new products to meet the needs of a
growing economy.Regarding the development of insurance in Ethiopia,
significant strides have been made in recent years. The country has
recognized the importance of insurance and risk financing as critical
components in building resilience against socio-economic, climate, health,
and disaster risks. Here are some key points

 Microinsurance Initiatives: Ethiopia has piloted microinsurance

projects that have covered thousands of smallholder farmers. These
initiatives, supported by various local firms and international
organizations, are based on weather index insurance to protect
against climate-related risks.

 Regulatory Developments: New microinsurance regulations were

introduced in 2020 to foster market growth. However, the market is
still in its nascent stages, with challenges to expansion remaining.
 Disaster Risk Financing: The Ethiopian government has launched a
Disaster Risk Financing (DRF) Strategy. While it’s a significant step
forward, further efforts are needed to operationalize and implement
this strategy effectively.
  Reliance on Humanitarian Aid: Currently, Ethiopia heavily relies on
humanitarian aid to finance disaster costs. There is an increasing
shortfall in contributions, highlighting the need for more sustainable
risk financing solutions.

 Future Recommendations: To advance inclusive insurance and

disaster risk finance, it is recommended to work with the private
insurance sector to expand market-based product offerings,
leverage demand information for microinsurance, develop
distribution channels reaching low-income populations, provide
support to the regulatory authority, and build actuarial capacity for
microinsurance.

These developments indicate a growing awareness and proactive

approach towards establishing a robust insurance sector in Ethiopia,
which is crucial for mitigating risks and fostering sustainable economic
growth.

Importance of insurance in Ethiopia.

Insurance is one of the sectors that increase the potential of the

country in the financial sector in particular and the economy as a
whole. Its role in assisting the country to achieve its macroeconomic
stability and growth objectives is undeniable. Which indicate it is
essential not only for Ethiopia but also for any other developing or
developed country.

Listed below for the main reason why insurance is important for
Ethiopia :

Provides Financial Stability: The need for insurance cannot be

stressed enough. Insurance provides financial stability to families
and helps them cover expenses like education, loans, housing,
groceries and more. It also ensures financial stability during
unexpected situations and helps cover medical expenses, property
damage and other similar costs.

Promotes Personal Economic Growth: Insurance acts as a catalyst

for personal economic growth by empowering surviving family
members to pursue their aspirations in the absence of the
policyholder. It provides a safety net to ensure your loved ones have
access to essential resources, such as education. Your loved ones
can also use the insurance payout to improve their financial
situation by investing in businesses, purchasing real estate and
more.

Generates Long-Term Wealth: Life insurance plans like endowment,

money-back or Unit
-Linked Insurance Plans (ULIPs) provide a means to accumulate
wealth over time. These policies offer long-term savings and
investment opportunities and allow you to secure your financial
future. Life insurance can be used for various financial goals like
retirement, a child's higher education and others.
Supports Families in Medical Emergencies: The importance of
insurance is particularly pronounced in today's times. Medical
expenses are skyrocketing due to medical inflation and the
increasing frequency of various illnesses1. Therefore, having a
robust health insurance policy is essential at this time. Health
insurance offers financial protection against medical costs. It
provides an affordable solution by allowing you to buy policies with
a high sum assured without straining your wallet.

Opportunities and challenges of insurance industry in Ethiopia

As of 2022, there are 18 insurance companies operating in Ethiopia,

offering various products such as life, non-life, and micro insurance. The
regulatory framework is governed by the National Bank of Ethiopia (NBE)
and the Insurance Supervision Directorate. Ethiopia has a growing
economy with a GDP growth rate of around 8% per Annum, a population of
over 115 million People, and an average income per Capita of around
$850.

Opportunities include :-

 the low insurance Penetration rate (less than 1%),

 growing Demand for micro insurance,

 and Government initiatives to increase

Financial inclusion. Challenges include:-

 the need for Regulatory reforms,

 low public Awareness of insurance products,

 and Limited infrastructure in rural areas.

The competitive landscape is Characterized by a few large players

Dominating the market, with a focus on Traditional distribution
channels such as Agents and brokers. There is potential for
innovation and Technology to increase efficiency, reduce Costs,
and improve customer experience, Particularly through digital
distribution Channels and product development.

The insurance industry in Ethiopia faces Opportunities such as low

insurance Penetration, growing demand forMicroinsurance, and
government Initiatives, but also challenges such asRegulatory hurdles,
lack of awareness And limited infrastructure. Key areas for Growth and
development include Increasing public awareness, investing in Digital
technology, and expanding Distribution channels.
Relationship between effective claim management
and growth of insurance industry in Ethiopia
When the policy is first issued the holders should calculate and
understand the policy itself, in insurance there is what we call anti
selection people want to get insured for a particular risk or some part of
the risk because they think that they will pay a lot of premiums and when
a loss happens their whole properties are lost.

And when the policy is first issued it is considered lightly but when a loss
occurs there is back and forth in that process of claim settlement.

since the policy is firstly wrong it will be a source of conflict and secondly
we have what we call indemnity most of the time the loss payment and
the customers expectation are not the same this Is because first there is a
lack of information and secondly assumption about lost payment are
sometimes confusing, for example brand new cars are for instance
serviced by the importer and any loss is paid accordingly but when it
comes to old cars using auction as valuing and since we use the lowest
possible price and using that to settle a claim there is a conflict.

One of the things that insurance companies avoid is paying for

consequential loss when for example a car is damaged and repaired,
within that time of interval the policyholder will lose income and the
insurance companies wants to only pay the repair and leave the claim
since the premium received only allows for the payment of the repair
unless forced by law and big dissatisfaction is caused when the
policyholder does not get the service timely due to spare parts shortage,
lack of quality of garages, not servicing in time also these and others
make the customer unpleased.

And when looking to their relationship ato lemesa said that Insurance
industries are allowed to be mostly liquid and only a small portion of
premium is going to investments.

Due to a lack of law governing the subject and fierce competition

premiums charged are very low and the insurance activity is not profitable
instead they are depositing in banks and getting interest on that. In light
of this the insurance industry is not growing as much.

Impact of financial crisis on insurance company

The impact of a financial crisis on insurance businesses in Ethiopia, like in

many other nations, can be multidimensional. Here are few crucial aspects
to consider:

 Liquidity and Solvency: An insurance company's liquidity and

solvency may be significantly impacted by a financial crisis. Like
their international counterparts, Ethiopian insurers might
experience a rise in claims, a decline in investment income, and
 possible challenges getting access to capital markets.

 Investment Losses: Typically, insurance firms use a variety of

financial instruments to invest the premiums they receive.
Significant investment losses for insurers result from
 a financial crisis' frequent impact on stock markets and other
investment opportunities.

 Increased Claims: As businesses and individuals experience

financial hardship, economic downturns can result in a rise in
claims, particularly in industries like credit insurance. Insurance
firms' reserves may be strained as a result.

 Premium increase: When people and businesses cut back on

discretionary spending, including insurance policies, economic
challenges can cause a halt in premium increase.

 Regulatory Difficulties: In an effort to stabilize the financial

system, regulations are frequently changed in response to
financial crises. New rules may be imposed on insurance
businesses, which could have an effect on their business and
financial stability. This might result in the National Bank of
Ethiopia exercising more stringent monitoring in Ethiopia.

 Reinsurance Costs: As global reinsurers reevaluate their risk

exposures, reinsurance costs may rise during financial crises.
Ethiopian insurers may have to pay more and deal with more
restrictive terms if they depend on reinsurance to manage their
risks.

 Currency fluctuations: A financial crisis frequently causes a

country's currency to depreciate, such as Ethiopia. This may result
in higher import costs for goods and services, including reinsurance
from overseas firms, further pressuring insurers' already precarious
financial positions.

 Operational Difficulties: Financial crises frequently result in more

general economic problems like unemployment, inflation, and a
decline in consumer expenditure. These may have an impact on
how insurance businesses run, including how they sell policies and
handle claims.

 Consumer Confidence: A financial crisis can undermine consumer

confidence in the financial system, including insurance companies.
This might result in fewer new policies being purchased and more
existing policies being canceled.

 Strategic Adjustments: Insurance companies may need to adjust

their strategies to navigate the financial crisis. This could
include revising their investment portfolios, restructuring their
product offerings, or exploring new markets.

To sum up, the impact of a financial crisis on insurance companies in

Ethiopia would likely be significant, affecting their liquidity, solvency,
investment returns, and operational dynamics. The exact impact would
depend on the severity of the crisis and the resilience of the individual
companies and the broader financial system.
Source:

YouTube.com/association of Ethiopian insurers/insurance in Ethiopia.