The Insurance Guru speaks out
Eyessuswork Zafu, the insurance guru is a Chairperson of the Board for Hibret Bank S.C. He was a founder and Chairperson of Hibret Insurance S.C. He speaks on the challenges, prospects and competitiveness of the insurance industry to Kaleyesus Bekele of Origins Media, excerpts;
Insurance business was first introduced to Ethiopia indirectly through the Banks in 1912. The concept however had a long history—highly linked to the society in forms of Iqub and Idir, which are traditional means of insurances. However there are misconceptions regarding the sector as if it was launched after 1991, when the then government allowed participation of the private sector in banks and insurance industries. Providing insurance services was first launched in 1912.
Fortunes of human beings are in high risk of danger. Therefore, insurance’s meaning is to minimize the damage or totally avoiding the risk.
Banks need to get collaterals while they provide a loan to customers. But the collaterals are highly exposed to risks, and they are also requiring to be insured for that.
Transfer of risks is a way to manage risks. Dealing with it is also another means otherwise.
Ship-owner agreed to get insured with others in case if his ship sank and he lost everything he had. That marked as a benchmark to start the insurance concept.
When Bank of Abyssinia (BoA) first established in 1912, insurance companies from Europe started providing the service and BoA was their agent. Insurance services have been provided through other banks too.
Imperial Insurance Company was the first full-fledged insurance company of Ethiopia that was established in 1959 by a local firm in partnership with Britain and other international shareholders.
Commercial Code of Ethiopia, which was enacted in 1960, is the first legal framework that permitted provision of insurance services.
“The financial industry is a sensitive sector,” said Eyessuswork . Those industries were fully seized by Europe colonial powers. The United Nations Conference and Trade and Development (UNCTAD) recommended then that banks and insurances should be run by African nationals first and then allowing foreign institutions once they are becoming competitive a better option.
When Ethiopia proclamation number 281/1970 enacted, close to 21 companies and agents (including the foreign ones) were engaged. That proclamation banned 8 foreign companies to be agents in Ethiopia and 13 remained. But, the proclamation allowed foreign companies to own a share in finance companies.
“We have worked through this proclamation until the 1974. By 1975, the revolution of Ethiopia was followed by nationwide revolutionary uplift. And, one of the first actions taken by the Provisional Military Government (PMG) in laying the foundation of command Economy was to nationalize the private banks and insurances.
Foreign nationals got compensated for government’s take over their shares unfortunately local investors including him were not got compensated, says Eyessuswork.
The Ethiopian Insurance Corporation (EIC) was established in a merger of 13 nationalized companies. EIC was established first as a state-development agency. Then CEOs of the most nationalized institutions were fired from their role and substituted by internal staffs and officials from other places.
The then government appointed Eyessuswork as the first CEO of the EIC when it was established in 1976.
Eyessuswork heard his replacement as CEO of EIC on the radio. Fortunately, governor of Monetary Authority of Swaziland, whom he was his classmate during a Masters Scholarship class offered Eyessuswork a job to replace the Head of Swaziland Royal Insurance Company. “But I cannot leave Ethiopia officially due to the political situation in the country—the then government thought leaving the country was denouncing the revolution,” he remembers.
“I left Ethiopia on foot via Metema, a town in northwestern Ethiopia, on the border with Sudan,” he said.
He became CEO of the African Reinsurance Corporation in Nigeria and later received a diplomatic passport.
Eyessuswork says the insurance industry was under government’s monopoly until 1994. I was against the monopoly of insurance companies that threatens industry’s competitiveness, he added.
Private sector involvement in the insurance industry
“I revisited my plan to return back to Ethiopia from Nigeria following the green light from the government to allow private sector involvement in the banking and insurance industry,” said Eyessuswork.
Proclamation number 84/1994 and 86/1994 permitted establishment of private banks and insurance companies. Today’s banks and insurance companies are the results of those proclamations. “In my view, that is the right decision because the financial sector has been playing a constructive role in employing trained man power and mobilizing finances,” he said.
Today there are 20 insurance companies including the stated owned EIC. Their annual premium income is close to 14 billion Birr. Their profit is more than 2.3 billion Birr, according to figures.
Challenges and prospects of the sector
Universal Insurance Company, the first insurance company after private sector investment allowed, was closed down in its early years of establishment. That’s not much known by many, according to Eyessuswork.
“When you think the establishment of insurance companies in a multidimensional way, it has a great significance,” he says. But he raises a question: “Did they discharge their responsibility which has to be implemented?” Do the favorable environment created for them to flourish?
“I can’t confidently speak on that unlike their creation,” he replied.
“I was being approached and requested by the National Bank of Ethiopia (NBE) over what sort of arrangement needed for a regulatory institution for the industry,” Eyessuswork said, adding, “I recommended that the country should establish an institution on the basis of contextual reality of the country and knowledge-based independent supervisor institution”.
“I even wrote a letter by comparing other nations experience,” as he puts it.
But later on he learnt that the NBE was fully entitled in supervision of both banks and insurances.
State-of-the-art technology and superior knowledge must be implemented by the independent supervisory agency, which is other than the NBE, according to Eyessuswork.
“I think NBE is exposed to outdated ideas despite its strengths we have seen so far,” he grumbled. “All the actors in the insurance industry agree the establishment of other independent regulatory agency”.
In recent years, NBE planned to spin-off insurances supervision to other independent institutions. World Bank supported over $13 million to NBE to finance the feasibility study establishing independent regulatory agency overseeing insurances.
“Based on request, I even forwarded my proposal regarding the plan”.
Insurance companies even financed a survey on the matter, and its findings suggested a need to have an independent supervisor for them, he says.
“NBE has a lack of awareness in the aspects of insurance industry,” he told Origins Media. “I don’t think they are not allowing a creation of such an institution because they care about insurances.”
Competition among insurance companies
As competition among insurance companies is getting stiffer, there are reports of penetration pricing to attract more customers away from competitors. With regards to that, the insurance guru explained: “I can’t be 100 percent sure that the reality is a big risk by itself.” “But that is expected as far as the real situation on the ground”.
He admits, however, there’s a price war among insurance companies.
Lack of trained staffs is testing the sector.
There is no even a single institution specialized in training of capable insurance experts, he complains. “That’s why I believe the main problem in Ethiopia is lack of awareness about the industry”.
Entrance of foreign companies into Ethiopia’s banking and insurance sector is inevitable. Ethiopian accession process to the World Trade Organization took almost 18 years. “That will be finalized,” said Eyessuswork citing opening-up of local markets to global firms will be realized soon.
Through the African Continental Free Trade Area (AfCFTA), companies are longing for it and will join other nations markets. That would open the market of Ethiopia too, he predicts.
Competition has its own merits to expand the market. But beyond the price war, awareness creation about the insurance companies is at a backward stage, he says.
He also mentioned about a dominant attitude of among the majority of Ethiopians that buying life insurance is to reminding oneself about death.
We have to give a thought about life and education insurance for the next generation in case parents die because of accidents, says Eyessuswork.
On the competition from foreign companies he said, “We have to be ready for that—we have to be willing to learn international competition”.
For instance, if it’s allowed to foreign firms to buy at least 25 percent share of local financial companies, big companies will join and sharing of technological, expertise as well as flow of foreign currency will be accelerated.
Opening Ethiopia’s insurance sector gradually to foreign companies is a step in the right direction to create a competitive platform, which makes our companies stronger, according to Eyessuswork, the veteran insurance expert.
He stresses a gradual learning of competition from foreign companies’ side by the local firms. “Unless, once the government allows those firms it will be disaster to the industry.”
“I support a creeping (gradual) liberalization and I have been arguing for it for years despite the lesser attention received from the decision makers,” he complained.
NBE’s orders banks to buy DBE bonds from their 15% annual profit
The NBE has ordered recently that banks should buy Development Bank of Ethiopia (DBE) bonds from 15 percent of their annual profits. However, that’s hard to swallow for Eyessuswork.
“I will be filing a suit against the NBE soon,” he said firmly. “The main charge file was about the impossibility of revoking proclamation through directives”.
“I won a court case against NBE before the Cassation Bench of the Supreme Court, the highest court but the judge was ordered on the phone not to rule in my favor.”
“Ordering the insurance companies to buy 15% bonds is not in the lists of NBE’s mandates. They are ordering companies to invest the shareholders money, which is totally illegal,” he said.
He went on saying that, “Insurance companies can sue the NBE as the case makes the regulatory agency liable under the revised law.”
“I am a shareholder in a bank and insurance company, and as far as the law is concerned there’s no single article that enforces me to buy bonds from my net income.”
Impacts of the Covid-19 pandemic, conflicts on insurance companies
Beyond claiming the lives of people, the Covid-19 pandemic has been a bottleneck that hindered successes of projects. Also, the pandemic has claimed the lives of experts.
Movement of people and goods has been severely limited by Covid-19.
As far as the ongoing conflicts and following damages in the country are concerned, he said, “That’s a disaster. I don’t even have words to explain it.”
I think the unimaginable damages caused by the conflict take Ethiopia long years backward in terms of development, he says. About a quest for insurance claims for those damaged properties, he said, insurance companies are even got destructed by the consequences of the war.
He mentioned his insurance company, Hibret insurance’s 45 branches have been ransacked in the ongoing war.
To compensate such damages, there are specialized insurance companies globally. “But local insurance companies do not have obligation to compensate for such damages,” he said.
He recommends the establishment of an insurance center of excellence from a 1% contribution of their premium incomes.