Expert advises using solvency tool to combat price wars in insurance industry

A finance expert advised implementation of solvency tools to combat the price wars among insurance companies in Ethiopia.

The concept of solvency is about the ability for an insurance company to meet its long term obligations.

The minimum amount of eligible own funds that a company must have in order to be able to continue its insurance activities without restriction is generally referred to as the solvency margin or Solvency Capital Requirement.

“If we start using solvency tool the price war problem among local insurance companies can be resolved,” Tewodros Tilahun, General Manager of Diligence Consultancy Service PLC, told Origins Business.

“Even the insured person started to lower premiums owed to the companies,” he said. “In Ethiopia’s case if a person gets insured for 1 million Birr vehicle and the total reserve by a company are calculated by the solvency tool, the insured will be out from the company,” he explained.

The insurance industry has an international standard by its nature, he says. “Therefore, we’ve to keep up our standards with the international system,”

“The Europeans are implementing the solvency tool to make the industry standard-led,” he said. “Hence, it’s impossible to say that we can’t compete with European companies’.”

He also argues for the entry of international insurance companies to Ethiopia. Their entry will have a benefit if we fulfill standards such as solvency tool, he says. “These companies will ask the regulator to use the solvency tool to prevent price wars unless they’ll not work with the current regulation and way of doing businesses,” he said.

With regards to foreign insurance companies’ entry into Ethiopia, he argues that, “We shouldn’t be afraid of their entry,” he said. Foreign companies’ entry would be very crucial for the local companies to join the international competition, according to Tewodros.

A panel discussion on the Insurance Industry held on Saturday at Elilly Hotel.

Eyesuswork Zafu, the prominent Insurance guru also argues in favor of international insurance companies’ entry. He however says any steps are not being taken.

“I don’t see any series steps being taken for their entry,” he said by stressing some liberalizing measures to be taken.

Mr. Eyesuswork further criticized the protectionist outlook. “Our mindset has to be changed,” he said, adding, “We’re still in statist approach of strict control of everything”.