NBE approves minimum premium policy rate

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The National Bank of Ethiopia (NBE), which regulates financial intuitions, is amending Insurance Business Proclamation No. 746/2012. This would allow NBE to set a minimum premium policy rate and it would permit Ethiopian born foreign citizens to take part in the insurance business.
Capital obtained a copy of the draft document which the central bank developed. It indicated that the central bank would issue a directive setting a minimum premium. Setting a minimum premium was a major issue for insurance companies because free market competition has hindered their profits and increased their risk, especially in motor and engineering coverage. It has been one of the most talked about issues in insurance companies’ general assemblies.
The insurers and their associations have tried many times to work with NBE to come up with a solution. In 2017 NBE recommended insurance stakeholders conduct a study to reduce risk and stop unfair competition.
Since NBE made the recommendation in early 2017 insurers have come up with concrete solutions via their association, the Association of Ethiopian Insurers (AoEI). Then they assigned Kenyan based Actuarial Services (East Africa) Limited (ACTSERV) to undertake a detailed study and come up with possible solutions.
However the Kenyan company failed to come up with a satisfactory result and the association looked for another actuary.
Yared Mola, Chief Executive Officer (CEO) of Nyala Insurance and president of AoEI said that another Kenyan company Zamara Actuaries, Administrators and Consultants Limited, is undertaking the study and will make recommendations.
The first Kenyan company was expected to finish the study within a few months but the preliminary study took over a year. Insurance companies agreed they should have done things differently. “The consultant requires data from local firms, but our experience with a modern database is very weak which led to the delay,” an insurance company spokesperson told Capital previously.
Yared agrees and hopes the study will soon be completed. “I believe the study will be finalized in the near future but it is difficult for me to be specific since the data collection that is crucial for the study takes time since Ethiopian firms have insufficient databases. The company needs to analyze records going back years,” he told Capital.
Even though he was unsure when the study would be accomplished, the study is in the final stages.
To come up with a conclusion the actuary has to examine trends, loss ratios, evaluate the premiums and commensurate with others’ market experience.
He said that the study will also take a historical look at market modeling and data analysis.
The study is expected to give a clue about the economic/floor rate for insurance premiums.
He also praised the NBE draft proclamation saying it would give the central bank a way to stabilize the market.
He commented that the draft proclamation allows NBE to issue a directive that would fix premium rates. “The governing body will issue the directive after the association tables the study,” Yared adds.
Experts said the main problem is related to motor vehicle insurance.
Car insurance has been a common problem for the profession. Premiums have now reached up to 0.5 percent of the value of the car. Insurers say the premiums they charge are small when compared with the damage. From the total claims insurers settle every year motor vehicles make up the largest proportion. In their annual report they expressed concern about the growing risk of auto insurance. Experts said that because the minimum premium was set insurance companies would have better revenue so they can invest more in saving expenses from vehicle accidents as issuers do in other countries.
“In other countries insurers take part in road designs, and even the production of vehicles which reduces traffic accidents,” one industry insider said. “We can engage in such kind of involvement to tackle the problem,” they added.
In addition to motor vehicle insurance coverage, premiums for project insurance have been decreasing over the past few years, experts say. A few years ago project premiums were about 0.4 to 0.5 percent but now they are less than 0.1 percent.
Experts said that the current competition between insurance companies is not based on the service that they provide instead they are pulling the rug out from each other in a race to the bottom by trying to offer the lowest premium payments. Experts said that even though they expressed their concern and agreed to increase premiums during their meeting, nothing happened. “It backfired and this affects them,” an expert explained.
An insurance company leader told Capital that the experience of others is related to the minimum premium rate. “For instance in Kenya the minimum insurance premium amount for motor vehicle insurance is set to three percent of the value of the vehicles but the actual premium amount has grown to 5 percent since the car compensation has risen,” the expert said.
According to sources, NBE and the board of directors of insurers have talked about the draft proclamation before it was sent to the Council of Ministers, who is responsible for reviewing it before it is tabled to the parliament.
The government also changed the banking business proclamation to open up the insurance industry to Diaspora. Currently it is only open to native Ethiopians, but the current draft amendment will give the green light for Ethiopian born foreign citizens to invest in the insurance industry including establishing a new firm that may include Ethiopian citizens or may be fully managed by the Diaspora.