- 3+ Years Pass Without a Single New Entrant in Ethiopia's Neglected Sector
While Ethiopia's banking sector boomed with player numbers doubling, its insurance industry stagnated over six years despite premiums skyrocketing. Only one new insurer entered despite a 25 billion birr premium jump. Insurers face obstacles like inflation eroding margins, regulatory barriers hindering innovation, and instability weakening investment appetite. Established players call for reforms to allow foreign ownership and modernize rules, BirrMetrics’ Mihret Alem writes.
The Ethiopian financial services sector has undergone massive transformations over the past six years, yet growth has been uneven across industries. While banking flourished with a doubling of players and deposits, the insurance industry remained stagnant despite premiums skyrocketing.
Banking expanded rapidly, with the number of licensed commercial banks nearly doubling from 17 to 33. Outstanding deposits from customers followed suit, ballooning to an estimated 2.2 trillion birr as of June 2023 - virtually doubling the prior level. This aggressive expansion reflected growing opportunities as Ethiopia's economy developed and more citizens embraced modern financial services.
In sharp contrast, Ethiopia's insurance sector changed little despite notable achievements. Annual gross premium production jumped substantially, estimated at around 25 billion birr last year compared to just a few billion birr previously. However, the number of licensed insurance companies increased by only a single player, leaving the total still in the low teens.
There are several potential factors discouraging investment and competition in Ethiopia's insurance sector compared to banking, according to industry sources.
Mesert Bezabih, CEO of United Insurance, points to rising inflation putting pressure on insurers' ability to pay sizable claims. "Growing inflation has made paying claims more expensive over time, reducing profit margins," she explains. Loss ratios in some segments like motor insurance have climbed as high as 70 percent, with average ratios across all segments around 50 percent for many insurers. With thin profitability, there is less incentive for new investors.
An executive of Ethiopian Insurance Corporation, the industry leader, believes the main deterrent has been instability and conflict weakening the overall investment climate. "The economy has faced major challenges over the past five years due to internal conflicts and the civil war in the north of the country. As insurance fundamentally deals with managing risk, this volatile environment has undermined confidence for potential investors," he notes.
Other issues cited include a lack of reliable country-wide data making risk assessment difficult, as well as ongoing regulatory reforms that create market barriers. "While there is no insurance-specific code, some regulations are outdated and do not facilitate innovation in the sector. Modernizing these could help boost competitiveness," says the executive.
The insurance sector in Ethiopia is still developing, with a history dating back to the 1960s when the state-run Ethiopian Insurance Corporation (EIC) held a monopoly for decades. Private insurers were permitted in 1996 through Proclamation No. 86/1994, but growth was hindered by nascent demand and supply challenges.
On the demand side, insurance awareness was low as most Ethiopians focused on basic needs over risk planning. Financial illiteracy regarding insurance value also limited early adoption, exacerbated by a lack of established private brands and nationwide distribution.
Supply challenges included the difficulties of establishing new insurers from scratch. Currently there are 16 private companies alongside EIC, which still derives most business from state-obligated contracts.
Regulatory gaps did not help either, such as the absence of dedicated insurance laws leading to interpretational inconsistencies. Scarce actuarial data similarly complicated risk modeling and reinsurance cooperation. Poor claims handling also damaged consumer trust in local insurers.
Over the past decade, Ethiopia's insurers have built expertise and scale, introducing specialized covers. However, penetration remains amongst Africa's lowest at 0.03 percent due to socioeconomic constraints and past trust issues. "As an industry, we have not developed over the years, stuck in the past," argues Meseret Bezabih of United Insurance.
Fikru Tsegaye from Ethiopian Reinsurance disagrees, citing 30 percent average annual growth and potential for 6-7 new players. He believes performance is on par or exceeding banks, as demonstrated by Awash Insurance's 2023 EPS of 360 birr.
Last year, the biggest private insurance company, Awash Insurance reported, an earnings per share of 360 birr, above what is the average in the banking industry during the same period, with proift is a bit higher than half a billion birr, almost equal with the lowest profit reported in the industry.
The three-year-old Zemen Insurance, the last entrant in the sector, secured a 45 million Br gross profit during last year and a 325 million Br gross written premium collection, with motor insurance making up three-quarters. The company’s earnings per 1000 birr share climbed by 33 percent from 18 birr in the previous year during the same period.
Fikru advises mergers to boost returns. "That would have made them the insurance companies make a bigger impact," he added. Meseret says allowing foreigners invest would enable existing insurance companies build up their capital. "This would boost our premium capacity," she said.
Industry players also want opened foreign ownership for capital boosts, as seen beneficial in Kenya's higher 2.2 percent penetration. Opening up could facilitate diversity, scale and ultimately drive the industry forward, helping insurers better serve Ethiopia's developing economy and population, Fikru said. But consensus on regulatory reforms is still emerging for Ethiopia's budding insurance ecosystem.
While the insurance sector still faces challenges, there are indications that regulatory changes may help boost investor confidence going forward. The National Bank of Ethiopia is in the process of establishing a dedicated insurance agency that will be given the mandate to oversee and regulate the industry.
Removing regulatory authority from the central bank and establishing an independent agency specialized for insurance is expected to bring much needed reforms. It could help standardize rules, facilitate data collection to strengthen market supervision, and implement policies that promote further development, professionalization and innovation within the insurance space.
Such changes may increase transparency and predictability, addressing lingering concerns of potential investors. If successfully established, this dedicated agency could help restore confidence from private capital looking to tap into Ethiopia's insurance market potential as the sector strives to better serve the evolving needs of the economy and public.
