Ethiopian insurers have long advocated for an independent regulatory body separate from the National Bank of Ethiopia (NBE), which also oversees the country’s banking industry and monetary policy, as well as other key macroeconomic affairs.
Insurers argue regulators at the central bank are spread too thin, and worry it could translate to issues in addressing the specific needs of the insurance industry. A decade ago, an industry lobby group outlined the need for a separate regulatory body as part of a roadmap for its future.
The NBE oversees a diverse range of financial institutions, including banks, insurers, reinsurers, microfinance, and capital lease financing. This broad scope, however, raises concerns among insurers who feel that the NBE’s “one-size-fits-all” approach, often mirroring policies designed for banks, fails to address the unique needs and challenges of the insurance sector. This has led to long-standing calls for an independent regulatory body specifically focused on the insurance industry. Organizations like the World Bank have also echoed this sentiment, advocating for a separate regulator to better serve the needs of insurance in Ethiopia.
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The central bank actually pre-empted insurers’ calls for an independent regulator, according to Belay Tulu, director of the Insurance Sector Supervision Division at the NBE.
He explained that the initiative began back in 2010, with studies conducted in collaboration with World Bank experts, demonstrating the NBE’s own initiative in exploring this possibility.
After a decade of discussions and studies, the National Bank of Ethiopia (NBE) announced three weeks ago a concrete step towards an independent insurance regulator. This positive development, with a target completion date of June 2025, represents a potential answer to the sector’s long-standing call for a regulatory framework tailored to its unique needs and growth potential. However, while the establishment itself is a welcome step, the true test lies in its effectiveness. Understanding the existing gaps in the sector’s development will be crucial in ensuring this new body delivers meaningful change. Thus, while the announcement sparks optimism, further details and a clear vision for addressing specific needs remain foggy.
Ethiopia’s insurance industry in a nutshell
Despite boasting a century-long history (123 years), Ethiopia’s insurance industry lags behind its potential. While early growth was fueled by international involvement, the nationalization under socialist rule in 1974 dealt a significant blow. Though privatization since 1991 has offered a means of recovery, the industry’s development remains sluggish, and there are pressing questions about the effectiveness of its current structure.
Ethiopia’s insurance landscape currently consists of 17 companies (one state-owned and 16 private insurers), with three more on the horizon. However, the industry remains underdeveloped and faces various challenges. Notably, it only has a single, recently established reinsurer, highlighting a lack of diversification and potential limitations in risk management.
The stagnation in Ethiopia’s insurance industry is particularly striking in contrast with the population of over 120 million. Insurers boast a measly penetration rate of 0.3 percent, and even that is largely owed to legally mandated third-party motor insurance policies.
The figure pales in comparison to the global average of 7.2 percent and even the regional average of 1.08 percent. The picture grows dimmer when considering insurance density – three dollars in Ethiopia compared to USD 764 in South Africa and USD 48 in Kenya.
This stark contrast paints a clear picture: Ethiopia’s insurance industry remains significantly underdeveloped and neglected even within the frame of its own financial landscape.
With the planned establishment of an independent regulatory body on the horizon, many are asking: can it truly address the stagnated development of Ethiopia’s insurance industry? Proponents of the independent regulator believe it holds the key to unlocking growth and addressing critical issues. But how, in reality, will this new body translate into tangible benefits for insurers?
What gaps will it address?
Yared Molla is the CEO of Nyala Insurance S.C. as well as president of the Association of Ethiopian Insurers.
He views the establishment of an independent regulator as a game-changer for the insurance industry, promoting healthy competition and ensuring level playing ground. He believes this will ultimately lead to better consumer protection – a crucial gap in the current market.
“The domestic industry is plagued by a culture of client poaching between firms, leading to unsustainable practices,” he said.
Yared recalls NBE regulators had to step in last year, setting a minimum premium rate (currently at 1 percent) to prevent a potential industry collapse. He observes the floor rate is significantly lower than the threshold in Kenya (6-6.5 percent), and argues it is inadequate.
Market confidence, especially for foreign investors, is essential for the success of the newly opened insurance industry. An independent regulator can contribute to this confidence by ensuring fair competition, protecting consumer rights, and upholding international standards.
“It’s baffling that our insurance industry doesn’t have actuaries, which is the global standard for setting accurate and responsible pricing,” noted Fiku Tsegaye, executive officer for strategy and business development at Ethio-Re, the country’s sole reinsurance firm.
The establishment of an independent insurance regulator is also hoped to address the limited attention the industry currently receives from the NBE.
“The NBE already juggles many responsibilities, primarily managing the monetary aspects of the economy, leaving limited resources for close supervision and assistance to the insurance sector,” said Yared.
This lack of dedicated focus, exacerbated by a wide range of separate issues, has resulted in the insurers feeling critically underserved compared to their banking counterparts.
Belay from the NBE acknowledges the limitations of the current system.
“The NBE’s mandate extends beyond the insurance industry, encompassing crucial national agendas like managing key monetary policies,” he explains. This juggling act, as Belay points out, “leads to competing priorities, potentially diverting attention from supporting the insurance industry’s development as effectively as desired.”
It is an observation echoed by Fikru.
“This limited capacity restricts our ability to go beyond the bare minimum requirements,” he said.
Yared criticized the system for shortcomings in accommodating innovation within the insurance industry.
“Imagine,” he said, “you propose a fresh idea, only to be blocked because there’s no rulebook for it yet. It’s quite uncommon.”
He believes an independent regulator, dedicated solely to the insurance sector, would solve this issue.
“With a proactive focus, they could even suggest new products based on their research, not just react to proposals,” said Yared.
Many hope the new independent regulator will be a key player in driving product diversification within the insurance industry. This is crucial because, currently, most insurers offer similar products and services, leading to cutthroat competition.
Yared believes the new regulator will usher in a “premium to freemium” shift, implying a more diverse and dynamic market.
Ethiopia’s insurance industry remains heavily reliant on basic products, despite facing significant risks like the widespread damage to factories and other businesses that occurred during the transition period.
Many of these affected businesses lacked insurance protection. Yared identifies a lack of awareness as a major obstacle to the industry’s growth, emphasizing the need for extensive public education campaigns.
“Currently, mandatory government requirements drive most insurance purchases, like vehicle insurance,” he says, highlighting the vast untapped potential. “There’s a whole world of possibilities waiting to be explored.”
Fikru strongly advocates for a shift in regulatory approach, urging a move away from solely focusing on control towards actively fostering talent and performance within the industry.
“The new regulator should act as a catalyst, nurturing skills and professional development,” he advised.
This sentiment resonates deeply with insurers who struggle with a significant lack of skilled professionals. They see the independent body as an opportunity to bridge this gap by facilitating access to qualified personnel and specialized training.
Insurance experts like Fikru propose innovative solutions like incorporating insurance education into the school curriculum, fostering a pipeline of young talent equipped with the necessary knowledge and skills. Implementing such initiatives in collaboration with the newly established regulator could significantly equip the industry for future growth.
Fikru emphasizes that insurers’ desires extend beyond the mere establishment of an office.
“We need a truly independent institution that can deliver tangible results,” he said.
Will the upcoming regulatory body finally meet the industry’s long-held expectations? The answer hinges on one crucial question: how independent will it truly be?
How independent will it be?
While the NBE has announced a target date of June 2025 to establish this long-awaited regulatory body, details about its structure and function remain unclear. The exact nature of this institution is yet to be defined, with questions lingering about whether it will take the form of a commission, an authority, or something else.
The composition of the board and its degree of independence are also yet to be determined. Speculation exists that the National Bank of Ethiopia’s existing Insurance Supervision Directorate might be restructured into this new entity.
“The specific details, including board composition and independence levels, will be addressed in the upcoming regulations governing this new institution,” Belay told The Reporter. “We have a strong aspiration and commitment to make it happen, but the specifics are still under development.”
Belay cautioned that full independence cannot be achieved immediately.
“It’s a gradual process,” he said, “with relative independence building over time.”
The comments imply insurers will have still longer to wait before they have the regulator they so desire.
Yared highlighted the critical link between the regulator’s independence and its structure, particularly its reporting lines.
“If it’s tethered to the executive branch and led by political appointees, achieving its true goals becomes impossible,” he warned.
Fikru echoed this sentiment, emphasizing the need for a clear separation of powers to ensure the regulator’s objectivity and effectiveness.
The new regulatory body’s success hinges on transparent answers to critical questions. Will its board truly represent diverse stakeholders, with voices from industry experts, consumer watchdogs, and academics? Will the leader be chosen based on merit and experience, or simply through political ties? How much autonomy will the body have from political influence, and to whom will it ultimately answer? The answers are crucial in determining the body’s independence and effectiveness in achieving its intended goals.
Fikru highlighted the need for the new regulatory body to possess four key pillars of independence: regulatory, supervisory, institutional, and budgetary.
To truly function effectively, Belay stressed, the institution must also be independent in practice – “free both financially and in operation.”
Fair representation is another key concern. Public-Private Partnership (PPP) is touted as the core principle of the new institution, and insurers rightly expect their voices to be heard on the board. They envision a structure with appointees who represent all stakeholders equally, including investors, industry actors, and consumers. This balanced representation is crucial to ensure the regulator acts in the best interests of all involved parties.
“Simply establishing the regulator isn’t enough,” Fikru warned, emphasizing the need for concrete measures to ensure its independence. “Without that, achieving its intended goals will be impossible.” Belay echoed Fikru’s concerns, highlighting that structure and function are crucial: “The establishment itself doesn’t guarantee the independence and effectiveness we all hope for.”
Expectations in the formation process
Fikru emphasized that ‘independent’ truly means independent. He stressed insurers are not simply seeking a rebranded version of the existing supervisory body.
The jury is still out on whether the long-awaited insurance regulator will deliver on its promises. While only time will tell, there is one immediate step stakeholders are looking for to gauge the government’s commitment to a truly independent body: meaningful participation in its formation.
Insurance industry experts want the opportunity to review and contribute to the draft papers prepared by the NBE, marking a crucial first step towards genuine inclusivity and independence.
While insurers welcomed the recent establishment timeline of June 2025, a note of caution has also emerged. Some raise concerns that the process might be moving forward without sufficient stakeholder involvement, particularly from the insurance industry itself.
Fikru expressed his disappointment at the lack of public and expert involvement in shaping the new regulatory body.
“There have been stakeholders advocating for this change for years, and yet there haven’t been any open forums where their voices could be heard,” he noted. “Their participation is crucial to ensure the new body effectively serves the needs of the industry.”
Fikru proposes establishing a dedicated “think-tank group” comprising industry experts and representatives from various stakeholder groups. He envisions this group would actively participate in brainstorming, drafting, and refining the regulatory framework from its inception.
“A mere relocation of the directorate won’t suffice,’ he said. “Substantive change is what we need.”
