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CHAPTER EIGHTINSURANCE BUSINESS IN ETHIOPIAAt the end of /after studying this chapter, students should be able to:Discuss the historical development of insurance industry in EthiopiaExplain the general theoretical supervision and regulation of insurances companies.Identify and explainthe Licensing and Supervision of Insurance Business andFunctions of the National Bank of Ethiopia in the country.IntroductionIn our earlier studies of the preceding chapters, we have learnt about the nature andcharacteristics of insurance, its principles and limitations and the major types of insurance. Inthis chapter, you will primarily deal with insurance policies in Ethiopia. A short discussion onthe historical development of insurance business is made in the first section. And the secondsection focuses on the theoretical aspects of regulation and supervision in general. A muchgreater emphasis has been placed on section three to the licensing and supervision of insurancebusiness in Ethiopia.8.1 Historical Development of InsuranceTraditional protection of risks in Ethiopia can be found in the form of Edir and Equib werepeople get in some financial contribution to save themselves and losses of properties fromunexpected troubles in the future.According to some researches year 1951, marked the beginning of a new chapter in the historyof Insurance industry in Ethiopia in that it witnessed the launching for the first time entirelyowned by Ethiopians called “Imperial Insurance Company” formed by the initiatives taken bysome enlighten Ethiopians and the expatriates, which brought significant development infinancial sector of the economy lead to the coming in to existence some eighteen company in1954 operating in different parts of Ethiopia engage in offering coverage for life, marine, motorand fire or property Insurance services.Proclamation No. 281/70 which was the first Governmental act on the supervision of Insurancebusiness in the country brought about a significant change, in that the government put thePrepared by: Biniam G. @Bonga University, Department of Management1

governmental control in place for it feel the promotion and protection of the public Interest wastimely as the scope of Insurance business in the country expanded and Insurance registrationlicense was setup under the Minster of trade and Industry tourism.Insurance business in its modern sense in Ethiopia started in 1905 when the then Bank ofAbyssinia got underwriting authority in the form of Agency for Fire and Marine Insurancebusiness. The first local insurance company was formed in 1951. Later on the number ofinsurance companies reached 15 of which two withdrew from business in 1972.As a result of nationalization of these companies in 1975, Proclamation No. 68/1975 wasdeclared to form the Ethiopian Insurance Corporation with a capital of Birr 11 million. Sincenationalization, its premium production on the average has continuously grown at the rate of26.5% in 1976 to Birr 300 million in 1994/95. While its claims increased from 20 million in1976 to Birr 160 million in 1991/92.With the declaration of Proclamation No. 86/94, which allowed the licensing and supervisionof insurance companies, there emerged seven more than private insurance companies with atotal capital of nearly Birr 205 million. The total market that was Birr 50 million in 1976reached Birr 345 million in two decades’ time. These insurance companies have reinsurancearrangements with reputable international re-insurers mainly from Munich Re., Swiss Re., etc.Though there is a growing performance in the industry over the last few years, the industry isfacing some problems. The major problems of the existing insurance companies in Ethiopiatoday are listed below in the order of importance:I.II.Lack of adequate public awarenessShortage of skilled manpowerIII.Price cuttingIV.Lack of professional ethicsV.VI.Unfavorable policiesLack of proper data to conduct business analysisPrepared by: Biniam G. @Bonga University, Department of Management2

8.2 Licensing and Supervision of Insurance Business in EthiopiaThe government of Ethiopia has adopted a new economic policy to guide the country’seconomic development direction. Under the new economic policy, the involvement and activeparticipation of all economic sectors in the economy is called for. To this end, there arisen aneed for a new and comprehensive law that governs the licensing and supervision of insurancebusiness to enable the full participation of all sectors in the economy. It is to this effect that thelicensing and supervision provision was stipulated. Dear student, in the forthcoming sections,we will discuss about some of the points related with the licensing and supervisionproclamation, viz., Proclamation No. 86/ Functions of the National Bank of EthiopiaThe licensing and supervision proclamation attempts to figure out some of the functionsexpected to be played by the National Bank of Ethiopia in connection with insurance businessesto be licensed to operate in Ethiopia.The principal function of the National Bank of Ethiopia with regards to insurance business isto formulate policy.I.Conditions for insurersThe proclamation also discusses some more points in connection with the conditions that needto be fulfilled to operate in the insurance industry of the country. Accordingly, in order to carryon insurance business in Ethiopia, any person is expected to meet the following conditions.a. It has to be a company. Insurance businesses need to have their separate legalpersonality as a separate entity, distinct from its owners. As such they will have anartificial (judiciary) personality created by law and carrying limited liability.b. As stipulated in the commercial code of Ethiopia, the minimum capital required for ashare company is Ethiopian Birr 50,000. However, proclamation no. 86/94 demands amuch bigger figure for minimum share capital. The capital requirement also varies withthe types of insurance being carried on. Thus, the insurance share capital should not beless thanI.II.Birr 3,000,000 if the business is a general insurance businessBirr 4,000,000 if the business is a long-term insurance businessPrepared by: Biniam G. @Bonga University, Department of Management3

III.Birr 7,000,000 if the business is a both general and long-term insurancebusiness.c. The insurer is required to deposit cash in its own name to the amount of the capitalstated above. Deposit requirements, as will be discussed in the subsequent pages, willalso be extended to statutory reserves, as a percentage of paid up capital and legalreserves, a percentage of annual profits of insurer.d. The insurance company, after fulfilling the requirements set by Proclamation No. 86/94and the National Bank of Ethiopia, need to obtain a license for operation.e. It needs to have principal officers that meet the standard set by the National Bank.II.SharesThe Proclamation also discusses about the features of the shares to be issued by the insurancecompanies. In this regard, it dictated insurance companies to issue only one class and registeredordinary shares of the sum per value. In addition, the proclamation prevents owning of morethan twenty percent (20%) of the company’s share by any one person or with persons relatedwith him to first degree.III. Licensing of InsurersPersons should get the license for the particular class or classes of insurance business theywould like to operate. In addition, the proclamation stipulates that every application for thegrant of a license should be accompanied by memorandum and articles of association,insurance policy forma and such other particulars as may be prescribed by directive to be issuedby the National Bank. A license granted by the National Bank shall constitute finalauthorization to carry on insurance business in Ethiopia.IV.Cancellation of licensesThe National Bank may cancel the license of an insurer either wholly or in so far as it relatesto a particular class of insurance business: a. If the provisions stated in the proclamation are not being complied with by the insurer.b. If the margin of solvency of the insurer fails below the line provided.c. If the insurer, at any time during the period of validity of the license injects his funds,moneys or assets or any part thereof in investments prohibited by law.d. If the business or a class of business of the insurer has been transferred to oramalgamated with any other insurer.Prepared by: Biniam G. @Bonga University, Department of Management4

e. If the insurer carries on business other than insurance business without the authorizationof the National Bank or any class of insurance other than the one for which he islicensed.f. If the insurer has not conducted any insurance business for twelve months after thegrant of license.g. If the insurer has failed to comply with the requirements of the NBE.V.Statutory DepositsThe proclamation stipulated articles with regard to the amount of deposits to be made by theinsurance companies as well. According to it, every insurer shall, in respect of each main classof insurance business he carries in Ethiopia, deposits and keeps with the National Bank anamount equal to fifteen percent (15%) of his paid up capital, in government securitiesThe deposit specified above shall be held to the credit of the insurer provided that the aforesaiddeposit or any part there of shall not be withdrawn except with a written permission of theNBE, nor shall such deposit be used as a pledge or security against any loan or overdraft.VI.Legal reserveAccording to this same proclamation, every insurer shall credit for ten percent (10%) of hisannual profit into its legal reserve account. As soon as the amount deposited in the legal reserveequals the capital of the insurer, it shall maintain other reserves as may be determined by theNational Bank.VII. Reserve Accounts (provisions)In addition to the aforementioned reserves, every insurer is required to maintain provisions forA. Premium that have already been collected but the risks have not yet materializedB. Claims that are outstanding.C. Insured claims but not yet reported, andD. Other similar matters to be determined by the BankPrepared by: Biniam G. @Bonga University, Department of Management5

Preparation of AccountsEvery insurer shall, in respect of all insurance business transacted by him prepares statementsshowing its financial position at the expiration of each financial year with reference to thatyear.These financial statements include:A. A balance sheet in the prescribed form, showing the financial position of the companyat a specific date for each financial year.B. A profit and loss account in the prescribed form. Moreover, the insurer is required toprepare revenue account in the prescribed form in respect of each class of insurancebusiness for which the insurer is required to keep separate account of income andexpenditure.C. The statements referred to above should be signed by the chairman of the board ofdirectors and the principal officer of the insurer and shall be deposited with the Bankwithin three months from the end of the financial year to which the statement relatesLicensed insurance auxiliaries only to act as suchThe proclamation disallows any party from acting as an auxiliary or an actuary unless heobtains a license authorizing him to act as such by the NBE. A license to act as an insuranceagent, insurance broker, assessor, insurance surveyor or actuary will be granted by the nationalbank of Ethiopia upon the receipt of a fee set and an application.In addition, the proclamation stipulates that it would be unlawful for any insurer to:A. Appoint an actuary orB. Appoint an insurance agent orC. Entrust any work of assessing insurance claims to an insurance assessor and paybrokerage to any person whether an individual, a firm or a company which is notlicensed or whose licensed has expired and not been renewed or has been cancelled.Prepared by: Biniam G. @Bonga University, Department of Management6

VIII. InvestigationThe National Bank, as stated earlier, is given the authority to license, supervise and regulatethe insurance business. To this effect, the bank may, at any time investigate the affairs of anyinsurer. The bank may, whenever necessary employ trust worthy and qualified persons or firmsfor the purpose of assisting its investigation. On receipt of any report the Bank after giving theinsurer such an opportunity to be heard as it thinks, in connection with the report by order inwriting, may:A. Require the inspected or examined insurer to call a meeting of its board of directors forthe purpose of considering any matter arising out of or relating to the affairs of suchinsurer or require an officer of such insurer to discuss any such matter with an officerof the Bank.B. Depute one or more of its officers to watch the proceeding at any meeting of the boardof directors of the inspected or examined insurer or of any committee or of any otherbody constituted by it, require the inspected or examined insurer to give an opportunityto the offices so deputed to be heard at such meetings.C. Require the insurer to take such action in respect of any matter arising out of the reportas the Bank may think.D. Prohibit the inspected or examined insurer from under writing new insurance policiesand publish a notice of such prohibition in newspapers of general distribution and otherwise.E. Order the removal of one or more of the directors and officials of the inspected orexamined insurer.F. Direct the inspected or examined insurer to temporarily suspend business in whole orin part.G. Revoke the license of the inspected or examined insurerH. Initiate a liquidation procedureX. Appointment of AdministratorAny insurer should do its business in a manner that keeps the interests of its policyholders.However, in cases where the Bank has evidence that the insurer carrying on long term insurancebusiness is acting in a manner likely to be prejudicial to the interests of holders of long terminsurance policies, it may, after giving such an opportunity to the insurer to be heard as it thinksfit, appointing administrator to manage the affairs of the insurer under its direction.Prepared by: Biniam G. @Bonga University, Department of Management7

The insurer, however, may apply to the high court for such act of the bank. The high court mayon the application of the insurer, revoke, for good cause, the appointment of the administratoror if the appointment of an administrator is in the court’s opinion justifies, either confirm theappointment made by the Bank or appoint a new administratorA. Power and Duties of AdministratorThe administrator appointed by the Bank or the federal high court will conduct the managementof business of the insurer and shall, as soon as practicable, file with the Bank a report statingthe course which in his opinion shall be most advantageous to the general interests of theholders of insurance policies. The Bank shall, after examining the report field with it takemeasures it thinks appropriate, including, where necessary, legal action to promote the interestof holders of insurance policies in generalA. Restrictions on Loans, Advances etc by an InsurerNo insurer shall grant any loan, advance, financial guarantee or other credit facility against thesecurity of its own shares. This restriction doesn’t apply to loans on life policies issued by himwithin their surrender value to any shareholder or the insurer or to any director, manager,actuary, auditor or officesD. Power of Bank regarding returnsIt has already been discussed that the insurer is required to submit financial statements at theend each financial year. However, where it appears to the NBE the returns are inaccurate ordefective in any respect it may require from the insurer such further information certified whereit so directs by an auditor or actuary as the cases may be to correct or supplement such returnsor can upon the insurer to submit for its examination only books of account, register or otherdocument or any other statement which it may specify in a notice served on the insurer for thepurpose.E. Power of the Bank to order RevaluationIn addition to regulating, further information on returns, if it appears to the NBE that the returnsby reason of wrong method of valuation, doesn’t properly indicate the condition of the affairsPrepared by: Biniam G. @Bonga University, Department of Management8

of the insurer, it may after giving to the insurer a notice and an opportunity to be heard mayorder re investigation or re-evaluation to be made by the actuary.The insurer should place at the disposal of an actuary all the information records and materialsfor the purpose for re-investigation.F. Certification of Soundness of Terms of Insurance BusinessThe NBE will conduct activities to the effects of insuring that the terms of insurance policiessafeguard the rights of policy – holders, under the laws of Ethiopia. Where at the time ofconsidering an application for a license or at any other time, the insurance businesses are inany respect not workable or sound, the insurer may require the bank certify that the said rates,advantages terms and conditions are workable and sound.G. Power of issue directives to be issued by the bankThe bank also regulates the manner, in which reinsurance business may be transacted, fees forinsurers and insurance auxiliaries’ license, winding up of insurer. In addition, the bank isempowered to apply to the court for the dissolution of an insurer whose license has beencancelled. The court may dissolve an insurer on the petition of the bank.H. Amalgamation/mixNo insurer can amalgamate with or takes over the insurance business of another insurer exceptwith the prior approval of the Bank. Schemes of amalgamation approved by the bank will beaffected in accordance with the procedure laid down in the commercial code. The manual ofissuing shares by insurers and the transfer or assignment by shareholders of shares. Theminimum academic qualification and practical experience to be possessed by actuaries andinsurance auxiliaries are: Investment government securities within specified limits. Investments in which insurers may not invest their money, assets of funds. Limits forreinsurance business, which insurers may place with non-domestic insurers. Procedurefor investigation to be made by the Bank into the affairs of insurers and any othermatter, which is necessary for supervision of insurance business, will be issued by thebank.Prepared by: Biniam G. @Bonga University, Department of Management9

The proclamation disallows any party from acting as an auxiliary or an actuary unless he obtains a license authorizing him to act as such by the NBE. A license to act as an insurance agent, insurance broker, assessor, insurance surveyor or actuary will be granted by the national bank of Ethiopia upon the receipt of a fee set and an application.

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