Ethiopia: Central Bank to Introduce Micro Insurance Policy

By Eden Sahle, Addis Fortune

National Bank of Ethiopia (NBE) is looking into offering micro insurance coverage to small income individuals as well as Micro and Small-scale Enterprises (MSEs).

Micro Finance Insurance, which would be the first of its kind for the industry, is aimed at providing individuals and businesses with insurance against risk of property loss. Properties include livestock, crops, homes, and family members.

Crop insurance is offered in two schemes; one provides coverage against poverty through a weather index and the other provides insurance and multi-peril insurance against flood, fire, and pests.

NBE, which regulates and supervises insurers, is conducting a study to draft a policy for offering the insurance. The study commenced in 2009, following the issuance of the proclamation on the micro financing of businesses.

The study involves the International Labour Organisation (ILO) and Miliman Consulting, an American company, which is training insurance company employees about the micro financing insurance. It is participating in the study free of charge.

The forum studying the micro finance insurance policy pool includes Oromia Insurance, United Insurance, Nyala Insurance, Africa Insurance, Ethio Life Insurance, and Awash Insurance.

The insurance sector in Ethiopia focuses on the corporate market and general insurance.

Ethiopia’s insurance market premiums for life and general insurance contributed 0.2pc to the GDP in the 2006/07 fiscal year with 105 million dollars, according to research titled, “Opportunities and Challenges for Micro Insurance in Ethiopia,” that was conducted by Anja Smith and Doubell Chamberlain in 2010.

“Life insurance contributed six per cent, constituting only six million dollars, while general insurance premiums, particularly motor vehicle insurance, contributed 99 million dollars, 94pc of the insurance premiums,” the research found.

Conventional insurance offers the insured protection with many terms and conditions before compensating a materialised risk. It is expensive for individuals with little income who cannot afford to pay regular fixed premiums, insurers agreed.

The planned new policy differs from conventional insurance.

The micro finance institutions, MSEs, and NGOs will be the policyholders on behalf of the individuals who are members of the associations. The institutions will collect irregular premiums from the certificate holders who are individually insured through their associations.

This will decrease the cost of the insurance as the insurer would offer the same kind of protection to more than one individual at a time, according to Mesfin Eyasu, micro insurance officer at United Insurance.

However, the valuation of the coverage of the insurance policy, which is planned to be prepared in the local language of the associations, is yet to be determined.

The planned micro insurance coverage should have social protection schemes subsidised by the government for those who cannot afford to buy a policy, according to Wolday Amha (PhD), director of the Association of Ethiopian Microfinance Institutions (AEMFI).

The institutions are to purchase Credit Life Insurance on behalf of their members to service their debts if the debtor is unable to due to natural death or financial loss, according to Wolday.

The new policy should provide farmers with an insurance policy to insure their crop production, which is usually affected by drought, flood, and price fluctuations, as well as their health, the director argued.

Nyala Insurance has been offering farmers crop insurance for the past three years through Dedebit Micro Finance as general insurance coverage because there is no policy to cover it as micro insurance.

Once the drafting of the micro insurance policy is completed, it will potentially insure individuals through the AEMFI, which extended over 6.2 billion Br in credit to 2.4 million active borrowers from eight regions, including Addis Abeba and Dire Dawa, during the fourth quarter of 2009/10.

In the same year, Amhara Credit & Saving Institution (ACSI) was the largest lender by disbursing loans amounting to 1.7 billion Br to its 677,331 members.

It was followed by Oromia Credit & Saving Institution (OCSI) with a little over a billion Birr to its 469,713 borrowers; Gambela Micro Finance Institution (GMFI) gave over a million Birr to its 880 members; Hawassa Omo Micro Finance Institution (HOMFI) gave over 17 million Br to the 424,258 members of the four associations under its administration; while Harar Micro Finance Institution (HMFI) gave out seven million Br in loans to its 2,501 members.

Dedebit Micro Finance Institution extended two billion Birr in loans to its 414, 041 members, Benishangul-Gumuz Micro Finance Institution extended 51.8 million Br to its 28,874 members, while Addis Abeba Micro Finance Institution (AAMFI) gave out 648.9 million Br in loans to the 347,635 members in its 12 associations, according to data from the AEMFI.

All the associations have saved a combined total of a little over 2.7 billion Br in their respective institutions.

Harnet Asgedom, 45, a member of AAMFI, obtained 10,000 Br through Yesetoch Merdaja Mahber, her association for women, from the wereda to start a baltina shop selling things like spices and shiro around Megenagna. This mother of three monthly earns 600 Br from her two-year old business after paying 300 Br to repay her debt.

She does not intend to insure her business against risks or to buy life insurance as she does not understand that insurance is a protection policy that could prevent her business from being shut down if she failed to pay her debt. Life insurance could help her children if she is harmed as she is the family’s breadwinner along with her husband who works as a guard.

NBE is working on creating awareness of the policy, which is not widely known even outside Ethiopia.

The first step is to inform potential clients of the benefits of insurance, according to Firezer Ayalew, acting director of micro finance supervision at NBE.

However, those in the industry speculate that the policy would face challenges in creating awareness.

Insurance companies might also be reluctant to offer the policy, since they also offer more expensive policies that are open for interpretation and from which they collected set amounts monthly, those in the industry agreed.

The companies that decide to offer the policy may not see the benefits right away, but in the long run they will benefit from the large numbers of insured certificate holders, according to Mesfin.

“The absence of experts on the specific policy in the industry will be a challenge,” he said.