Ethiopia
About the country
Microfinance Institutions (MFIs) and Savings and Credit Cooperatives (SACCOs) are the main providers of microinsurance in Ethiopia, with a predominance of compulsory credit life insurance.
A country diagnostic study for Ethiopia, conducted by CENFRI in 2008, showed that there was a low use of financial services and a small insurance market. Based on 2007 estimates, only around 5 million people (about 11%) used any form of financial products. The insurance sector, with less than 0.3 million clients, was underdeveloped with many small insurers. The total premiums were about 0.2% of the GDP (US$105 million) and life insurance premiums constituted only 6% of total premiums, with almost half (43%) of total insurance premiums derived from motor vehicle insurance. In addition, few insurers implemented electronic management information systems and most operated using paper-based systems. The regulatory framework didn’t include any concessions or definition of microinsurance. The study revealed that there was a big potential for microinsurance market development with clear indications of demand for insurance in the low-income market including a potential inclusion of 3 million people to the insured market.
Our engagement
Overview
The Facility has engaged in microinsurance development in Ethiopia for more than five years. A Joint Program (JP) between the ILO and UNCDF on promoting access to microinsurance began operating in Ethiopia in 2009. The initial circumstances were complicated: a lack of stakeholder consensus on market development, and a closed and underdeveloped insurance sector with limited interest in microinsurance. The JP has implemented a wide range of activities to address some these challenges, working with various stakeholders on the macro, meso and micro level. Based on the findings of the microinsurance diagnostic study, an action plan was prepared to develop and implement the microinsurance market in Ethiopia. The main focus has been on policy and regulation, market development and partnerships development. So far, we have catalysed the expansion of microinsurance with consumers at the centre of our activities, and advocacy for microinsurance with stakeholders including government, development partners and local institutions.
Component 1: Policy and regulation
A clear legal and regulatory framework is a prerequisite to expand and improve the provision of microinsurance. The efforts and activities in the regulatory area should focus on creating an enabling environment for the development of the microsinsurance market. Initially, the main regulatory challenges were defining microinsurance, agreeing to a broad policy framework and coming up with a draft of a microinsurance regulation. In particular, insurers couldn’t compete with MFIs that were allowed to provide insurance to their clients. To address these challenges, the main activities of the Facility regarding policy and regulations have been:
- Define microinsurance in the Ethiopian context.
- Voluntary reporting on microinsurance activities by insurance companies and other microinsurance providers.
- Explore possible incentives to encourage insurers to engage in microinsurance.
- Identifying and promoting technological advancements and their potential benefits for microinsurance.
- Explore the integration of microinsurance in Draft Proclamation for Insurance Supervision.
- Develop directives on market conduct and prudential regulation on microinsurance business.
Component 2: Market development
Given the small size of the microinsurance market and its great potential, it was necessary to implement activities aimed at developing the market in both the supply and demand side. When the Facility became involved in Ethiopia, the insurance sector was scarcely focused on the low income market, especially because the insurance industry did not have experience working with this market. In addition, the main risks identified by the Ethiopian population (illness, death and drought) had no insurance products. Therefore, our endeavours have focused on developing life, health and agricultural insurance products. In order to develop the microinsurance market in Ethiopia, the Facility has worked on these activities:
- Promoting functional microinsurance units within existing insurance companies
- Training Microinsurance underwriters and managers.
- Organize a workshop for insurers about microinsurance product design.
- Provide technical assistance on product design as requested by individual insurers.
- Identifying and promoting technological advancements and their potential benefits for microinsurance.
- Design and launch livestock insurance.
- Support for weather index and multi-risk insurance pilots.
- Programme to bundle microinsurance with savings and credit for rural farming households.
- Financial education and skills activities such as the Mekelle Prison Project and Women in Self Employment.
Component 3: Partnerships development
The low development of the insurance market in Ethiopia was largely due to the lack of partnerships among key actors. One of the initial steps to develop the microinsurance market was to find synergies between actors in order to reach a multi-stakeholder approach. Any initiative to extend insurance in the low-income market would have to be done in partnership with the appropriate government agencies. It was also clear that the distribution of insurance would be difficult due to fragmented and widely distributed nature of the population, therefore client networks and aggregators, such as SACCOs and MFIs, played a critical role as distributors of financial services. Because of this, the Facility's activities to develop sustainable partnerships included:
- Twinning SACCOs, Insurers and MFIs.
- Creation of one specialized microinsurance company.
- Organize training on microinsurance for delivery channels and facilitate partnerships between insurers and delivery channels.
- Product registration with regulator and preparation of manuals.
- Provide insurance and coop training for members of the Confederation of Ethiopian Trade Unions.
Market development results
Over the past five years, the Facility has partnered with a number of institutions serving the low income population to implement better insurance products at scale in Ethiopia. We have made good progress with MFIs and Coops, provided extensive training for workers unions, and worked with NGOs and development partners as well as government agencies. While insurance awareness has increased, much more could be done if our activities are fully synchronized with other financial services for the low income population.
The Facility has also the insurance regulator in defining microinsurance, agreeing to a broad policy framework and coming up with a draft microinsurance regulation. We have also provided various training opportunities locally and internationally. This has enabled us to have good working relations and a good level of trust.
Four insurers have begun to engage in the low income market, mainly in life, credit life and agricultural insurances. MFIs lead in distributing credit life, and cooperatives are also active players. By the end of 2013, the total number of low income clients has reached over 4.1 million, mainly due to credit life offered by MFIs. The market premium has reached USD 273 million, with life and general insurance having a market share of USD 24 million and USD 249 million respectively. The microinsurance market share is USD 15 million out of the total life market share of USD 24 million.
The Facility has created life insurance awareness among insurers, MFIs and Coops as well as supported them with microinsurance training; we have introduced selected life, accident and disability products; we have successfully linked microinsurance to financial activities of MFIs and SACCOs so that they understand and can readily mainstream microinsurance into their savings and lending programmes.
Over the past five years, we have seen a number of crop and livestock index as well as multi-risk pilots. There are six agricultural insurance pilots, and their results would provide critical data to help develop index insurance models. It has been proposed to hold a roundtable to understand these pilots and share knowledge with the objective of applying what has been learnt towards designing functional and scalable agricultural insurance schemes.
Lessons
Special benefits for MFIs and cooperatives might discourage the participation of insurers in the microinsurance market. The ability of MFIs and cooperatives to underwrite their own products has discouraged the development of microinsurance by commercial insurers. MFIs were provided by legislation opportunities to write microinsurance business without being required to apply for a license or to go through licensed insurance companies. Therefore, insurers found it difficult to compete with MFIs that enjoy tax advantages and are not obliged to insure their business with licensed insurers. The National Bank of Ethiopia has taken steps to change this imbalance; and a new regulation has been prepared and discussed whereby MFIs will have to acquire a license to provide microinsurance or work with licensed insurers. The cooperatives will have to place insurance with insurance companies. When the regulation becomes effective, more insurers are preparing to engage actively in the microinsurance market.
Lack of consensus between stakeholders hinders a multi-stakeholder approach for local ownership. The fragmented nature of the microinsurance landscape in Ethiopia complicated the implementation of a multi-stakeholder national strategy on microinsurance as envisioned by the JP. Efforts were made to set up the steering committee, but this did not happen due to lack of enthusiasm of insurers to work along with MFIs due to their special benefits. Furthermore, insurers realize that they couldn’t engage in microinsurance business utilizing the limited shareholders’ funds at their disposal, if they did not have business development support for internal capacity building, product development and distribution. Given the lack of consensus between stakeholders, the country coordinator resorted to working with insurance providers and other partner organizations on an individual basis, focusing on introducing new products and improving technical capacity.
Reaching momentum of agricultural insurance pilots requires joint efforts from all stakeholders. Various pilot projects were established that seek to provide index-based crop and/or livestock insurance to Ethiopian farmers. However, a number of pilots were completed or aborted due to lack of take-up and other operational challenges. Some weather index pilots were concluded without announcing their findings or devising an exit strategy that protects the farmers. The regulator was not a party to the launch of these pilots and, therefore, has no way of insuring the adequacy of client protection. Also, lack of statistical data makes it difficult for any index insurance pilot to reach scalable profitably. The JP proposed to hold a roundtable to understand these pilots and share knowledge with the objective of applying what has been learnt towards designing functional and scalable agricultural insurance schemes.
Lack of technical capacity is a major challenge for microinsurance providers. Compared to MFIs and cooperatives, insurance companies have more extensive expertise in insurance processes. However, they lack understanding of the rural/informal market as well as specific microinsurance knowledge. Product design and actuarial rating were frequently mentioned as areas in which insurers will need to develop their technical capacity. In the microfinance and cooperative sector, specific insurance knowledge is very limited. MFIs have not hired specialized insurance staff to manage their microinsurance operations, and typically do not apply actuarial pricing models. Insurance underwriting is not separated from credit and savings business, and is not appropriately accounted for. The collection and management of experience data has started only recently, following an initiative by the JP. Due to their smaller size, cooperatives and cooperative unions are likely to have an even lower capacity for microinsurance product design and implementation.
