Rift Valley University

Risk Management
Group Member
Azmera
Bile Kedir
Bethlehem
Fikir Tesfaye
Meseret Tilahun
Tesfaye habtamu
Development of Insurance
Modern Insurance Service in Ethiopia started in 1905. Before the commencement of Modern Insurance
Service in the country, there have been traditional practices by which people help each other whenever
they face either financial difficulties or needs assistance. “Edir” and “Equb” are samples of such
traditional practices and have some similarities with Modern Insurance.

In the case of “Edir” people form an association where by each member contributes a fixed sum,
normally monthly, to a common fund from which predetermined compensations are paid to members
upon occurrence of unforeseen events such as death of family members or relatives. The compensation
is meant to cover expenses that a member would incur as the result of the incident. The “Edir” also
owns physical assets life tents, household foods like plate and drinking& cups, chairs and the like used
mainly during the periods of mourning.

The other insurance type of association is “Equb". “Equb” members contribute a fixed sum of money
weekly, fortnightly, or monthly to a pool of fund and lots are cast where upon the winner receives the
money so collected and uses it for a protect if he or she has owned or sell it to another member at a
premium. If something happens to a member, who had already taken the money that would not enable
him to continue contributing to the fund, his guarantor will have to be held responsible.

Insurance, being one of commercial activity, its historical growth is associated with what a human being
now reached in the fields of Science, technology, Law, Economy, culture and politics.

Historical development of Modern Insurance Service in Ethiopia can be categorized into three distinct
historical phases:

1. Pre nationalization phase (1905 - 1974)

2. Nationalization and Monopolization phase (1974 – 1993)
3. Liberalization phase (1993 to date )

Pre-Nationalization Phase (1905 – 1974)

The initial phase started in 1905 when insurance business used to be transacted by an Egyptian Bank
which served as agent of foreign Insurance Company. The covers given by the bank were fire and marine
risks.

The late 1970 that is during the five year Italian occupation signifies the existence of a number of
Insurance Companies in the country. At that time only in Italian Insurance Companies had been
operating and other Non-Italian companies were closed. After liberation of Ethiopia from Italy in 1931,
Seven Insurance Companies, most of them British, were established. These were Phoenix, Caledonia,
Royal, South British, London, Union and Queensland.

The first motor insurance policy was issued in 1932 by the South British and all classes of insurance
cover, except life, were available by 1950.Until the beginning of the 1950s, there was no locally
incorporated insurance company in Ethiopia .In 1951, the first domestic insurance company, named
Imperial, was formed. In 1953 a study was conducted by the Ministry of Commerce 6 Industry to assess
the existed situations of the Insurance Industry in the country. The study noted, that there were 19
insurance companies in the market out of which Imperial were the only local company. And, others
companies had been operating in the market as an agent of foreign Companies. In 1959 of the total
number of vehicles in the country and the value of foods imported from abroad only 50% and 14% were
covered, respectively. During the same period 9 Insurance companies were registered to give life
Insurance and total number of policy sold were 541. A second study conducted by Ministry of
Commerce and Industry in 1960 indicated that the number of insurance companies reached to 77 and
still Imperial Insurance company was the only domestic companies. Until 1960, there had not been any
insurance law. But in 1960, two bodies of law were enacted one of them was the Maritime Code of
Ethiopia. In title VII. Chapter 1-4, articles 288-356, marine insurance has been properly dealt with. The
other was the Commercial Code of Ethiopia. This law contained provision on the relevant points of
insurance as a commercial activity, especially for property, liability and the insurance of person. Title III,
chapters 1-4, articles 654 -712 of the commercial code mainly the manner under which insurance
contracts are entered into the rights and duties of contracting parties. A preliminary study was
conducted by the Addis Ababa Chamber of Commerce in 1967 to investigate complains arose by unfair
trade practice among insurance company. The study shows that there were 30 foreign and 10 local
companies in the market. And it also pointed out to major problems. These were nonexistence of
compulsory third party motor insurance law and detailed Insurance law that regulated and control the
activities of Insurance.

On the basis of the provisions of Article 656 of the commercial code, proclamation No.281/1970, known
as the Insurance proclamation (dealing specifically with insurance business), was issued at October 8,
1970 to regulate the market.

Therefore, it should be noted that the Commercial and Maritime Code of 1970 served as the only law
that governed the insurance business in Ethiopia up to 1970. When the first insurance proclamation
came into existence there were already 1 companies in the market. The Proclamation Limited
Insurance to Ethiopian nationals and banned foreign companies to operate in the country either directly
or through agent. The minimum requirements like the ownership and capital structure, records to be
kept and returns required by the controller of insurance were all stated in the proclamation. This
proclamation assigned the task of controlling insurance activities to the Ministry of Commerce and
Industry. Based on the provisions of the proclamation an Insurance council was formed chaired by the
above ministry that included various government offices as a member. The main duties of the council
were formulating policies that encourage and control the activities of insurance, Reinsurance,
Investment and formation of new strong insurance companies in the market.

2. Nationalization & Monopolization phase (1974 – 1994)

By 1923, the revolution of Ethiopian people was followed by nationwide revolutionary uplift. And, one of
the first actions taken by the Provisional Military government in laying the foundation of command
Economy was to nationalize the private companies. Therefore, the existence 6 development of private
companies became impossible. In effect, 17 private Insurance Companies that had been operating in the
market, during the period, were nationalized. The nationalized companies were:

1. Imperial Insurance Company.

2. Ethiopian American Life Insurance Company
3. National Insurance Company
4. Afro-Continental Company
5. Blue Nile Insurance Company
 6. Afro Solidarity Insurance Company
7. Lion Insurance Company
8. Ethiopia Life Insurance Company
9. General Insurance Company
10. Pan-African Insurance Company
11. International Insurance Company
12. Union Insurance Company
13. Rasai Ethiopian Insurance Company On the 1st January 1976 thirteen nationalized insurance
companies merged under one corporation. That is, the establishment of Ethiopian insurance
Corporation. EIC by proclamation No.68/1975 by taking over the assets and liabilities of the
nationalized companies with a paid up capital of 11 million Ethiopian birr as a sole insurer in the
country with the following objectives.
⇒To engaged in all classes of insurance business
⇒To ensure that insurance service reach the broad mass of Ethiopia and
⇒To promote efficient utilization of resource.

The proclamation empowers the Corporation to manage, administer, supervise and direct all insurance
business transaction at national level and also negotiate, arrange, underwrite and contract reinsurance
treaties and policies with foreign reinsurers. The first action taken by the Corporation was to consolidate
small branches of the ex-companies into bigger units and the following six regional main branches were
structured.

1. The Northern Main Branches including Asmara and Massawa.

2. The Life Main Branch
3. The Western Main Branch
4. The Southern Main Branch
5. The Eastern Main Branch
6. The North Eastern Main Branch

At the early stages, the Corporation was also pre-occupied with internal consolidation. Training stood as
a priority for taking over the duties and responsibilities of the nationalized companies from expatriates,
company managers and foreign advisors. An early task in 19A0 of the corporation was branch expansion
to popularized insurance service to the whole country. As a result, the following 11 new branches were
opened in different cities of Ethiopia.

Combolcha & Mekele in the North Eastern part

Bahirdar and Gondar in the North Western Part

Arbaminch, Assela, Awassa, Robe and Zeway in the South Part

Nekemet and Jimma in the western Part

The expansion was accompanied by the construction of a standard two storey building consisting of
office blocks and fully furnished staff residence quarters. The Corporation also opened a new branch in
Djibouti in 19A0. During the same period, the Ethiopian Insurance Corporation was underwriting
reinsurance business mainly from other African Countries. Along with the opening of new branches life
and on life insurance agents were trained assigned in a number of places throughout the country.
Ethiopian Insurance Corporation have insurance service as a sole insurer for 19 years
192?;19934.espite the corporation monopolize the market for 19 years Gross Premium Income of the
industry increases year after year, that is at the end of 1976 total premium income was 50,530,000
Ethiopian Birr this amount increases to 2573,968,000 Ethiopia Birr in 1994, which is 406.6% growth.

3. Liberalization phase (after 1994)

Following the 1991 change in Political and Economic Environment in the country, by 199 the
Provisional Government of Ethiopia enacted a new investment proclamation /o. 15C199 to encourage
investment in the country. Amon& the provisions of this proclamation chapter two Article 34 Sub-
Article 14 e4, stipulates that Insurance, Banking and large scale financial institutions are areas served
for the Government to invest. However, Sub-Article (3) further states “the conditions under which
Regulation of Insurance Companies of Ethiopia

The non-life insurance companies indemnify the properties from the risk of being damaged due to
unforeseen events like natural calamity or accidents. The probability of bankruptcy is imminent on
account of large, unprecedented claims. As a risk saver of various society stakeholders, these insurers
must be efficient while managing the insurance business. The present research thrusts upon to evaluate
the efficiency and decomposition that would further direct the insurers towards achieving optimal scale.

Thus, the captioned research aims to measure and rank the technical efficiency of the general insurance
firms of Ethiopia and evaluate and analyze their relative efficiencies. The research adopts a quantitative
approach and deploys descriptive analysis by a panel data of 17 Ethiopian general insurers for the period
2005-2016 on the input-output oriented approach of Data Envelopment Analysis (DEA).

The data of general insurance are obtained using stratified sampling from the mix of life and general
category. The inputs employed are total expenses, total liabilities, and shareholder’s fund, while net
premiums earned and income from investments are used as outputs. The findings reveal that the public
insurer is technically efficient by operating at an optimal scale as compared to all private insurers who, in
turn, experience pure technical inefficiency to scale inefficiency due to poor management practices and
erroneous utilization of input materials. Increasing Returns to Scale (IRS) witnessed a major form of
scale inefficiency in 2016. Private insurers should increase capital and size of assets, cost efficiency and
improve key management skills.

LICENSING OF INSURANCE AGENT

ISSUING AUTHORITY

These Directives are issued by the National Bank of Ethiopia pursuant to the authority vested in it by
Article 41 of the Monetary and Banking Proclamation No. 83/1994 and Article 25 and Article 42(j) of the
Licensing and Supervision of Insurance Business Proclamation No. 86/1994.

DEFINITION

“Insurance Agent” or “Agent” shall mean a person licensed by the Bank as an insurance agent who,
acting for and on behalf of one or more insurers, engages in: (a) soliciting or procuring insurance
business; (b) work preparatory to the conclusion of, or in concluding of insurance; and (c) activities
relating to the continuance, renewal or revival of contracts of insurance or in assisting in the
administration and performance of such contracts.

“The Bank” shall mean the National Bank of Ethiopia.

GENERAL REQUIREMENTS

Where the applicant is a natural person, the person:

shall be an Ethiopian national;

shall at least have completed general secondary school level of education or equivalent;

shall attend compulsory insurance sales agency training as stated under article 5 of these directives; or
must have, at least, five years experience obtained through working in the underwriting and/or claims
department of an insurance company;
d) has not been convicted by court of law in any country, for an offense involving dishonesty.

Where the applicant is a juridical person:

It shall be formed in accordance with the requirements of the provisions of the Commercial Code of
Ethiopia and that of Proclamation No. 86/1994;

It shall be fully owned by Ethiopian nationals;

It shall have its head office in Ethiopia;

The chief executive officer of the agency should at least meet the education, training and/or experience
and other requirements provided for under article 3 sub-article 1 (b) & (c) of these directives;

The owners and the chief executive officer have not been convicted by court of law in any country, for
an offense involving dishonesty.

Where an application is made to carry on business:

as a general insurance agent or as a long-term insurance agent, the applicant shall deposit Birr20,000
(Birr twenty thousand) with the Bank, or shall maintain a professional indemnity insurance cover of
Birr20,000 (Birr twenty thousand); or

as both general and long-term insurance agent, the applicant shall deposit with the Bank Birr40,000 (Birr
forty thousand), or a professional indemnity insurance cover of Birr20,000 (Birr twenty thousand), in
respect of each main line of insurance agency business he/she is applying for.

4. INFORMATION REQUIRED FROM AN INSURANCE AGENT

A duly completed application form shall be accompanied by:

The name and occupation (including date and address of previous employment) of the applicant.

Two passport size recent photographs of the applicant or the chief executive officer, as the case may be.

Curriculum Vitae of the applicant or the chief executive officer, as the case may be.

5. TRAINING

An applicant intending to carry on business as an insurance sales agent must have attended a mandatory
pre-licensing insurance sales agency training, offered by institutes acceptable to the Bank, in the main
line of business that he/she is applying for license.

A licensed insurance agent shall attend at least 30 hours of refreshment course every five years, focusing
on insurance products covering, but not limited to, subjects such as motor, property, workmen’s
compensation, life and permanent health assurance; sufficient to deliver technical information essential
for maintaining a level of expertise that will continue to benefit insurance consumers.

The insurer, on behalf of whom the insurance agent solicits business, shall ensure that its agents
attended the refreshment course mentioned under sub-article 2 hereinabove.
6. FEES

A person applying for a license to carry on business as an insurance agent shall pay an initial
investigation fee of Birr300 (Birr three hundred).

A person applying for a license to carry on business as an insurance agent shall pay an initial license and
subsequent renewal fee of Birr250 (Birr two hundred fifty).

An insurance agent licensed to carry on business either as general or long-term insurance agent and
who subsequently applies for a license to carry on business both as a general and long-term insurance
agent shall pay an Investigation and license fee of Birr300 (Birr three hundred).

RENEWAL

An insurance agency license shall be renewed annually.

The insurance agent shall apply for the renewal of his/her license in person or, in the case of insurance
agents residing outside Addis Ababa, an application duly signed by the agent shall be mailed or faxed to
the principal insurer, or to the Bank, whichever is convenient to the applicant.

The duly signed renewal application shall be accompanied by evidence of payment of renewal fee, valid
indemnity policy, evidence of payment of applicable federal or regional tax and certificate of attendance
of refreshment course, where applicable.

The insurance agent shall submit his/her renewal application together with the documents mentioned
under sub-article 3 hereinabove within one month of the expiry date of the license.

Renewal applications submitted later than one month of the date of expiry of the license shall be subject
to a penalty of Birr200 (Birr two hundred).

Where an insurance agent fails to apply for renewal within 12 calendar months after the date of expiry
of the license, his/her license shall be automatically cancelled, and such an agent shall only be eligible to
apply for a new license after fully satisfying the conditions required of a new agent.

8. MAINTAINING A VALID PROFESSIONAL INDEMNITY POLICY

The Bank shall automatically cancel the license of any insurance agent who fails to maintain a valid
professional indemnity insurance policy at all times.

For the purpose of ensuring compliance with the requirement of sub-article 1 hereinabove an insurance
agent shall promptly file with the Bank a copy of valid professional indemnity insurance policy upon
renewal.

9. REPEAL

Directive No. SIB/18/1998 is hereby repealed and replaced by these Directives.

10. EFFECTIVE DATE

These Directives shall enter into force as of 1st day of January 2008.
Proclamation No. 68/1975

Ethiopian Insurance Corporation (EIC) was established in 1976 by proclamation No. 68/1975. The
Corporation came into existence by taking over all the assets and liabilities of the thirteen nationalized
private insurance companies, with Birr 11 million (USD 1.29 million) paid up capital aiming the following
objectives.

Proclamation No.86/1994.
An applicant applying for a license to undertake a business as an insurance auxiliary or an
actuary shall pay investigation fee of Birr 300 (three hundred) to the National Bank of
Ethiopia. These directives shall enter into force as of 3rd day of November 1994
NATIONAL BANK OF ETHIOPIA Directives

LICENSING AND SUPERVISION OF

INSURANCE BUSINESS

Directive No. SIB/30/2007

LICENSING OF INSURANCE AGENT

ISSUING AUTHORITY

These Directives are issued by the National Bank of Ethiopia pursuant to the authority vested in it by
Article 41 of the Monetary and Banking Proclamation No. 83/1994 and Article 25 and Article 42(j) of the
Licensing and Supervision of Insurance Business Proclamation No. 86/1994.

DEFINITION

“Insurance Agent” or “Agent” shall mean a person licensed by the Bank as an insurance agent who,
acting for and on behalf of one or more insurers, engages in: (a) soliciting or procuring insurance
business; (b) work preparatory to the conclusion of, or in concluding of insurance; and (c) activities
relating to the continuance, renewal or revival of contracts of insurance or in assisting in the
administration and performance of such contracts.

“The Bank” shall mean the National Bank of Ethiopia.

GENERAL REQUIREMENTS

Where the applicant is a natural person, the person:

shall be an Ethiopian national;

shall at least have completed general secondary school level of education or equivalent;

shall attend compulsory insurance sales agency training as stated under article 5 of these directives; or
must have, at least, five years experience obtained through working in the underwriting and/or claims
department of an insurance company;

d) has not been convicted by court of law in any country, for an offense involving dishonesty.

Where the applicant is a juridical person:

It shall be formed in accordance with the requirements of the provisions of the Commercial Code of
Ethiopia and that of Proclamation No. 86/1994;

It shall be fully owned by Ethiopian nationals;

It shall have its head office in Ethiopia;

The chief executive officer of the agency should at least meet the education, training and/or experience
and other requirements provided for under article 3 sub-article 1 (b) & (c) of these directives;
The owners and the chief executive officer have not been convicted by court of law in any country, for
an offense involving dishonesty.

Where an application is made to carry on business:

as a general insurance agent or as a long-term insurance agent, the applicant shall deposit Birr20,000
(Birr twenty thousand) with the Bank, or shall maintain a professional indemnity insurance cover of
Birr20,000 (Birr twenty thousand); or

as both general and long-term insurance agent, the applicant shall deposit with the Bank Birr40,000 (Birr
forty thousand), or a professional indemnity insurance cover of Birr20,000 (Birr twenty thousand), in
respect of each main line of insurance agency business he/she is applying for.

4. INFORMATION REQUIRED FROM AN INSURANCE AGENT

A duly completed application form shall be accompanied by:

The name and occupation (including date and address of previous employment) of the applicant.

Two passport size recent photographs of the applicant or the chief executive officer, as the case may be.

Curriculum Vitae of the applicant or the chief executive officer, as the case may be.

TRAINING

An applicant intending to carry on business as an insurance sales agent must have attended a mandatory
pre-licensing insurance sales agency training, offered by institutes acceptable to the Bank, in the main
line of business that he/she is applying for license.

A licensed insurance agent shall attend at least 30 hours of refreshment course every five years, focusing
on insurance products covering, but not limited to, subjects such as motor, property, workmen’s
compensation, life and permanent health assurance; sufficient to deliver technical information essential
for maintaining a level of expertise that will continue to benefit insurance consumers.

The insurer, on behalf of whom the insurance agent solicits business, shall ensure that its agents
attended the refreshment course mentioned under sub-article 2 hereinabove.

FEES

A person applying for a license to carry on business as an insurance agent shall pay an initial
investigation fee of Birr300 (Birr three hundred).

A person applying for a license to carry on business as an insurance agent shall pay an initial license and
subsequent renewal fee of Birr250 (Birr two hundred fifty).

An insurance agent licensed to carry on business either as general or long-term insurance agent and
who subsequently applies for a license to carry on business both as a general and long-term insurance
agent shall pay an Investigation and license fee of Birr300 (Birr three hundred).

RENEWAL

An insurance agency license shall be renewed annually.

The insurance agent shall apply for the renewal of his/her license in person or, in the case of insurance
agents residing outside Addis Ababa, an application duly signed by the agent shall be mailed or faxed to
the principal insurer, or to the Bank, whichever is convenient to the applicant.

The duly signed renewal application shall be accompanied by evidence of payment of renewal fee, valid
indemnity policy, evidence of payment of applicable federal or regional tax and certificate of attendance
of refreshment course, where applicable.

The insurance agent shall submit his/her renewal application together with the documents mentioned
under sub-article 3 hereinabove within one month of the expiry date of the license.

Renewal applications submitted later than one month of the date of expiry of the license shall be subject
to a penalty of Birr200 (Birr two hundred).

Where an insurance agent fails to apply for renewal within 12 calendar months after the date of expiry
of the license, his/her license shall be automatically cancelled, and

such an agent shall only be eligible to apply for a new license after fully satisfying the conditions
required of a new agent.

8. MAINTAINING A VALID PROFESSIONAL INDEMNITY POLICY

The Bank shall automatically cancel the license of any insurance agent who fails to maintain a valid
professional indemnity insurance policy at all times.

For the purpose of ensuring compliance with the requirement of sub-article 1 hereinabove an insurance
agent shall promptly file with the Bank a copy of valid professional indemnity insurance policy upon
renewal.

9. REPEAL

Directive No. SIB/18/1998 is hereby repealed and replaced by these Directives.

10. EFFECTIVE DATE

These Directives shall enter into force as of 1st day of January 2008.