Recent unrest in parts of the country have exposed the gaps in the provision of insurance services in the country. Ethiopia’s four-decade-long insurance service experience can be characterised as poorly performing, in terms of knowledge, the setting of risk appetites, pricing risk, service marketing and innovation.
This distinctly troubling trend seems beyond control, particularly these days, as the country exhibits an actual risk phenomenon, without industry base standards where prices are not proactively determined using actuarial science.
The industry experienced market rate is determined not by principles of supply and demand, but rather based on the existence of irrational pricing and competition. Both policy holders and insurers are paying the cost of nationwide defects in pricing risk, resulting out of collecting unequitable premium and exposed to insolvency, in order to meet current obligations.
Pricing psychology of insurers cannot exist exclusively in the absence of competition. When the competition is scientific the perception and psychology of insurers will become regular. This is because, in the competitive market (which is oligopoly in our case), setting prices is mutually inclusive with consumer behaviour.
Insurers, to take advantage of the untapped potential market, may move adversely by setting package pricing – a premium to be paid by the insured for different risks. This is normative in the insurance sector. But in the process of competition, they may lose their strategic position as they price the risk lower than the average buffer price. Both trends leave the wrong benchmark – if the insurer or rival firm start with a price lower than break even, this will lead them to incur loss for more than one accounting period.
Pricing risk for usual perils was a day-to-day activity for insurers in the normal situation. Extraordinary perils rating, as well as setting appropriate terms and conditions, is a greater challenge during times of instability. The risk of a strike, riot, civil commotion or malicious damage should be consciously addressed to potential customers, rather than wrongly pricing insurance due to the fact that the need may arise.
Insurance companies have a better capacity to shape the knowledge of the general public and set appropriate risk compensation measures to mitigate the impacts of fundamental loss, because the disadvantage is theirs too.
We need to have the appetite of accepting risk at large during instability, in order to maintain our competitive position by considering policy terms, conditions and charging a commensurate premium through the process of integration. We must also give room in negotiations to the insured to take its part in risk minimisation.
We have the capacity even to design new products following instability. In the traditional market, the response to emerging risks and disasters is only on pricing. Sometimes, we find in the traditional market, both the insurer and the insured during an emerging situation, react in the same manner – rather than changing the prevailing situation to opportunity.
The problem of such marketing bias is a result of the non-materialisation of emerging risks so far in the industry and a perpetual incorrect trend of pricing risks of claims associated with strikes, riots and civil commotion (SRCC).
The industry has contracted a common cold due to an endless query of existing, as well as potential, customers having no readily available policy to address the issue.
The psychology of accepting any risk will never remain untouched forever in light of industrialisation and its associated risks. Civility urges insurers to think differently than the insured’s appetite for coverage. Modernisation has the solution for measuring the risk adequately and charging a commensurate premium.
The fact is that the market dynamics will change soon without giving a chance to insurance companies to rehearse, compare and contrast their policies and procedure, as some of them are outdated. The solution is at hand, if we can break through the innovational pricing curtain.
Our philosophy of underwriting risks, which is also challenged by innovation, should change as socioeconomic makeups, depth of knowledge, consumer behaviour, the problem of profitability of the insured, integrity of the society, customs, norm and the growing culture and psychology of the society changes at large.
Insurance policy holders want to buy their policies, among others, to have a sense of peace at the top of their psyche and hope to be compensated promptly during misfortune or claims.
Clearly defining what the level of peace and the cost of security during instability would be is the assignment of the insurer. Should the risk of fire and consequential loss, additional premium for bandits, shifta and guerrilla (BSG) covers, all engineering classes – insurance policies designed for engineering activities – be rated with a similar pattern as before?
The country’s economic outlook remains very positive and will ultimately serve to benefit its broader population; the insurance industry lacks a strategic nationwide risk map and sound disaster recovery programme in the face of the recent unrest. It will significantly affect insurers in their pricing of every risk in their underwriting and for already priced products. Insurance companies should seek a solution by revising the pattern of pricing immediately, before emerging gushing risks wash them away.
The industry should find out the best medicines that can bring cure, lest it withers away with wrongly packaged products. Rationalisation during the underwriting of risk will take both the insurer and insured to a desirable destination.
In the face of the recently rising incidences of social unrest, which could spark a higher degree of political instability and undermine growth, the industry so far has no wider experience in pricing political risks as western insurance companies do. The burden of proving claims associated with SRCC remains in the hands of insurers, if they keep on doing business as usual.
The solution lies in adjusting the price, investigating policy conditions, designing new products and urging the regulator to devise a mechanism of implementing the agreed terms and conditions designed to secure the insured.
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