It is that time of the year when insurance companies are releasing their annual reports at their annual shareholders meetings, making their profits and losses known to the public at large. Most insurance companies are registering profit declines. This should be a cause for concern for the industry which is still in its infancy because much growth is expected in this sector.
The total profit reported last year was a combined meager one billion Birr for 16 insurance firms, four percent lower than the preceding fiscal year.
The reason for the decline in profits is the damaging marketing strategy implemented by most insurance companies – price-cutting. This is done in a bid to attract customers that competitors are eyeing by offering a slightly lower price. Price-cutting does not offer better service or products to the customer but just a discounted price; this, in turn, decreases the companies profit which is reflected on their annual reports.
Most insurance firms use price-cutting as a strategy because it is the easiest way a new and emerging insurance company can enter the market.
There is competition pressure, and in a developing economy like Ethiopia cutting prices of a product or service seems to be the easiest way to win over a customer even though the profits of the firm takes a hit.
The clients may have limitations in their understanding about insurance policies; it is hard to offer them anything other than a discount to appease them.
The industry is an affiliation based market, as insurance companies get their business from being associated with the clients somehow, whether it is from their sister companies like the banks or other relationships they have with the client. Take for instance the Ethiopian Insurance Company (EIC), the biggest insurance firm in the country, usually covers most of the government related insurance needs because it is state-owned.
Government projects and investments take up the majority of insurance needs. And the EIC handles most of these clients, and takes up the lion’s share, around 36pc of the industry’s business, leaving few leftovers for other insurance companies to scramble over.
This creates an unhealthy environment for competition. The insurance firms should be competing for the same clients with the intention of providing better alternatives for prospective clients.
Even looking at neighboring countries like Kenya, they have been able to succeed in their insurance industry because of real competition, which compels insurance companies to perform better than each other and in turn benefits the client. Only last year, the insurance industry generated a gross written premium of 6.4 billion Br, eight times lower than of Kenya.
In Ethiopia, auto insurance accounts for almost 70pc of all insurance companies portfolio; the firms rely heavily on the premium they get from auto and motor related services.
The downside is Ethiopia’s traffic accident rate is amongst the top ten in the world according to the World Health Organization. Last year, in Addis Abeba alone 20,000 car accidents were reported. The insurance companies’ biggest expense is also auto insurance.
There is an urgent need for insurance companies to diversify their policies if they continue to depend on a certain type of service to stay in the market. Their days might be limited.
The Central Bank is trying to build up the insurance industry, by introducing two years ago a new requirement of paid up capital of 60 million Br for general insurance and 75 million Br for general and life insurance.
The types of insurance products that are available are also limited. Insurance companies are not providing a wide-range of products for customers. Mostly focusing on auto and motor insurance will not lead to increased profits anytime soon. The firms need to introduce other services and products and promote it to the public.
There are not many countries that have been successful by having limited options available for clients or by leaning heavily on one aspect of the business in insurance.
When insurance companies cannot provide an array of policies for clients, it costs both the businesses and the clients dearly.
When there was political unrest in the country about six months ago and businesses in different regions were damaged or destroyed by discontented youth that were looting and vandalizing properties, the insurance companies were not able to compensate them because their insurance policies did not cover “political risk.” It was believed that such insurance cover was not available; it was not on the list for clients to choose from.
The industry is not even making a meaningful contribution to the country’s economy as one part of the financial sector. The contribution of the insurance industry to GDP is around one percent and the per capita premium is below three dollars.
Foreign insurers are seeing the gap in the market and eyeing the country. Even though it is early, foreign financial companies are already setting up offices in the capital such as the African Trade Insurance Agency.
For now, the insurance industry is closed. No foreign financial company will be allowed to enter the market in the next three years. But there are no guarantees after that. If international insurances decide to take aim at the Ethiopian market, the local companies are too weak and fragile to stand the pressure. Before this happens, now is the time to make changes and beef up the industry.
The insurance industry is shrinking and it is not achieving its potential as a money-making giant. Insurance companies should not continue on the path they are taking now. They need to rethink their strategy in order to have a healthy competition in the industry. They need to compete by providing better services and products, not by price-cutting and affiliation which is dragging them down and leading to declines in profit.
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