Ethiopian Review

The fall in the demand for floriculture may lead sector-specific insurance companies to a disaster, according to a paper on the “global financial crisis and its impact on the insurance industry” presented at the 6th annual general meeting and 12th workshop of society of Insurance Professionals (SIP).
According to the paper, the global economic downturn may force companies to cut their costs, with insurance costs top priority. This, in turn, the paper states, would affect premium from property insurance.

The paper presented by Eyob Meherette Deputy CEO of Nyala Insurance S.C further noted that Ethiopia’s target to earn foreign currency from exports may decline by one billion dollars due to the decline in the demand of the major importing countries.

Remittances and foreign aid decline and the decline in foreign direct investment (FDI), complemented by the restriction on commercial banks’ lending shall also affect insurance premiums.

The paper notes that engineering and marine business has already started falling down drastically; from greater than 20 per cent to less than 10 per cent in 2008/09.

The profit of insurance companies will further decline due to a tougher reinsurance market and a possible decline in commercial banks’ profits, where some insurers have a stake.

In order to protect the insurance industry it requires a coordinated effort by all stakeholders, with the emphasis on integrated risk management, risk modeling and liquidity risk management, the paper suggests.

Integrated risk management is advised to introduce a sound and comprehensive risk governance, which requires establishment of an independent and empowered risk management function.
The risk modeling involves viable and sustainable risk; ensuring companies have the tools for developing, designing and managing products.

The last lesson to be learned is the liquidity risk management, which has to be developed to prepare companies for the unexpected in this economic crash, with companies needing to put cash flow at the top of their priority list.

According to the paper presented, Eyob placed the major root cause of the global financial crisis on weak regulatory systems and a lack of corporate governance practices. Therefore the paper highly recommends to practice at all times a high level corporate governance by applying the principles of governance with accountability, transparency and equanimity.

The current global financial crisis is the worst since the great depression of the 1930s, with its origin in the US sub-prime market, which inflated a huge debt bubble that started rumbling in 2007 and burst in 2008.

According to the International Monetary Fund (IMF), the credit write off could reach four trillion dollars over the next two years.

- By Groum Abate | Capital Ethiopia