Ethiopian Review

The impact of the global economic crisis on the Ethiopian insurance industry is expected to result in the decline of the growth rate of premiums for all classes of business from 48.96pc in 2007/08 to 22.03pc this year, disclosed a paper presented at the 12th workshop of the Society for Insurance Professionals (SIP).

Gross premium, the actual amount of money charged by insurance companies for active coverage, is expected to fall from a little over 1.1 million Br in 2007/08 to over 1.4 million Br by the end of this year, according to the research paper which the conclusions based on the Central Bank’s findings.

“There are some indications of the impact of the crisis but it is still early to underline and say this is a well established fact,” Eyob Mehrete, deputy general manager of Nyala Insurance S.C., told Fortune.

The global recession affects Ethiopia through three key transmission mechanisms: earnings from key export items, declining foreign investment and potential for reduced foreign aid. In 2008/09 export targets may fall by one billion dollars mainly due to the decrease in demand for commodities from major importing countries, according to Eyob’s paper.

He writes that foreign investment income is expected to decline by three per cent every year. Remittance of foreign aid is expected to decline due to the recession in donor countries which will affect the infrastructure sector and thereby slow down the engineering class of business.

This paper, entitled “Global Financial Crisis: Its Impact on the Insurance Industry”, also voices concern that the premium from property insurance, motor vehicles and insuring bank collaterals will be affected.

The impact on Foreign Direct Investment (FDI); on export and import shall force premiums on property and marine cover to go down.

“As a result of the economic downturn commercial truckers will also be affected as premiums on vehicles may also decline,” reads the paper.

Profit of insurance companies shall further be squeezed due to a tougher reinsurance market and there is a possible decline in commercial bank profit where some insurers have stakes, the paper explains.

SIP, a professional association formed by ten founding members in April 2005, met on June 20, 2009, at Ghion Hotel’s Sheba Hall, to hold its 6th Annual General Assembly, and discuss the theme “Financial Crisis and the Insurance Industry”.

During this workshop, the “Global Financial Crisis and its Impacts on Economies of Developing Countries” was presented by Eyob. The other major paper presented focused on the impacts of the crisis on Ethiopia’s insurance industry. This was presented by Mehari Mekonnen (PhD), financial and investment director at Ayat Share Company

“The crisis will affect us because we are interconnected,” Mehari said while explaining that the effect of the crisis has knocked on the doors of many countries. “Every country and every continent is no longer an island”.

Fiscal balance is deteriorating, current account deficit is high and balance of payment is bad because exports are dying. However, Mehari feels, it is China’s hard landing that will be most difficult for the world’s economy.

“We do not want China to go into recession because their economy is one of the most important,” he explained, “Where there is greater consumption and production that is what is expected to turn the world’s economy around”.

His paper discussed potential options to help alleviate the recession. Expansionary monetary policy and injecting more money into the economy in correlation with the rate of inflation, are two major proposals he addressed.

Another option would be to “capacitate the incapable”.

“The poor must develop to have the capacity to consume the products of the developed countries. They have to help us so we can help them,” Mehari said.

Participants questioned one of the solutions proposed by this presenter – government bailout – which they consider nationalization.

They also questioned the fact that the discussant, Teshome Beyene, secretary general of the Addis Abeba Chamber of Commerce and Sectoral Association, consistently agreed with the conclusions and findings of the International Monetary Fund (IMF) and similar institutions.

“I have doubts about their approaches because they were the ones who prescribed specific cures to the problems in the third world,” one of the participants said. “We have been talking about what happened while the economists in these organizations were around, yet none predicted what is happening now.”

The SIP concluded the workshop with recommendations.

One of their recommendations was that liquidity management which forecasted how much cash a company needed to run its business, must be implemented in the insurance industry by conducting studies on a regular basis and taking accounts of the specific concepts of integrated risk management. They would like to conduct trainings on this topic because this is a new issue to Ethiopia.

- By HILINA ALEMU | Addis Fortune

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