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NBE drafts lower rates for motor insurance

National Bank of Ethiopia (NBE) drafts its own minimum premium rate for motor calls of business with by far a lower rate than the amount set and made effective by the Association of Ethiopian Insurers (AEI) as of November 1st last year.
It can be recalled that a minimum premium was a major issue for insurance companies because free market competition had hindered their profits and increased their risk, especially in motor and engineering coverage.
The case was also looked into by the regulatory body, National Bank of Ethiopia (NBE), which finally recommended insurers to come up with the necessary detailed study with implementing indications for the minimum premium.
Since 2017, insurers through the Association of Ethiopian Insurers have been comprehensively conducting the study. Initially they assigned Kenyan based Actuarial Services (East Africa) Limited, while the study was carried out by Zamara Actuaries, Administrators and Consultants Limited, a similar company from Kenya.
On the Insurance Business Proclamation 1163/2019 which was amended in 2019, the central bank has also taken the mandate to issue a directive to determine an economic (minimum) premium rate.
The AEI then finally issued a uniform minimum premium policy rate for the motor class of business, which was then applied by all insurance companies as of November 2022.
When the uniform minimum rate was applied the association filed the case to NBE to endorse the case, while until this week there was no formal information from the regulatory body, who this week dispatched a draft directive on a case for consultation.
On the draft directive, ‘motor insurance own damage minimum premium rate’, at its preamble stated that the directive is needed to ensure that premium rates are adequate, fair and sufficient.
It added that it becomes necessary to culminate the unwarranted premium undercutting, ensure the stability of the insurance industry and protect the interest of policyholders.
However the rate that was mentioned on the draft directive is lower than the amount that is applied by insurance companies.
For instance the minimum premium rate that set by AEI is from vehicles type and their service and set from 1.5 percent to 4 percent of the value of vehicles.
The NBE draft directive on the other hand put 1.02 percent as the least minimum rate and 2.86 percent as the highest rate.
The 2.86 percentage points is put on public service vehicle types that have up to 16 seats, while the AEI percentage for similar category is four percent.
On the draft directive 1.02 percent was proposed for private cars that was 1.5 percent on the AEI rate table.
Insurance company experts appreciated the initiative taken.
Ebsa Mohammed, General Manager of Alfa Certification Consultancy, told Capital understanding and accepting the need of setting a minimum rate by the regulatory body is a big move. With others like Endalkachew Zelekew, CEO of Zemen Insurance, sharing Ebsa’s view.
He told Capital that at least it is supposed to be appreciated.
“Proposing the directive is a big success now we are on the same page for the matter,” Endalkachew says, adding, “I understand that proposing such kind of directive is showing me that the regulatory body is accepting the concern of the sector problem.”
“In the global experience associations are raking this kind of responsibilities but NBE has taken the mandate by the amended proclamation so it is expected to come up with it,” he added.
Ebsa expressed that it is difficult to accept that NBE undertook further assessment by itself.
He reminded that the study that was carried out by AEI through actuaries was tabled for NBE more than a year ago, “At the time NBE promised that it will come up with a final decision in one month’s time since it received the study but was then delayed for more than a year.”
“I am not sure that the regulatory body took its own study. For instance in the first quarter of the current financial year, several insurance companies’ profit has highly dropped, while NBE proposed the rate that has at least reduced by 30 percent compared with the rate that was implemented by the association,” he elaborated by expressing his expectation that the draft will be reviewed.
Insurance leaders said that since the implementation of the association rate there were some challenges with even the consumer protection regulatory body being involved on the investigation. Due to that such kind of directive come from NBE is a good recognition for the sector challenge it faces in terms of a motor insurance policy.
They claimed the motor insurance premium is highly deteriorating particularly compared with the unfair market competition and frequent price hike on vehicle parts.
“Proposing the directive shall enable us to come up with our argument and to set acceptable minimum rate for the business, while the proposed percentage is small compared with the rate that our association set,” the sector actors said.
For instance Endalkachew showed one of the gaps on the draft directive is that the rate between one and the other was very narrow and that it was not considerate of the actual price of the covered property.
“I hope we will get to acceptable points before the implantation of the directive,” he expressed his expectation.
When Capital reported about the case in early November some experts argued that the move of the association is totally unacceptable.
For instance Assegid Gebremedhin, CEO of At Insurance Broker and Consultant, expressed the case as it will erode the sector dynamism and creativity. “It is like the concept of what the oil cartels did,” he argued.
He said that insurwers have to maximize their profit and competitiveness by introducing information technology, development of human capital, new policies, expanding on different sectors and different new market destinations rather than concentrating in Addis Ababa and motor class of business.
In the past several years insurers say the premiums they charge are small when compared to the damage. From the total claims insurers settle every year, motor vehicles make up the largest proportion. In their annual report they expressed concern about the growing risk of auto insurance.
Experts said that the competition between insurance companies is not based on the service that they provide instead they are pulling the rug out from each other in a race for loss by trying to offer the lowest premium payments.