Viewpoints | Nov 11,2023
A new directive issued by the National Bank of Ethiopia (NBE) requires insurance companies to receive confirmation from Ethiopian Reinsurance (Ethio-Re) before covering a risk that exceeds 30pc of their gross capacity.
The 11-page directive, which became effective as of August 17, 2020, makes Ethio-Re the lead reinsurer for any risk that falls out of a treaty signed between the insurance company and reinsurance firm.
Gross capacity is the sum of the risk covered by the insurance company and the agreement signed between the insurance company and the re-insurer.
Any balance from the risk that falls out of the treaty has to be shared at least among five reinsurers including Ethio-Re, African Re and PTA Re. With this arrangement, Ethio-Re is entitled to a 20pc priority portion of obligation in the insurance company's policy portfolio for a risk that is covered outside of a treaty.
This gives Ethio-Re the mandate to have the first refusal right to accept or reject the individual or set of risks that exceed the treaty, according to Dagnachew Mehari, CEO of Bunna Insurance.
"Unless the risk is spread to another reinsurance company that covers Ethio-Re," said Dagnachew, "it's going to be risky."
Being the lead reinsurer, Ethio-Re is authorised to give confirmation to insurance companies to offer coverage whenever there is a risk that surpasses the gross capacity by 30pc. To give this confirmation, Ethio-Re has to earn an A rating or equivalent in its recent credit rating. However, the four-year-old firm is not a credit-rated reinsurance company yet.
"Regulators have exempted the reinsurance company to work together with other insurance companies despite not being rated," said Dagnachew.
The balance sharing of the risk between the reinsurance companies has to be under the same terms and conditions with the lead reinsurance company.
This is going to be very risky in the case of a huge or major event, according to a CEO of an insurance company who wanted to remain anonymous.
"Every insurance company has its own risk management system," said this executive, "but with this directive, all small and big insurance companies are boxed and handled in a box."
Reinsurance by nature has to be dispersed in a way that crosses borders, and the regulator cannot make everything pass through Ethio-Re in the name of saving forex, according to this executive.
Insurance companies under the risk-sharing offer have to respond in two business days. If the insurance company fails to respond within the specified time, then the underwriting insurance company can offer the risk to international reinsurance.
"There is an over-accumulation of risk under Ethio-Re," said the CEO of the insurance company who wanted to remain anonymous. "Ethio-Re is already taking on too much risk from the mandatory treaty reinsurance and policy cession."
Currently, Ethio-Re takes 25pc from treaty reinsurance and five percent of policy cession from insurance companies. However, the five percent mandatory policy cession that was supposed to be given for only five years will expire this coming fiscal year. Executives of Ethio-Re hope that this scheme continues until it grows since it helps the firm to have a solid set as well and expand its business portfolio.
"Capacity is something that can be grown, and we're a very well-capitalised firm," said Fikru Tsegaye, executive officer of strategic planning and business development at Ethio-Re, which has 50 million dollars in paid-up capital.
"There is no over accumulation of risk. We handle our risk with a wise, calculated and professional assessment," he said. "In addition, we spread our risk with other global and continental reinsurance companies that cover us."
Ethio-Re is covered by reinsurance companies such as Munich Reinsurance Company, a reinsurance firm based in Munich, Germany.
"We're now working to get rated, which didn't happen earlier because we're a very young company, and we don't have a solid setting," said Fikru.
During the last fiscal year, Ethio-Re managed to decrease the outflow of forex by some 300 million dollars.
"We'll continue to improve that," said Fikru.
This is another directive to ensure the flow of forex out of the country is limited, according to Wassihun Mekonnen, a legal attorney that has worked for multiple insurance companies.
"It's inevitable that Ethio-Re is going to benefit from this," he said. "However, this is going to affect small insurance companies that can't cover big risks as they have to depend on reinsurers."
The insurance industry has 17 companies, 16 of which are privately owned, and 595 branches throughout the country. Out of the total number of branches, close to 54pc are located in the capital. The total paid-up capital of all insurance companies has reached nine billion Birr.
PUBLISHED ON
Sep 19,2020 [ VOL
21 , NO
1064]
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