Contractors are apprehensive about buying a policy from insurance companies as the requisite for collateral is half the performance bond. After insurers started to require collateral for policies, the Construction Contractors Association of Ethiopia (CCAE), established in October 1991, has been flooded with complaints from contractors.

Tewodros Zewde, head of the Association, says his table is filled with complaints from contractors claiming that insurance companies are demanding them to provide collateral to get performance and advance guarantee bonds.

The insurance companies claimed the rulings came following the alarming announcement by one of the five reinsurers in the country this July. African Reinsurance Corporation (African Re) argues most Ethiopian insurance companies pay large amounts of compensation addressing a huge claim and draining its capital.

The Association has attempted to discuss the issue with regulators at the central bank. However, the meeting was called off last minute.

"We'll exert utmost effort to discuss with insurance companies," Tewodros told Fortune.

According to him, the insurers claim the construction companies are attempting to engage in multiple projects without considering their human and capital resources, leading to failure and disagreement with the clients. As a result, the insurance companies are forced to pay compensation, with reinsurers also sharing the loss.

Kassa Lisanework, CEO of Tsehay Insurance S.C., says collateral is not a new idea, and the insurance companies just started enforcing it. He recalled an incident two years ago when the Ethiopian Roads Administration banned the insurance company from selling policies for contractors in charge of its project due to its default on Akir Construction Plc.

The construction company failed to deliver the project it had contracted with the Ethiopian Roads Administration. The insurance company had settled the advanced payment guarantee bonds last year, with ERA lifting the embargo in November. According to the CEO, the insurance firm had to pay the administration a compensation cost of 4.7 million Br.

The legal framework for collaterals is not rolled out for insurers as it is for banks.

The independent lawyer Elias Endale, with a decade of experience, says there is no legal framework for insurers' requirement of collateral and auction. As contractors shoulder the burden from banks and are required collateral for the loans, insurers must pass through the court process and win to sell the property in times of defaults, said the expert. He said the law should entitle the insurance companies to the same privilege as it did for banks to auction the property of the construction companies.