Viewpoints | Apr 20,2019
Federal authorities gear up to amend compensation and premium rates for third-party motor insurance policies almost a decade after a proclamation compelling vehicle owners to have coverage was passed.
Annual premium rates vary from 188 Br for motorcycles to as much as 2,700 Br for cross-country buses. Compensation for death or injury is capped at 40,000 Br, and claimants can receive up to 100,000 Br for property damage. Officials at the Insurance Fund Administration Service (IFAS) are undertaking the amendment, claiming the revision was precipitated by the declining purchasing power of the Birr and the inflationary pressure in the economy – headline inflation hit 34pc in the consumer price index (CPI) in September 2021.
The amendment is expected to raise premiums and compensation significantly, as much as double the current rates, although authorities say "nothing will be definite until an actuary determines adequate adjustments.
Two consulting firms are bidding to win the contract to study the options for revising premiums and compensations.
Adel Abdulahi, head of operations of the IFAS, expects the consulting firm selected will be announced this month, and the actuary will have three months to complete the study.
IFAS is responsible for paying compensation to claimants who are victims of injury, death or damage due to drivers without coverage or hit-and-runs. Last year, it paid out a total of one million Birr to 38 people. The proclamation issued nine years ago makes third-party insurance policy mandatory, helping insurance firms raise revenues from motor insurance. However, the windfall was short-lived, according to industry insiders. Few insurance companies reported underwriting surplus from a motor insurance policy.
According to executives of insurance firms, the loss ratio for the third-party policy can reach as high as 100pc. They blame the "insufficient" premium rates applicable to all firms.
"No insurance company is reporting underwriting surplus from the policy," says Sessen Yilma, an insurance expert who worked for Nile Insurance for eight years, his last responsibilities handling claims under third-party insurance.
The 18 insurance firms operating in the market collected a total of 855 million Br in premiums for third-party insurance policies last year, accounting for a third of all revenues from the motor insurance line of business. This represents eight percent of the gross premium written by insurers, of which nearly 20pc was underwritten by the state-owned Ethiopian Insurance Corporation (EIC).
The insurance industry paid out half a billion Birr in claims for the third-party policy last year.
The industry sees the decision by the authorities to readjust premium as overdue.
"Both the premium rates and the compensation paid to the third party were supposed to be adjusted a long time ago, as both are impacting our business," said Gudissa Legesse, chief executive officer (CEO) of Awash Insurance.
Awash Insurance, which reported premiums of over one billion Birr last year, has not seen profits from third-party policies for years.
Other insurance companies also welcome the decision to revise the rates.
"It's the third-party that is experiencing more losses than anyone involved," said Zufan Abebe, chief executive officer (CEO) of Nib Insurance, which collected premiums of 568 million Br last year, 21pc higher than the preceding year.
The proposed revision will be up for discussions with executives of the insurance industry before it is sent to the Ministry of Transport & Logistics for review and the Council of Ministers for approval, Adel disclosed to Fortune.
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