The road to reinsurance

Shimelis Belay joined the insurance industry in 1977 and worked in different capacities before rising to the position of Head of Risk Management and Survey Department of the Ethiopian Insurance Corporation. He then moved to Kenya in 1994 and served as general manager, managing director and chief executive officer for various risk management and loss adjusting companies. In 2004, Shimelis joined Africa Reinsurance Corporation (Africa Re) as senior underwriter and rose to the position of assistant director of operations in Kenya before moving to Ethiopia in 2011 to be a pioneer local representative of the Addis Ababa Local Office. Shimelis Belay holds a Bachelor of Science in mechanical engineering.  He is also an associate and fellow of the Chartered Insurance Institute UK; an associate member of the Chartered Institute of Arbitrators in the UK and an associate member of the Institute of Loss Adjusters of South Africa. Currently, Shimelis is serving the Corporation as a local representative and consultant since 2013. Via an email interview with Birhanu Fikade The Reporter Shimelis talks about the prospects and challenges of the insurance industry in Ethiopia, the introduction of reinsurance business, the competitiveness of local insurance firms and the position of private insurers in an industry dominated by the state-owned insurer. Excerpts:   

The Reporter: Tell us about the Africa Re and its achievements over the years?

Shimelis Belay: Africa Re or the African Reinsurance Corporation was established in February 1976 by the then member states of the Organization of African Unity (now the African Union), at the initiative of the African Development Bank (AfDB), with the signing of an establishment agreement in Yaoundé, Cameroon.

The corporation was set up following the report of a study commissioned by the UNCTAD into the outflow of scarce foreign exchange by way of reinsurance premium from Africa.

Its mission is to foster the development of the insurance and re-insurance industry in Africa, to promote the growth of the national, regional and sub-regional underwriting and retention capacities and to support African economic development.

When it comes to its achievements, we can cite some figures. From a humble beginning of about USD 3 million, in 2014 the premium income of African Re has risen to USD 717.525 million. The corporation is a leader in the continent with around 10 percent of market share. Not only that but it has now become the largest reinsurance company in Africa and the Middle East. I can also tell you that Africa Reinsurance Corporation is one of the very few A–rated reinsurance companies in Africa and the Middle East by rating agencies like A.M Best, Standard and Poor and the like. Back in 2013, we were ranked 40th in the Standard & Poor’s list of 40 Global Reinsurance Group. Furthermore, African Re is the winner of the coveted “Best Insurance Institution in the last 40 years” award at the African Insurance Organization (AIO) 40th Anniversary Celebration held in Mauritius in October 2012; and it has won the “Best Regional Retakaful Company” Award for the third time during the international Takaful Summit in London. Add to that list Award of the Best Reinsurance Company in 2012 by the institute for Government Research & Leadership Technology, Abuja, Nigeria.

The company is strong in terms of capitalization with a total asset of USD 1.403 billion, shareholders’ funds of USD 736.925 million, and high international solvency ratio of 119% in 2014. It is also a leader in the promotion of regional insurance initiatives including new pools for natural catastrophes, war & terrorism. It is also consistent in paying dividend to shareholders, Ethiopia being one. Following September 11, when international reinsurers pulled out of the Africa market, Africa Re was able to stand in and provide the required capacity. It is also a manager of the two Pan-African insurance pools: oil and energy and aviation.

What does the future hold for Africa Re operations in Ethiopia?

Africa Re will be a very close partner in the development of the insurance & re-insurance industry in Ethiopia. Africa Re will continue to grow in Ethiopia, as it is committed to providing quality services of the highest international standards, in terms of reinsurance and other insurance related technical issues that require expertise advice, and is prepared to enthusiastically face the challenges of the future.

Also our mandate is still valid; our wish is to foster the development of the insurance and re-insurance industry and to promote the growth of national, regional, and sub-regional underwriting and retention capacities thereby supporting African economic development.     

Recently there have been move to establish a national reinsurance corporation in Ethiopia. How will that be realistic given the lack of international exposure?

All insurance companies in Ethiopia have international exposure, albeit to varying levels. There is also support from Africa Re, which is an international player in this sector.

The mission of Africa Re is to foster the development of insurance and re-insurance industry in Africa; and Ethiopia being a founding member can benefit greatly from this.

If requested, Africa Re will obviously provide proper advice, training and give guidance to the management and staff of the national Reinsurance Corporation, which is currently under formation.   

How, do you think, will such a corporation serve the local business in the international arena?

As far as reinsurance is concerned, it is an international business by its nature. Ethiopia Re may soon grow to a level of an international player.

As the basic point of insurance is spread of risk, this national reinsurance corporation will obviously need retrocession arrangement with international reinsurers, where our Africa Re could be the preferred choice.  

The country has an undeveloped insurance sector which depends on international insurers for cover of its country’s international business engagements. Will the new corporation credibly handle such tasks like that of the African Re which has been doing the job in Africa for years?

The insurance industry is developing. The issue here is to get reliable and sufficient protection for the part of the business which is over and above the insurance companies’ retention capacity. A major concern could be the saving of foreign currency (foreign currency reserve) in the country. In this aspect, the National Reinsurance Corporation will obviously contribute in preventing the foreign currency outflow to a certain extent since it will substitute the service which is now being purchased in foreign currency.

It is difficult to say that the new national reinsurance corporation will have the same capacity, experience and strength, in terms of finances and technical expertise, as the well-established ones like Africa Re. But once established, it will grow in the course of the years to come to achieve the required level.

Africa Insurance Corporation has been in Ethiopia since 2011. What can be said about its engagement in the local insurance business?

Africa Re is the reinsurance market leader in Ethiopia. It has assisted the insurance companies in Ethiopia by leading their insurance treaties. The insurance industry has grown from a single government-owned insurance company some years back to a sector hosting sixteen private insurance companies. This is a good sign of growth and potential for investment. The local insurance companies have been supported by Africa Re’s growth from a premium income of 227,311,605 birr in 2011 to 407,719,880 birr in 2014. The establishment of the local office has greatly contributed to the retention of the reinsurance premium within the economy thereby conserving foreign exchange. As a result, all the indicated balance has been settled in local currency into Africa Re’s account maintained locally.

Africa Re has also contributed a lot in the form of periodic trainings in special classes of insurance and has also been advising the market on risk management and loss adjusting risk surveys.

From the Africa Re’s point of view, what describes the Ethiopian insurance sector?

The market is relatively young but growing, with a huge potential, as the economy is booming whereby many people are getting out of poverty, the level of education is rising and generally the critical middle class is emerging. It is a matter of time that the industry will be at par with that of neighboring countries’ and the market will be ready to provide solutions to emerging demands. When we compare insurance businesses in Ethiopia to that of our neighboring countries, Kenya had a relatively well-developed industry. If we compare the premium income, Kenya is almost five times bigger than Ethiopia. However, the Ethiopia market fares better or is in par with those of Tanzania and Uganda.

The National Bank of Ethiopia (NBE) recently issued new directives reinforcing the law that prohibits diaspora investors from owning or acquiring shares in any financial institution in the country. How does this affect the insurance business? And how will it reflect on the reinsurance sector.

I am not conversant with the details of the National Bank of Ethiopia’s directives. As far as I can see, there have been many companies registering, opening and growing in this sector.

Some say the number of insurance companies is too much for this market. On the face of it, it could be an indication that there is sufficient capital to open an insurance company in this country.

I don’t think the market currently is short of capital to start an insurance business.

What can be said about Ethiopia’s stern stance to prohibit foreign financial institutions to enter the local market?

My understanding is that, the government is protecting these young and growing companies until they reach a level where they can fairly compete with strong international financial institutions. It basically helps to create strong local institutions. Such a policy has helped the indigenous institutions to come up like Ethiopia Re, which is currently under formation. Nevertheless, the government must have a very good reason when issuing such a policy, as it has its pros and cons such as preservation of capital flight, maintenance of the independence of the financial sector and empowerment of the local companies.

How does such policy affect the reinsurance business?

Very minimally I might say. Reinsurance is an international business. One does not need to open a company in Ethiopia to do reinsurance business. As long as one is able to satisfy the industry’s demand, one can do reinsurance business from elsewhere.

How do you describe the performance of private insurance companies in the country where the state-run company dominates the scene?

Some say there is no level playing ground. To my knowledge, the private sector is doing well and has so far competed very well and they are all growing and making profit. The concern here is that competition among insurance companies is mainly based on price. The price war is detrimental to the survival of the industry. Competition need to be on service delivery and not on price alone. Insurance is risk taking and one needs to have sufficient money to pay claims. If some companies go out of business, as a result of price under cutting, that will dent the industry’s image. So, this problem should be handled professionally and the approach should be cautious.