13 January 2013

Ethiopia: Insurance Association Asks for Credit Information Exchange

Insurance companies, through their association, have requested permission from the National Bank of Ethiopia (NBE) to be able to share credit information amongst themselves.

The credit information will enable insurance companies to check whether new clients are in debt to other insurers and if so will deny them coverage until the debt has been settled.

If their request is granted, insurers will be able to collect around 1.7 billion Br in credit, collectively owed to them. The association has also proposed a two-year time line to finish collecting this debt.

Since the ratification of the 'insurance business proclamation' in August, 2012, insurance companies in Ethiopia are prohibited from selling policy on credit, except to federal and state government organisations.

Although the proclamation made several important changes to the sector, and repealed a previous 1994 proclamation that governed insurance businesses, it is known for its ban on credit. It was dubbed 'no premium, no cover' even while it was in its draft stage, as early as 2009.

Near its ratification, the National Bank had sent a circular to all insurance companies, asking them to refrain from advancing credit. The circular also asked them to come up with a clear plan and timeline on how to collect existing outstanding debt, according to Hailemariam Assefa, general manager of Nib Insurance and president of the Ethiopian Insurers Association.

"Instead of each insurance company working on separate plans, we came up with the idea of having a credit database," Hailemariam told Fortune. "This will enable us to gather information."

The decision was reached after a discussion by all CEO's of the member insurance companies.

During discussions, some young insurance companies expressed their fear that the information sharing system may deter them from attracting clients, Fortune learnt.

"The new insurance companies do not have much debt, and feel that sharing debt information does not benefit them," an insurance executive that attended the meetings told Fortune. "In fact they fear that asking new clients to settle old debts may drive them away."

However, a consensus was finally reached and the proposal was sent to NBE through the Association. The Association currently has, as members, 14 of the 16 insurance companies. One of the two non-members, Tsehay Insurance, has started the process of acquiring membership.

"The issue is not about attracting customers, but rather about the health of the insurance industry and the economy of the country," Hailemariam told Fortune, although he also stated that he did not recall such objections in the meeting.

The credit database would work much like the credit information system of banks, except nothing is yet determined about the kind of technology to be used and where the information would be kept.

For banks, all credit history and loans advanced to a borrower are recorded in a database at the NBE, where it is managed by a credit bureau. Banks will log on to this database and check the credit history, whenever a client requests new loans.

"We will use a system that is convenient to all," Hailemariam said. "Maybe with time that may include technology, but it could also be a manual database kept at offices of the Association."

The insurance sector will only need the credit information for a limited amount of time, because it no longer provides credit services.

Because of this, it may not require heavy investment in technology, a CEO at one of the earliest private insurance companies to enter the sector, told Fortune.

"The issue will be decided after the National Bank considers the proposal and comes up with a directive," Hailemariam told Fortune.

NBE is currently working on a directive concerning the 'no-premium, no cover' provision.

Last week, officials from NBE were surveying all insurance companies about the implementation of 'no-premium, no-cover'.

"They asked about its effect on business and about the demand from some sectors that have trouble with liquidity, like construction companies," the finance and accounts manager at a private insurance company, told Fortune.

"They needed it as input for the new directive."

The proclamation contains a provision that states that the NBE may make some exceptions to the 'no-premium, no-cover' rule.

Aside from the method of sharing information and any exceptions, NBE will also decide on the two-year time limit that insurers have proposed to finish collecting outstanding debt.

The commercial law provides for a 10-year period in which to collect outstanding debts. However, a cassation bench ruling has narrowed that gap to two years. It is this same timeline that insurance companies have now proposed to NBE.

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