Claims paid and failed price policies were worse than expected in the past three quarters
Despite a surge in written premiums, insurance companies have suffered a profit decline for the third year in a row, earning 311 million Br in nine months. The profit is 11pc lower compared to the same period last year.
The profit trend observed in the past nine months is worse compared with the past two years, on which aggregate profit registered by all insurers declined by four percent to around one billion Br.
Last year, more than 10 of 16 insurance companies reported a dwindling profit. About the same number of insurers also reported a slump in shareholders' return during the same period.
Conversely, in the past nine months, the industry leveraged a premium of six billion Br from general insurance businesses, which is 20pc higher than the same period last year. Awash ranked first with a premium of 409 million Br, which is 14pc higher compared with the same period last year. Africa and Nyala Insurances follow with a premium of 359 million Br and 325 million Br, respectively.
The premium growth, however, is accompanied by a bulge in claims paid, resulting in a fall in profit. Claims paid and failed premium policies were worse than expected in the past three-quarters of the current fiscal year, according to industry insiders. This is a cause for concern for the insurance industry which is still in its infancy in Ethiopia, contributing a meagre one percent to GDP.
Abdulmenan Mohammed, an accounts manager at London Portobello Ltd, believes that stiff competition is a primary factor for the drop in profit.
"Competition has contributed to the profit tumble. In recent years, increased competition has driven premiums down," he said. "As a result, customers have been undercharged for the risks they insure."
The premium rate charged by the insurers is three times lower compared with neighbouring countries such as Kenya. The minimum premium price in Kenya is no less than two percent while in the case of Ethiopia it has reached below one percent.
"Insurance is the only service in the country which is exhibiting a significant decline year-on-year," says Ermias Teshome, a marketing & strategic manager at Nile Insurance, whose profit plummeted by half to 20 million Br last year. "Sometimes, it is even difficult to know which insurer is responsible for the undercutting. It is very hard to find the pattern."
The ill-advised marketing strategy adopted by insurers is a major reason for the premium decline, according to industry insiders. Most insurers tend to implement price-cutting strategies rather than making an effort to come up with new products and ideas.
"Price cutting does not yield better service or products to the customer but only a discounted price," says Ermias of Nile. "It is a zero-sum game."
Recent statistics show that insurers are more beneficial to earn from investment rather than income earned from operational activities.
Investments of insurers have reached 8.4 billion Br in the past three-quarters, two billion higher than the premium collected during the same period.
The cut-throat price cutting, among other reasons, has forced the insurance companies' profits to drop at an astonishing rate.
"If the trends of price cutting continue, it might lead to freemium, an insurance service without a charge," says Yared Molla, chief executive officer of Nyala. "It seems like the insurance firms are operating for the sake of survival."
Currently, the Association of Insurance Companies is undertaking a study to set a minimum premium price aiming at overcoming threats arising from price cutting.
"Unless regulatory measures are taken regarding pricing of insurance policies, unhealthy competition will pose a serious threat to the industry," said Abdulmenan.
The association has already hired actuaries to develop the study before the current budget concludes. Upon completion of the study, the association will send the survey to the National Bank of Ethiopia for approval.
Besides the price cutting, the surge in motor claims is also another reason for the profit decline in the industry. Contributing more than 70pc in the premium portfolio of private insurers, the insurers' loss ratio, the percentage of premium paid as a claim was around 73pc. This amount was more than 100pc for some insurers, resulting in a huge loss.
Last year, Brehan Insurance S.C., a late comer in the insurance industry, registered a loss of close to seven million Br. The unfortunate surge in motor claims was the primary reason for the negative performance at the Firm.
Also, some relate the dependency of insurers in the general insurance business as a major factor that deters the sector from growing.
Insurers get more than 97pc of their premium from general insurance business while the rest comes from the life insurance line. Globally, life insurance constitutes more than 50pc of premiums.
"A premium earned from life insurance is declining at an alarming rate," said Yared, who has been in the industry for decades. "A growth in the industry cannot be achieved without the development of life policies."
In the first three quarters of the current fiscal year, the amount of premium collected from life insurance policies reached 291.2 million Br, representing close to five percent of the total premium. Nyala is the highest earning in this stance, leveraging 48.5 million Br. Awash and Africa follow with a premium of 44 million Br and 34 million Br, respectively.