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The impact of the global economic crisis on the
Ethiopian insurance industry is expected to result
in the decline of the growth rate of premiums for
all classes of business from 48.96pc in 2007/08 to
22.03pc this year, disclosed a paper presented at
the 12th workshop of the Society for Insurance
Professionals (SIP).
Gross premium, the actual amount of money charged by
insurance companies for active coverage, is expected
to fall from a little over 1.1 million Br in 2007/08
to over 1.4 million Br by the end of this year,
according to the research paper which the
conclusions based on the Central Bank’s findings.
“There are some indications of the impact of the
crisis but it is still early to underline and say
this is a well established fact,” Eyob Mehrete,
deputy general manager of Nyala Insurance S.C., told
Fortune.
The global recession affects Ethiopia through three
key transmission mechanisms: earnings from key
export items, declining foreign investment and
potential for reduced foreign aid. In 2008/09 export
targets may fall by one billion dollars mainly due
to the decrease in demand for commodities from major
importing countries, according to Eyob’s paper.
He writes that foreign investment income is expected
to decline by three per cent every year. Remittance
of foreign aid is expected to decline due to the
recession in donor countries which will affect the
infrastructure sector and thereby slow down the
engineering class of business.
This paper, entitled “Global Financial Crisis: Its
Impact on the Insurance Industry”, also voices
concern that the premium from property insurance,
motor vehicles and insuring bank collaterals will be
affected.
The impact on Foreign Direct Investment (FDI); on
export and import shall force premiums on property
and marine cover to go down.
“As a result of the economic downturn commercial
truckers will also be affected as premiums on
vehicles may also decline,” reads the paper.
Profit of insurance companies shall further be
squeezed due to a tougher reinsurance market and
there is a possible decline in commercial bank
profit where some insurers have stakes, the paper
explains.
SIP, a professional association formed by ten
founding members in April 2005, met on June 20,
2009, at Ghion Hotel’s Sheba Hall, to hold its 6th
Annual General Assembly, and discuss the theme
“Financial Crisis and the Insurance Industry”.
During this workshop, the “Global Financial Crisis
and its Impacts on Economies of Developing
Countries” was presented by Eyob. The other major
paper presented focused on the impacts of the crisis
on Ethiopia’s insurance industry. This was presented
by Mehari Mekonnen (PhD), financial and investment
director at Ayat Share Company
“The crisis will affect us because we are
interconnected,” Mehari said while explaining that
the effect of the crisis has knocked on the doors of
many countries. “Every country and every continent
is no longer an island”.
Fiscal balance is deteriorating, current account
deficit is high and balance of payment is bad
because exports are dying. However, Mehari feels,
it is China’s hard landing that will be most
difficult for the world’s economy.
“We do not want China to go into recession because
their economy is one of the most important,” he
explained, “Where there is greater consumption and
production that is what is expected to turn the
world’s economy around”.
His paper discussed potential options to help
alleviate the recession. Expansionary monetary
policy and injecting more money into the economy in
correlation with the rate of inflation, are two
major proposals he addressed.
Another option would be to “capacitate the
incapable”.
“The poor must develop to have the capacity to
consume the products of the developed countries.
They have to help us so we can help them,” Mehari
said.
Participants questioned one of the solutions
proposed by this presenter - government bailout -
which they consider nationalization.
They also questioned the fact that the discussant,
Teshome Beyene, secretary general of the Addis Abeba
Chamber of Commerce and Sectoral Association,
consistently agreed with the conclusions and
findings of the International Monetary Fund (IMF)
and similar institutions.
“I have doubts about their approaches because they
were the ones who prescribed specific cures to the
problems in the third world,” one of the
participants said. “We have been talking about what
happened while the economists in these organizations
were around, yet none predicted what is happening
now.”
The SIP concluded the workshop with recommendations.
One of their recommendations was that liquidity
management which forecasted how much cash a company
needed to run its business, must be implemented in
the insurance industry by conducting studies on a
regular basis and taking accounts of the specific
concepts of integrated risk management. They would
like to conduct trainings on this topic because this
is a new issue to Ethiopia.
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