By Bacha Zewdie. Microinsurance is a type of insurance that is used to protect low-income people from disasters. This type of insurance has been neglected in Ethiopia. But now efforts are being made to revive the insurance industry. The National Bank of Ethiopia (NBE) recently held talks with representatives of financial institutions on the new rules for micro-insurance and mortgage lending.
A discussion paper was presented on what micro insurance is, who needs microinsurance, how to start a microinsurance business; what are the challenges, and what makes it different from the main insurance.
According to Belay Tulu, Director of Insurance Supervision at the National Bank of Ethiopia, who presented the discussion paper, Micro Insurance is an insurance that the poor or low-income people need. Beneficiaries of micro insurance are smallholder farmers, small-scale animal breeders, and small-scale urban dwellers. Thus, micro-insurance is different from primary insurance.
Small-scale farmers, small-scale pastoralists, and small-scale urban dwellers are vulnerable to various hazards, he said. These people need micro insurance. They may lose property due to fires, floods, wild and domestic diseases associated with climate change. Therefore, he said that insurance is very important for these groups.
According to Belay, in addition to losing property to these low-income groups, when a family member or close relative becomes ill, they are forced to spend time and money to take care of their family member. In addition to illness, death can occur. The death of a family head in particular, can have a devastating effect on family life.
Belay said that a family or an individual does not get into financial trouble by buying insurance. But the whole family is in danger when problems occur in the family because of not buying insurance. The whole family is in trouble, especially when the family heads are separated by death or exposed to various problems, he said.
Microinsurance helps small and low-income communities in urban and rural areas to survive, even in the face of adversity. He explained that it is very important indeed to keep the family life simple.
But so far there is no insurance in Ethiopia that involves low-income groups. As a result, the low-income community is facing a number of challenges. But this situation should not continue. He set out that efforts are underway to launch micro insurance.
According to Belay, not only is there a lack of microinsurance in Ethiopia, but the insurance market as a whole is at a lower level. In a country of about 110 million people, it is difficult to find people that owned life insurance. There are very few insurance companies and they focused on industrial owners and concentrated mostly in the cities.
Currently, 54 percent of the country’s insurance industry is located in Addis Ababa. 14.6 percent are in Oromia, 11.6 percent in Amhara, 9 percent in the Southern Nations, Nationalities and Peoples’ Regional State, and 5.2 percent in Tigray. The rest states of the country, except the four states listed above and one city administration, have the lowest insurance industry. Even in the states, the majorities of insurance users are residents of regional cities and have better incomes, he noted.
Belay Tulu further explained that there are various problems that have hindered the country’s insurance sector from growing as required. He added that as the concept and terminology of insurance originated from abroad, they are complicated and difficult to understand not only for the low-income rural community but also for regular insurers.
According to the director’s explanation, in order to transform the country in a sustainable way and benefit the low-income population, it is imperative to develop low-income community oriented and low-cost insurance policies that solve the problems. However, since the sector’s coverage is so low, it excludes a large number of the population.
As to him, various activities have been underway to solve the problems in the sector and to bring low-income rural and urban dwellers to the insurance sector. Necessary legal procedures have been put in place, improvements have been made to existing directives and new regulations have been issued.
He said the microinsurance industry is a business venture of people who are interested in the sector, who have new ideas and it is not a business run in the traditional business system. Rather, a business run by people who believe that they will be profitable in the sector.
Therefore, existing insurance companies will also be able to launch microinsurance companies to enable new microinsurance companies to enter into operation. In addition to developing and improving legal systems, extensive capacity building work has been done.
Capacity building works have been done on what kind of problem solving techniques should be deployed to fill the gaps of what are the needs of low-income groups in urban and rural areas? What dangers do they face? How do they deal with the problems they encounter? And what gaps are there?
It may not be effective to engage in the business without knowing the desire of low-income people. A survey was conducted nearly on 3,000 households in urban and rural areas to prevent such gaps. Based on this sample, and based on the problems faced by low-income groups, it was stated that five priority types of insurance should be developed, priced and identified distribution lines.
According to Belay, it is not possible to reach low-income groups in the traditional way, so it is important to develop easy-to-use insurance policies that do not waste time and money. In particular, crop and domestic insurance requires specialized knowledge, infrastructure, and public-private partnerships. As a result, those interested in engaging in the field are encouraged to do so.
Various insurance policies are designed and priced, distribution lines were developed and supplied to interested companies, but they did not go as planned. There is a huge market opportunity in the country. It is not possible to satisfy that market with the existing regular insurance alone. It is necessary to focus on microfinance. He said that this requires motivation to engage in the sector.
He said efforts to promote microinsurance have been fraught with challenges, especially fraud. Motivation is needed to overcome these challenges and achieve success. Many countries have also gone through the same process and achieved success in the sector. It is also likely to learn from the successes of other countries.
Enabling efforts have been made to prevent such problems, and efforts have been made to strengthen the National Bank’s engagement with the Ministry of Agriculture, the Agricultural Transformation Agency and others.
According to Belay, existing insurance companies can provide microinsurance services. It is easy to provide micro service for these companies. They only need commitment. Therefore, they should start providing micro services.
He said the directive will allow microfinance institutions to engage in microinsurance in addition to insurance companies. He added that if it is assured that they are capable to provide insurance services, they will be made to start providing services. Microfinance institutions need to set up a microinsurance department. They need capital and a manager.
Belay further explained that there are requirements set for new microinsurance companies operating in the microinsurance sector. Micro-insurers must be established and put into operation. One of the requirements to be met is to inform the amount of capital and set up a board he stressed.
In order to achieve the desired results in the sector, as to Belay, private and public partnerships are essential. State governments should increase the capacity of microfinance institutions and provide micro-insurance services that can be used by microfinance institutions. The National Bank provides other assistance.
Microinsurance should not be left alone according to Belay, and it is important to link with microfinance to poverty alleviation. Micro insurance should be considered as one of the solutions to the agricultural sector. It is hard to develop the sector to the desired level unless it is considered as a solution to poverty reduction and remedy of agricultural sector problems.
Implementing microinsurance requires a new thought and a different approach. It does not work on a regular distribution line. Microinsurance needs to serve a large number of people at low cost, he said.
According to Belay, there is a lack of knowledge about the sector and it is necessary to use innovative training methods to train the farmers and pastoralists. For example, selling insurance with veterinary medicine should be used as a means until people get familiarized with it.
Dr. Yinager Dessie, Governor of the National Bank for his part explained the guidelines to borrow money securing micro insurance and movable property. He said the National Bank of Ethiopia has made various preparations to implement the directive. The micro insurance policy should start from the New Year. He also said that problems in the implementation process will be solved.
According to Dr. Yinager, the directive answers questions of growth, justice and development. The financial institutions have a responsibility to work with pastoralists and farmers in rural areas and low-income groups in urban areas.
As to Dr. Yinager’s explanation, local administrators must take responsibility and act responsibly. They need to provide the necessary support for the benefit of low-income communities. Those who act outside the scope of the directive and those who fail to comply will be held accountable, he warned.
Representatives of various financial and insurance institutions who participated in the forum also said that they will work to implement the directive. They called on the government to provide the necessary support and monitoring.