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EthiopiaRe 40m Br Short Before Establishment

The formation of the Ethiopian reinsurance company faces delay as it falls short by 40 million Br of the 500 million Br in paid-up capital required by the National Bank of Ethiopia.

Organisers are hoping to raise the money by selling the remaining shares to banks before opening the sale to the public. Even then the manner of premium collection proposed for the would-be reinsurer is expected to become a thorny subject, as it could have a share of all premiums collected, and not just from the premium for reinsured risks.

Right after the proclamation issued on April 3, 2014, for the establishment of the firm, a project office was established and the work of organising the formation of the firm started immediately after an application was sent to NBE on May 8, 2014.

The reinsurance firm organising committee, which is under the project office, has already received the feasibility study, which cost 1.8 million Br out of the 10 million Br budget it has for the establishment process.

Three consultants were hand picked by the committee, which has 15 members from different financial institutions, and were assigned their task on May 6, 2015.

“We first tried to recruit consultants using their curriculum vitae, but it did not work out that way, because it needs deep knowledge. Hence we chose the three, because they have long years of experience in the insurance sector,” Kiros Jirane, chairman of the organising committee toldFortune.

The consultants assigned to the project were Teshome Beyene – founder of Ethio Life Insurance, Hailemikael Kumsa – deputy managing director of African Reinsurance Corporation and a consultancy firm named Diligence Consultancy Service Plc, owned by Tedros Tilahun.

Kiros declined to say what the feasibility study came up with, saying that it was a thick document. Tedros too, declined to comment saying that it was up to the committee to speak about it. But industry sources say that there are some problems in the study regarding premiums to be collected from member insurance companies. One anonymous source complained about the suggested requirement to collect from insurance firms a certain percentage of their premiums for every risk they cover.

Tesfaye Desta, CEO of Oromia Insurance Company (OIC), corroborated this industry concern.

“What shareholders want is to pay a premium set based on an agreement. If for example an insurance company is able to pay up to 10 million Br for a fire risk, then the premium should also go to the insurance itself. But if the risk is transferred to the reinsurance firm, then a certain percentage of the premium will go to the reinsurer,” Tesfaye told Fortune, explaining what he believed should have been the case.

This unresolved issue will be the main agenda item of a founders’ meeting called by the project office and scheduled to take place in a month’s time. The meeting will choose board members and the CEO of the company as this information needs to be submitted to the central bank for approval before the licence to operate is issued.

“Although this issue remains controversial and unaccepted, if the organising committee, which is assigned to look over the consultants’ work, approves it, then it can pass to the NBE [National Bank of Ethiopia]. The biggest decision is for the governor though,” Tesfaye said.

The study was submitted in November 2015, but the formation of the company was delayed because enough shares were not sold to meet the required paid-up capital of 500 million Br. So far 17 insurance companies and five banks have bought 460 million Br worth of shares. The committee anticipates that over the coming two weeks, banks will buy an additional 40 million Br worth of shares, before opening the share issue to the public, Kiros said. The Ethiopian Insurance Corporation is the biggest shareholder.

According to the NBE’s Directive No. SRB/1/2014, minimum paid up capital of a reinsurer must be half a billion birr and a single shareholder cannot own more than five per cent of the total share. However, state enterprises are allowed to buy more than five per cent of the total shares, while maximum share an individual insurance company can own is 50 million Br.

The formation of this firm could reduce the flow of hard currency to foreign reinsurers, among which the major ones are Africa Re, Kenya Re and Munich Re (Munich Reinsurance Company of Africa Ltd.).

“We now pay up to 53 million Br per year to reinsurance companies in different countries, which is from 15pc to 20pc of the total premium,” said Tesfaye, speaking of OIC’s experience. “So the hard currency we send will definitely decrease, although it might not decrease the percentage we pay,” Tesfaye said.

The difference, however, says Tesfaye, is that the insurance firms can get dividends from the new company.

Tags: Insurance Companies in Ethiopia,, Ethiopian reinsurance company,

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