ASSESSMENT OF THE REINSURANCE BUSINESS IN DEVELOPING COUNTRIES

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ASSESSMENT OF THE REINSURANCE BUSINESS IN DEVELOPING COUNTRIES

ABSTRACT

There are contrasting views about the impact of cross border reinsurance business in developing countries. In the literature, some argue that cross border reinsurance plays a critical role in strengthening risk absorbance, solvency, know-how, and in availing foreign capital for the insurance industry of developing countries. Some of the literature underpin cross border reinsurance as indispensable in availing foreign capital for the insurance industry in the aforesaid countries. Others claim that excessive dependency on cross border reinsurance not only negatively affects foreign currency holdings of a given country, but, also has an adverse effect on the contribution of the industry to the economy of a nation. The Ethiopian insurance industry is entirely dependent on cross border reinsurance business. Despite the importance of sound reinsurance business regulation for the stability and growth of the local insurance industry, no such regulations in Ethiopia have been issued. This paper reports the findings on the influence of the cross-border reinsurance business, on the insurance industry and the economy and perceptions of the management of the industry regarding reinsurance business regulations in the Ethiopian context. The study used ten years data including financial transactions of the insurance companies, GDP and sample primary data of the perceptions of the management of the insurance industry regarding reinsurance business regulations. Quantitative and qualitative analytical research approach is used. The results show that cross-border reinsurance business affects negatively the insurance industry from the financial performance perspective. The insurance industry is contributing little to the economy of the country. Awareness gap regarding the reinsurance regulation persists in both management levels. Lack of awareness induced the industry to engage in the international business without the appropriate regulations. Both the government and the industry should work in unison towards putting in place a regulatory framework and appropriate strategies that can enhance competitiveness of the industry, both at national and global spectrum.

CHAPTER ONE

ORIENTATION

1.1 The Ethiopian Context

The Federal Democratic Republic of Ethiopia (FDRE) is situated in the Horn of Africa. Ethiopia is bounded by Eritrea in the north, Djibouti in the north-east, Somalia in the south-east, Kenya in the south-west and Sudan in the west. With an area of 1,235,000 square km, Ethiopia is as large as France and Spain combined. About 65% of the land mass is arable while only 15% is cultivated. The population is estimated at 79.5 million; of which over 50% are under the age 20 and about 85% reside in rural localities. In terms of population density, the number of inhabitants per square km is about 50.

The capital Addis Ababa, has about 2 .8 million inhabitants (CSA, 2010).

Ethiopia is a multi-culture and multi-ethnic country with more than 83 languages. The official language, Amharic is spoken by 60% of the population but two other languages (Oromigna and Tigrigna) are also commonly spoken: English is widely spoken particularly in the big urban centers. Geographically, Ethiopia has a rugged topography with an elevated central plateau varying in height between 2,000 and 3,000 meters. In the north and centre of the country, there are some 25 mountains whose peaks rise over 4,000 meters (peak of Ras Dashen is at 4,620 meters). Dallol, world’s lowest place, being 48m below sea level, with live volcano (located at Erta Ale) and colorful hot brine springs is found in the North East part of the country. To the north, Lake Tana is the source of the famous Blue Nile River, which runs a distance of 850 miles and joins the White Nile at Khartoum, Sudan. The Nile River is the longest river in the world that stretches north for approximately 4,160 miles from East Africa to Mediterranean Sea. Similarly, Omo River rises in western part of the Ethiopian plateau and feeds into Lake Turkana on the Kenyan border.

Ethiopia has two seasons: dry and wet. The dry season prevails from October to May and the wet season from June to September. Due to huge variation in altitude, the country is not characterized by tropical climate across the national space. Under 1,830 meters, average temperature is 27°C. Between 1,830 and 2,440 meters, the temperature is about 22°C. Above 2,440 meters, the temperature is cooler (around 16°C) and precipitation is abundant (from 1,270 meters to 1,780 meters per year). Over 85 percent of the Ethiopian population is currently living in rural areas.

The vast and dispersed settlements in the rural areas have large populations with minimal access to services and limited economic resource base. Most urban areas are also fragmented with great spatial separations and disparities between towns and townships, resulting in inefficient and costly urban sprawl.

Since the last decade and half, Ethiopia is rigorously working to transform itself from the backward self-subsistence agriculture economy to commercialized agriculture thereby to enjoy agro industry and industrialization ultimately. Following the overthrow of the dictatorial military government, various policies targeting at promoting economic growth, market transformation social well being and equality under the auspices of market economy are put in place. Private investments have also been flourishing including in the financial sector. Structural adjustments such as liberalization of foreign trade, privatization of public enterprises and investment motivational schemes were undertaken to promote economic growth (Ahmed, Diaz-Bonilla, Robinson, & Lofgren, 2016). Hence, the economy is ever integrating into the global economic system.

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ASSESSMENT OF THE REINSURANCE BUSINESS IN DEVELOPING COUNTRIES

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