This report sketches an insurance innovation portrait for Ethiopia. It forms part of an eight-country study to determine what regulators can do to unlock innovation at scale and meet key insurance needs in sub-Saharan Africa.

Sector expansion and development defined by 1990s liberalisation. The insurance sector in Ethiopia has been shaped by the financial sector liberalisation and market reforms that took place in the early 1990s. These reforms dismantled the state-driven monopoly, opened the market for privately owned insurance companies to enter, and encouraged assistance from international development donors to support the growth of the insurance sector. As of 2021, the insurance market comprises 18 insurance providers, including a reinsurance company, and caters for an estimated 1.2 million insurance policyholders (Stakeholder consultations, 2022)[1].

Insurance sector remaining underdeveloped with limited retail reach. While market liberalisation prompted enhanced competition, this has yet to translate into broader and deeper access to insurance. Ethiopia continues to have one of the smallest insurance markets in SSA in terms of penetration rates, with premiums largely concentrated in general insurance and primarily driven by compulsory lines such as third-party motor vehicle insurance. While life business in Ethiopia holds about 5% of the market share, this figure is relatively miniscule compared to non-life business, thus signalling an underdeveloped voluntary retail market. With historically underserved segments such as farmers and MSMEs still without insurance, a clear need continues to exist for significant and accelerated market development to take place in Ethiopia.

Limited innovation observed beyond donor-led pilots. The low uptake of formal insurance, yet popular use of informal risk-pooling mechanisms such as edirs, suggests latent consumer demand that could be tapped through value-driven market innovation. However, while a few product innovations have been developed, these have not been successful at better serving the excluded. For example: international donors have entered into partnerships with incumbent insurers to pilot agriculture index-based insurance to cover farmer risks, but capacity constraints have undermined long-term sustainability. Furthermore, while insurance players are working to digitalise their service offerings and to partner with alternative distribution partners like MNOs, limited success has been observed to date due to the high level of risk aversion and weak capacity of Ethiopian insurers.

An increasingly enabling environment but with constraints remaining. The big innovation gaps left in the market suggest room for incumbents, new entrants and insurtechs to better serve Ethiopian individuals and businesses to increase insurance uptake. Yet, an assessment of the innovation-enabling ecosystem shows that, while some factors bode well for innovation, key elements continue to constrain market development:

• Expanding and increasingly competitive payment and ICT sectors, respectively, provide scope for more efficient and alternative distribution channels, such as via mobile money; but poor electricity access and reliability exacerbate weak digital connectedness, thereby hampering the scope for viable insurance distribution through digital channels.

Severe skills shortages prevail in terms of both insurance-specific skills (e.g. actuarial skills) and basic STEM qualifications, despite numerous state initiatives. While the local start-up ecosystem is expanding, a focus on insurtech development remains to be seen.

• Insurtechs struggle to outcompete paytechs for seed capital, while incumbent players lack financial resources to invest in product development due to conservative boards, weak access to capital and the unavailability of requisite skills.
• There is a strong demand for informal risk mitigation tools, but low trust, limited awareness and low incomes limit uptake of formal insurance.

• Alternative distribution channels, such as MNOs, are yet to be explored, while others remain inaccessible due to regulatory barriers such as constraints on bancassurance.
• The regulatory framework does not yet provide clear guidance regarding digitalised insurance, microinsurance and leveraging alternative distribution channels. More broadly, the remaining restrictions on foreign participation limit the scope for innovation.

• While the Insurance Supervisory Directorate (ISD) supports market development, its lack of independence from the National Bank of Ethiopia hinders its ability to prioritise innovation, adjust supervisory frameworks for greater flexibility and engage more proactively with market players.

[1]        This figure does not include community health insurance policyholders.