SURVEY OF INSURANCE COMPANIES IN ETHIOPIA

ABSTRACT
 Chapter 1

Introduction

1.1. Background of the Study

The role of financial institutions in the economy of a country in general and
insurance companies in particular it means their efficient and effective
financial system through saving mobilization ,risk transfer and
intermediation. therefore, financial institution channel funds and transfer risk
from one economic unit to another economic units so as to facilitate trade and
resource arrangement.

Hence the important aspect that financial institutions such as insurance

companies remain financing, insuring economic activity and contribute to
the stability of financial system in particular and the stability of the economy
of a country Ethiopia in general is part of immune and repair system of the
economy.

Therefore , this paper focuses on mainly the practices of insurance companies

of a country Ethiopia. As a result most of the insurance companies render
services in Non life Insurance , Travel Health Insurance and life Insurance.

In addition to these companies have been engaged in investment activities

like , Purchasing of shares of other corporation ,warehouse and recovery
yard, office Building ,real-estate development . we will asses the actual
insurance companies practices. Hence the efficient insurance practices has
become important and surveying by different researchers focus on which
1.2. Research Problem
Insurance is a very vital economic institution that allows the transfer of
financial risk from an individual to a pooled group of risks by means of a
two-party contract. The insured party obtains a specified amount of coverage
against an uncertain event for a smaller but certain payment . Thus, this study
focuses on Assessing & Evaluating actual Ethiopian Insurance companies
practices .

1.3. Research Objective

1.3.1. General Objectives
The objective of this research is to assess and evaluate the actual insurance
companies practices in Ethiopia.

1.3.2. Specific objectives

1. To study the actual Insurance practices, methods, types and
benefits.
2. To examine the insurance Practices development
3. To recommend to stakeholder based on the findings of this study.
4. To provide the necessary information and findings to the
concerned bodies so that they could take measures to preserve the
negative ongoing situation
 .
1.4. Significance of the Study
Most of the studies previously focused on banks not on insurance companies
as well as some focused on only analysis of financial performance not on
actual practices of insurance companies.
Therefore, this study is expected to provide up-to-date information on
practice of insurance companies in Ethiopia. Furthermore, many parties
would benefit from the results that will emerge from the study.
Administration interested in identifying indicators of success and failure to
take the necessary actions to improve the Practice of the company and choose
the right decisions. Investors interested in such studies in order to protect
their investment, and directing it to the best investment. In addition to that
this paper is supposed to be an input for academic purpose. Finally This study
can serve as a stepping stone for further research in the area.

1.5. Research Methodology

1.5.1. Secondary Data sources
Secondary data have been utilized to conduct the study. On the other hand,
theoretical type of analysis will also be used to analyze qualitative data and to
enrich and illustrate quantitative information specifically to assess the
practice insurance companies in Ethiopia.

This study will involve based on secondary sources. Different Insurance

companies Available documents and relevant information resources will be
the bases of secondary data. In additions, books available on the field
Insurance will be reviewed to increase the knowledge of the researcher on
the topic being studied.
secondary data will be used which are available in individual Insurance
companies Operation Department and yellow page website as well as from
the website of NBE .

1.5.2 Data process and Analysis

In this section the researcher will analyze the information collected from
secondary data
1.5.3 Population sampling
Survey of all insurance companies including their branches will take much
time and budget so we have used only 4 insurance companies out of 17
insurance companies in Ethiopia that are found headquarters in Addis ababa
these are Nib Insurance company , Nyala Insurance company , Nile
insurance company and Ethiopian Insurance company convenient sampling
technique of Secondary data will be employed in this research paper. It is
believed that the sample size will lead to a reliable and better conclusion.
1.6. Scope of the Study
Insurance companies may be examined from different perspectives like
profitability and performance. But this paper is limited only on the actual
practices of these companies. This Broadly encompasses how the insurance
companies are practicing the insurance activities. Financial and time
constraints will be some of the problems faced by the researcher. that limit
the study on only 4 insurance companies using secondary data.
1.7. Organization of the paper
The research paper will be organized in such a way that chapter one deals
about the overall structure of the research. It means it will discuss about the
introductory parts of the research, which includes the background, the
problem, objective of the study, the methodology and other important issues
that can fulfill as any research proposal. Chapter two will focus on the issues
of what other theoretical books, writings, and notes of scholar’s deals about
the subject matter-practices of insurance companies and reviewing other
relevant documents which literary mean related literatures. Then in chapter
three, the paper will present. In chapter three, the data will be discussed.
Finally, in chapter four summary, conclusion and recommendations will be
deduced based on the information obtained from secondary data.
1.8. Time Schedule
ACTIVITIES TIME REQUIRED

PROPOSAL 4
LITERATURE REVIEW 7
DATA ANALYSIS AND INTERPRETATION 4
CONCLUSION AND RECOMMENDATION 2
COMPILATION OF THE PAPER 1

1.9. Budget
1.9.1. Financial Budget
ACTIVITIES TIME REQUIRED

PHOTO COPY 100

STATIONARY 100
TRANSPORT 50
INTERNET COST AND MOBILE CARD 200
TOTAL COST 450 Br

Chapter 2
 1.10. Related Literature Review

A EVOLUTION OF INSURANCE COMPANIES IN ETHIOPIA

The history of insurance service is as far back as modern form of banking

service in Ethiopia which was introduced in 1905. At the time, an agreement
was reached between Emperor Menelik II and a representative of the British
owned National Bank of Egypt to open a new bank in Ethiopia.
Similarly, modern insurance service, which were introduced in Ethiopia by
foreigners, mark out their origin as far back as 1905 when the bank of
Abyssinia began to transact fire and marine insurance as an agent of a foreign
insurance company.
According to a survey made in 1954, there were nine insurance companies
that were providing insurance service in the country. With the exception of
Imperial Insurance Company that was established in 1951, all the remaining
of the insurance companies were either branches or agents of foreign
companies. In 1960, the number of insurance companies increased
considerably and reached 33.
At that time insurance business like any business undertaking was classified
as trade and was administered by the provisions of the commercial code.
According to Hailu Zeleke (2007), the first significant event that the
Ethiopian insurance market observation was the issuance of proclamation No.
281/1970 and this proclamation was issued to provide for the control &
regulation of insurance business in Ethiopia.
Consequently, it created an insurance council and an insurance controller's
office, its strange impact in the sector. The controller of insurance licensed 15
domestic insurance companies, 36 agents, 7 brokers, 3 actuaries & 11
assessors in accordance with the provisions of the proclamation immediately
in the year after the issuance of the law. Accordingly as stated by the office
mentioned above, the law required an insurer to be a domestic company
whose share capital (fully subscribed) not to be less than Ethiopian Birr
400,000 for a general insurance business, Birr 600,000 in the case of long-
term insurance business and Birr 1,000,000 to do both long-term & general
insurance business.
The proclamation defined 'domestic company' as a share company having its
head office in Ethiopia and in the case of a company transacting a general
insurance business at least 51% and in the case of a company transacting life
insurance business, at least 30% of the paid-up capital must be held by
Ethiopian nationals or national companies. After four years that is after the
enactment of the proclamation, the military government that came to power
in 1974 put an end to all private enterprises.
Then all insurance companies operating were nationalized and from January
1, 1975 onwards the government took over the ownership and control of
these companies & merged them into a single unit called Ethiopian Insurance
Corporation. In the years following nationalization, Ethiopian Insurance
Corporation became the sole operator.
After the change in the political environment in 1991, the proclamation for
the licensing and supervision of insurance business heralded the beginning of
a new era. Immediately after the enactment of the proclamation in
the1994,privateinsurancecompanies began to increase

DEFINITION OF INSURANCE
Insurance is a financial device for transferring shifting risk from an individual
or entity to a large group with the same risk.

This is accomplished through a contract, the insurance policy, with an

insurance company. Under this arrangement, the individual, along with other
insureds, pays
a sum to the insurance company. In turn, the insurance company agrees to
pay an
amount of money (reimbursement) to the individual, or on behalf of the
individual, if the events described in the policy occur.
Insurance is used to indemnify, or restore, a policyholder to a preloss
condition.
The individual accepts a known cost, the premium, in exchange for payment
of a
large, uncertain financial loss.

The insurance company combines, or pools, a large number of similar units

(homes, autos, businesses, etc.)and thus can predict losses within these units.

Although modern insurance transactions are somewhat different from those

used by , the result is the same.

The similarities are

• premiums are placed in a fund;
• payment from the fund is made for losses; and
• risks are shared equally.

The characteristics of an insurance transaction are

• pooling of resources;
• accumulation of funds;
• distribution of funds to those who have losses;
• transfer of risk from one person to the group; and
• spread of risk among all members of the group

Pooling of Resources
When people facing a common risk pool their resources, they create an
accumulation of funds from which individual losses can be paid. Such an
arrangement transfers risk
From the individual to the group because the group shares the cost of the risk
among all of its members.
All insurance, no matter what type or sold by which company, is a form of
this kind of
arrangement.

• COST AND BENEFITS OF INSURANCE

The products and services the insurance industry provides offer many
benefits to society. Today's insurance provides protection by reimbursing
people when their property is damaged or they suffer some other loss.

Insurance helps individuals and business owners resume their normal

standard of
Living and operations, which also benefits society as a whole. The primary
benefits of
Insurance include
• payment of losses;
• economic growth;
• credit support;
• loss prevention; and
• peace of mind. Insurance Fundamentals

Payment of Losses

If a business burns down and has no means to resume operation, it would

mean financial hardship for the owner. But the negative impact would extend
beyond the owner and affect
• employees (who now are unemployed);
• those from whom the business purchases raw materials, goods or services
(who now must find a new customer); and
• those to whom the business provides goods and services (who now must
find another business to fill their needs). The proceeds of an insurance policy
benefit everyone by restoring the insured person or organization to the same
financial condition as before the loss and preventing the loss from rippling
out and affecting
others negatively.

Economic Growth

The insurance industry plays an important role in the nation's economy. It is

second only to the commercial banking industry as a source of investment
funds because
Insurance companies invest the billions of the premium dollars they receive
annually
in a wide range of investments. Insurance companies use premiums collected
from
policyholders to
• pay for claims;
• pay for cost of doing business; and
• build cash reserves for future loss payments. Cash reserves are invested in
federal and municipal bonds that are used to build roads, schools and utilities.
Reserves are
Also invested in commercial developments and the stock market. These
investments promote economic growth in communities and support the
insurance company's requirement of maintaining sufficient capital reserves to
pay future losses and earn a
profit.

Loss Prevention

Insurance also benefits society by encouraging activities and devices that

reduce the
Amount of losses and their economic impact. Seat belts and other passive
restraints
In automobiles significantly reduce the extent of injuries suffered by vehicle
occupants involved in auto accidents. Insurance companies were a major
force behind requiring seat belts as standard equipment in all vehicles. You
may have noticed the "UL Approved" label on an appliance you own. UL
stands for Underwriters
Laboratories, an insurance industry think tank that develops safety standards
for items used in residences and businesses.
The Role of insurance in Society
Insurance agents and risk managers often work with individual and
commercial clients to implement loss prevention measures such as security
systems, better construction materials or employee disaster evacuation plans.

The life insurance industry also educates individuals and businesses on the
need
To develop financial plans in the event of a premature death of a breadwinner
or key executive. Helping clients to eliminate or reduce the amount of loss
and human suffering has long been a part of the insurance industry.
Credit Support

Banks and credit institutions rely on insurance to make sure they can
recovern loans if
disaster occurs. Insurance allows borrowers to guarantee creditors that their
investment is protected against disasters.
Insurance protects

• the value of property from unforeseen disasters; and

• a client's ability to pay back loans if illness or premature death occurs .

Cost to Society

Despite its benefits, insurance is not without costs. Insurance can

inadvertently create a situation where losses are more likely to occur.
For example, no one would burn down his or her house if he or she had to
bear the financial burden. Tempted by the opportunity offered by insurance
coverage, unscrupulous people commit arson simply to access policy
proceeds.This is an
insurance cost because the loss would not have occurred unless the narsonist
believed
he or she could collect on the policy.

In other words, without insurance, arson for profit would not exist. In a less
sinister but equally damaging way, some people aren't as careful to prevent
losses when they have insurance. insurance." They don't cause the loss
intentionally, but are indifferent as to whether it occurs. This indifference to
loss leads to damage and injury that could have been prevented, and it also is
considered a cost of insurance.While insurance provides significant benefits
our society depends on, it is not without its costs.

Insurance protects us all against unforeseen events that could cause financial
hardship.The protection insurance provides allows us to
• purchase cars;
• purchase homes and businesses;
and
• safeguard our families' financial futures. Overall, insurance is what helps us
have
Peace of mind in an uncertain world.
There are six basic principles that create a insurance contract
between the insured and the insurer:
1. Utmost Good Faith
2. Insurable Interest
3. Proximate Cause
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization
The principles of Insurance
The Principle of Utmost Good Faith
 Both parties involved in an insurance contract—the insured (policy
holder) and the insurer (the company)—should act in good faith
towards each other.

 The insurer and the insured must provide clear and concise information
regarding the terms and conditions of the contract
This is a very basic and primary principle of insurance contracts because the
nature of the service is for the insurance company to provide a certain level
of security and solidarity to the insured person’s life. However, the insurance
company must also watch out for anyone looking for a way to scam them into
free money. So each party is expected to act in good faith towards each other.
If the insurance company provides you with falsified or misrepresented
information, then they are liable in situations where this misrepresentations of
falsification has caused you loss. If you have misrepresented information
regarding subject matter or your own personal history, then the insurance
company’s liability becomes void (revoked).

The Principle of Insurable Interest

Insurable interest just means that the subject matter of the contract must
provide some financial gain by existing for the insured (or policyholder) and
would lead to a financial loss if damaged, destroyed, stolen, or lost.
 The insured must have an insurable interest in the subject matter of the
insurance contract.
 The owner of the subject is said to have an insurable interest until s/he
is no longer the owner.
In auto insurance, this will most times be a no brainer, but it does lead to
issues when the person driving a vehicle doesn’t own it. For instance, if you
are hit by a person who isn’t on the insurance policy of the vehicle, do you
file a claim with the owner’s insurance company or the driver’s insurance
company? This is a simple but crucial element for an insurance contract to
exist.

The Principle of Indemnity

 Indemnity is a guarantee to restore the insured to the position he or she
was in before the uncertain incident that caused a loss for the insured.
The insurer (provider) compensates the insured (policyholder).
 The insurance company promises to compensate the policyholder for
the amount of the loss up to the amount agreed upon in the contract.
Essentially, this is the part of the contract that matters the most for the
insurance policyholder because this is the part of the contract that says she or
he has the right to be compensated or, in other words, indemnified for his or
her loss.
The amount of compensation is in direct proportion with the incurred loss.
The insurance company will pay up to the amount of the incurred loss or the
insured amount agreed on in the contract, whichever is less. For instance, if
your car is inured for $10,000 but damages are only $3,000. You get $3,000
not the full amount.
Compensation is not paid when the incident that caused the loss doesn’t
happen during the time allotted in the contract or from the specific agreed
upon causes of loss (as you will see in The Principle of Proximate Cause).
Insurance contracts are created solely as a means to provide protection from
unexpected events, not as a means to make a profit from a loss. Therefore, the
insured is protected from losses by the principle of indemnity, but through
stipulations that keep him or her from being able to scam and make a profit.
The Principle of Contribution
 Contribution establishes a corollary among all the insurance contracts
involved in an incident or with the same subject.
 Contribution allows for the insured to claim indemnity to the extent of
actual loss from all the insurance contracts involved in his or her claim.
For instance, imagine that you have taken out two insurance contracts on
your used Lamborghini so that you are covered fully in any situation. Let’s
say you have a policy with Allstate that covers $30,000 in property damage
and a policy with State Farm that cover $50,000 in property damage. If you
end up in a wreck that causes $50,000 worth of damage to your vehicle. Then
about $19,000 will be covered by Allstate and $31,000 by State Farm.
This is the principle of contribution. Each policy you have on the same
subject matter pays their proportion of the loss incurred by the policyholder.
It’s an extension of the principle of indemnity that allows proportional
responsibility for all insurance coverage on the same subject matter.
The Principle of Subrogation
This principle can be a little confusing, but the example should help make it
clear. Subrogation is substituting one creditor (the insurance company) for
another (another insurance company representing the person responsible for
the loss).
 After the insured (policyholder) has been compensated for the incurred
loss on a piece of property that was insured, the rights of ownership of
this property go to the insurer.
So lets say you are in a car wreck caused by a third party and your file a
claim with your insurance company to pay for the damages on your car and
your medical expenses. Your insurance company will assume ownership of
your car and medical expenses in order to step in and file a claim or lawsuit
with the person who is actually responsible for the accident (i.e. the person
who should have paid for your losses).
The insurance company can only benefit from subrogation by winning back
the money it paid to it’s policyholder and the costs of acquiring this money.
Anything paid extra from the third party, is given to the policyholder. So lets
say your insurance company filed a lawsuit with the negligent third party
after the insurance company had already compensated you for the full amount
of your damages. If their lawsuit ends up winning more money from the
negligent third party than they paid you, they’ll use that to cover court costs
and the remaining balance will go to you.

The Principle of Proximate Cause

 The loss of insured property can be caused by more than one incident
even in succession to each other.
 Property may be insured against some but not all causes of loss.
 When a property is not insured against all causes, the nearest cause is to
be found out.
 If the proximate cause is one in which the property is insured against,
then the insurer must pay compensation. If it is not a cause the property
is insured against, then the insurer doesn’t have to pay.
When buying your insurance policies, you will most likely go through a
process where you select which instances you and your property will be
covered for and which ones they will not. This is where you are selecting
which proximate causes are covered. If you end up in an incident, then the
proximate cause will have to be investigated so that the insurance company
validates that you are covered for the incident.
This can lead to disputes when you have suffered an incident you thought
was covered but your insurance provider says it’s not. Insurance companies
want to make sure they are protecting themselves but sometimes they can use
this to get out of being liable for a situation. This might be a dispute where
you’ll need a lawyer to help argue for you.
The Principle of Loss Minimization
This is our final principle that creates an insurance contract and the most
simple one probably.
  In an uncertain event, it is the insured’s responsibility to take all
precautions to minimize the loss on the insured property.
Insurance contracts shouldn’t be about getting free stuff every time
something bad happens. Therefore, a little responsibility is bestowed upon
the insured to take all measures possible to minimize the loss on the property.
This principle can be debatable, so call a lawyer if you think you are being
unfairly judged under this principle.
The nature and significance of risk and method of handling risks has been
explained. As we have seen the possibility of loss creates uncertainty, which
has undesirable economic and psychological effect. When we speak of
methods of handling risks we are talking about efforts to reduce uncertainty.
While no approach to risk problems issued to exclusion of all others the
single most important an widely used alternatively for most families &
business is insurance.
Nature of Insurance
1) Insurance in terms of the relationship between the insured & the
insurer transfer device:
According to this school, Insurance may be defined as the transfer of pure
risk from the insured to the insurer.
The insured is the person or firm or company confronted by risk and the
insurer is a person or firm or company, which specializes in the assumption
of risk. The primary business of the insurers risk assumption for a fee.
2) Technical:
This school of thought defines Insurance in terms of techniques or mechanics
it involves. According to ProfMehr & Cammack, Insurance is a device for
reducing risk by combining a sufficient number of exposure units to make
their individual losses collectively predictable. The predictable loss is then
shared proportionately by all units in the combination. Therefore, it implies
both that uncertainty is reduced & losses are shared. Further, it is said that a
device will be deemed Insurance if
(i) it implies the law of large numbers so that there requirement of future
funds to cover losses are
predictable with reasonable accuracy.
(ii) it provides some definite method for raising these funds by levies against
the units covered by the scheme.
In short, the essential features of Insurance are the manner in which losses are
predicted & shared

3) Combination:
According to the third school of thought, Prof. Willet defines Insurance as a
social device for making accumulations to meet uncertain losses of
capital,which is carried out through the transfer of risks of many individuals
to one person or to a group of persons.Wherever there is accumulation for
uncertain losses, or wherever there is transfer of risk, there is one element of
Insurance, only when these are joined with the combination of risk in a
group is the Insurance complete.

PURPOSE OF INSURANCE

Every human being has fear in his mind. The fear whether he will be able to
meet the basic needs of the life i.e. Food, Clothing and Housing (Roti, Kapda
and Makkan). He has fear not only for himself but also for his dependents.
The source of income to meet his basic needs may be through service or
business. If he is able to meet his basic needs then he acquires the assets
i.e.vehicles, property or jewellery etc. Then he gets additional fear of saving
the assets from destruction. (The assets may be destroyed through accident,
fire or earthquake etc. and the income may be cut off due to certainty i.e. old
age and death or uncertainty i.e. accident, illness or disability.) As you know,
the old age and death is certain for every humanbeing while the accident,
illness, disability and destruction of assets may be by random. The number of
accidents will take place but with whom is uncertain. Therefore, to overcome
this problem, the Insurance plays a very important role.The principal source
of income of an individual comes from the compensation for work performed
by him. If this source of income gets cut off then: - Family will make social
and economic adjustments like: Wife may take employment at the cost of
home making responsibilities Children may have to go for work at the cost of
education.Family members might have to accept charity from relatives,
friends etc. at the cost of their independence and self-respect. Family standard
of living might have to be reduced to a level below the essentials for health
and happiness.
The basic threats which all of us may encounter to varied extent and which
result in cut off of income or sudden increase in - uncalled for expenses
(beyond our means or higher than our earnings) i.e. dislocates the human life,
are: -
ILLNESS (malnutrition, environment, chronic) –
ACCIDENT – (uncertain)
Disability – Permanent or Temporary (uncertain)
OLD AGE – (certain)
DEATH – (certain)
LIFE INSURANCE
Is an arrangement through which a person can plan for the continuation of
income when uncertainties and certainties (i.e.) illness or Accident and death
or old age disrupt or destroy his ability to earn his livelihood. Therefore the
Insurance is
1.The business of insurance is related to protection of human life, human
created assets, human disability and business liabilities possessed by human
beings which have a definite value, and
2.Assets and human life generate benefit and income for the owner and
his/her family members, and
3.Loss of assets / human life for any reason stops thebenefits and income to
the owner and family members respectively, and
4.Results in falling of living standards in the family, quality of life and future
growth of the associated family members,and
5.Insurance is a mechanism that helps to reduce such adverse consequences
through pooling, spreading and sharing of risk. Thus life insurance business
is complimentary to the Government efforts in social management.

NEED OF INSURANCE
(a) To provide Security and Safety The Life Insurance provides security
against premature death and payment in old age to lead the comfortable life.
Similarly in general Insurance, the property can be insured against any
contingency i.e. fire, earthquake etc.

(b) To provide Peace of Mind The uncertainty due to fire, accident, death,
illness, disability in the human life, it is beyond the control of the human
beings. By way of Insurance, he may be compensated financially but not
emotionally. The financial compensation provides not only peace of mind but
also motivates to work more and more.

(c) To Eliminate Dependency On the death of the breadwinner, the

consequences need not be explained. Similar to the destruction of property
and goods the family would suffer a lot. It could lead to reduction in the
standard of living or begging from relatives, friends or neighbours. The
economic independence of the family is reduced. The Insurance is the only
way to assist and provider them adequate at the time of sufferings.
(d) To Encourage Savings Life Insurance provides protection and investment
while general Insurance provides only protection to the human life and
property respectively. Life Insurance provides systematic saving because
once the policy is taken then the premium is to be regularly paid otherwise
the amount will be forfeited.
(e) To fulfill the needs of a person a) Family needs b) Old age needs c) Re-
adjustment needs
d) Special needs: Education, Marriage, health e) The clean up needs: After
death, ritual ceremonies, payment of wealth tax and income taxes are certain
requirements, which decreases the amount of funds of the family members.
(f) To Reduce the Business Losses: in business the huge amount is invested
in the propertiesi.e. Building and Plant and Machinery. These properties may
be destroyed due to any negligence, if it is not insured no body would like to
invest a huge amount in the business and industry. The Insurance reduced the
uncertainty of business losses due to fire or accidentsetc.
(g) To Identify the Key man: Key man is a particular man whose capital,
expertise, energy and dutifulness make him the most valuable asset in the
business and whose absence well reduce the
income of the employer tremendously and upto that time when such
employee is not substituted. The death or disability of such valuable lives will
prove a more serious loss than that fire or any hazard. The potential loss to be
suffered and the compensation to the dependents of such employee require an
adequate provision, which is met by purchasing an adequate life policies.
(h) To Enhance the Limit: The business can obtain loan but pledging the
policy as collateral for the loan. The insured persons are getting more loan
due to certainty of payment at their death.
(i) Welfare of Employees:The welfare of the employees is the responsibility
of the employer. The employer is supposed to look after the welfare of the
employees. The provisions are being made for death, disability and old age.
Though these can be insured through individual life Insurance but an
individual may not be insurable due to illness and age. But the group policy
will cover his Insurance and the premium is very low in group Insurance. The
expenditure paid on account of premium will be allowable expenditure.

HOW INSURANCE WORKS

Uncertainty is as to who will die or get disabled during day to day high
risk prone fast life. Although, number is known, but name, age, time, place
and extent is not known. If it is known that 200 persons are prone to
accidental death in a year, it is not known which 200 individuals?
Due to this certainty, that 10,000 people will die in an accident, or get injured
and disabled or die natural death or die of disease; All 1 lakh people will fear
accident, possibility of injury or death and its consequences to varying degree
as per their age, behavior, nature of work, environment hazards and many
other factors.

Grown ups and breadwinners may fear more and dependents may fear less. If
in a city of 1 lakh houses & shops, there are about 1000 thefts every year,
though some particular 1000 people are affected by the theft, all others (may
be more than 90,000) will fear theft, and will like some solution to this
problem. Human life is a unique income generating asset. When other assets
depreciate with age, it appreciates. Creator of all these assets is a human
being, whose efforts have gone a long way in owning them.

Before Assurance or Insurance companies came, there were social

arrangements in India which almost played similar role but to an limited
extent as we have already given the examples in the beginning of this chapter
which explains how Many would contribute to mitigate losses of a few”.This
method of sharing losses of a few by many is the basis or core philosophy of
insurance.
Insurance companies started from individual effort i.e. an individual or group
of individuals pooled funds in a partnership or company and started offering
a definite payment (called claim) in every case of death or disablement of the
participating individuals, against a small amount received (called premium).

INSURANCE AS A SOCIAL SECURITY TOOL

 United Nations Declaration of Human Rights 1948 provides: -”Every
one has a right to adequate standard of living for health and well being
of himself and his family, including food, clothing, housing, medical
care, necessary social services and the right to security in the event of
unemployment, sickness, disability, widowhood, or other lack of
livelihood in circumstances beyond his control.”
 Under a socialistic system the responsibility of full security would be
placed upon the state to find resources for providing social security. In
the capitalistic left to the individuals. The society provides instruments
which can be used in securing this aim. Insurance is one of aim. In
capitalistic society too there is a tendency to provide some social
security by the state under some schemes where members are required
to contribute.
 In India, Article 41 of our Constitution requires the State (with in limits
of its economic capacity and development) to make effective provision
for securing the right to work, to education and to provide public
assistance in case of unemployment, old age, sickness and disablement.
 Part of the obligations under Article 41 are met by the State through the
mechanism of Life Insurance.

 Where breadwinner of family dies, family’s income stops to that extent,

affecting the economic condition. Life Insurance provides such
alternate arrangement as we have discussed above. Otherwise another
family would have been pushed into the lower strata of society. The
 lower strata creates a cost on society. Poor people cost the nation by
way of subsidies etc.

 Life insurance helps in restoration of the adverse economic condition

so caused.
 Some of the legislation passed by the Govt. of India to protect the
rights and to provide benefits to the common man as a part of its efforts
to provide social security to its dominions is discussed in brief below:

(a) Workman Compensation Act 1923

This perhaps was the earliest act to be enacted for the benefits of the workers.
Before this Act was passed workers who met with accidents while
performing their duty not only lost their limbs or lives but also were denied
any medical aid and more often than not were simply removed from the job
and lost their livelihood placing them and their families in great difficulty.

By passing this act the liability of employer was fixed and he is now required
by law to pay compensation to victims of accidents while on duty. The
amount of compensation has been fixed in accordance with the extent of
injury, disability and linked to the workers salary and age on the date
accident.
(b) Employee State Insurance Act 1948:

The purpose behind this legislation was to provide medical aid to workers
and their families working in industries located in certain notified areas.
Under this act a part of the salary a small amount (at present 1.75%) is
deducted from the workman’s salary and some part is contributed by the
Employer (at present 4.75%) and the same is deposited with the Employee
State Insurance corp.

With the funds thus collected and with more contributions from the state and
Central Govt., Dispensaries and Hospitals have been set up all over the
country where the worker members and their families are provided health
care free of cost. Under this scheme regular periodic payment are made to
workers if they are unable to attend duty due to illness and there is provision
for payment of pension in the case of permanent partial disability or death.

(c) Motor Vehicle Act 1988:

The Motor Vehicle Act was amended in 1988 to make Third Party Liability
Insurance compulsory thus no uninsured vehicle is allowed to ply the roads
or in any public place in India.

The need of this enactment was felt due to the growing number of vehicles
and the increasing number of accidents causing injury and death of the people
involved in the accident and not being able to get relief from the owner/
driver of the vehicle because of long protracted legal battle involved, which
many victims could not afford.

The Act now provides that irrespective of the fact that the fault was of the
driver/ owner or not (No- fault) the victim of an accident will be entitled to a
payment of Rs. 50,000/- in case of death and Rs. 25,000/- in the case of
grievous bodily injury.
Motor Accident Claim Tribunals (MACT) have been set up by the State
Government to provide speedy redressal of Third Party claims. Damage to
property of Third party is also covered and the limit is Damage to property of
Third party is also covered and the limit is Rs.6,000/-. Motor Vehicle Act
also provides for the creation of a “Solatium Fund” to cater to the victims of
Hit and Run cases. The fund is created by the contribution from Insurance
companies, state and central Government and the victims of Hit & Run cases
are entitled to receive Rs.25,000/- in case of death and Rs.12,500/- in the case
of grievous bodily injury.

(d) Public Liability Act 1991:

The Bhopal Gas tragedy of 1984, which resulted in many deaths and caused
untold suffering to lakhs of people prompted the enactment of this legislation.
To recap the incident, poisonous gas escaped from the manufacturing plant of
Union Carbide leading to one of the worst industrial disasters of recent times.
The victims even now; 17 years later are yet to get adequate relief and
continue to suffer.

The public liability act now makes it compulsory for all individual
companies, industries involved in handling of hazardous substances to insure
against any untoward happening so that immediate succor is made available
to the victims from the Insurance companies. Other than passing legislations
to improve social security the Government also initiated certain schemes
under which Insurance is provided to the economically and socially backward
people and workers of the unorganized sector at highly subsidized rates.Some
of the schemes introduced by the Govt. of India are -

(e) (PASSS) Personal Accident Social Security Scheme:

Introduced in 1985 for the benefit of Poor families i.e. (whose income does
not exceed Rs. 7,200 per year). The scheme provided for a payment of
Rs.3,000/- in the event of death due to an accident of any person in the age

group of 18 to 60 who is the earning member of the poor family. The

premium is borne by the Central Government and the expenses for
implementation of the scheme by the state Government.
(f) (NAIS) National Agricultural Insurance Scheme

RKBY (Rashtriya Krishi Bima Yojna )introduced in 1999 with the objective
of providing Insurance coverage and financial support to farmers in the event
of failure of crops as a result of calamities, pests and diseases. The premium
is low and 50% subsidy in premium is allowed to small & marginal farmers
which are shared by the Central and State Government.
(g) Hut Insurance Scheme:

Introduced in 1988, for the benefit of very poor families (i.e. those whose
annual income does not exceed Rs.4,800/-p.a.). The scheme provides that in
case of destruction of Hut due to fire, compensation of Rs.1,000/ - for hut &
Rs.500/- for belongings shall be paid. The premium is borne by the Central
Government.
In addition, to the above schemes the Government has also introduced
insurances at subsidized rates for farmers (cattle Insurance), for women (Raj
Rajeshwari Mahila Kalyan Yojna), for the girl child (Bhagyashree child
welfare policy) and Gramin Personal Accident policy etc. for the benefits of
the common people. These shall be discussed later on in the course (under
GIC Products) but all this goes to show how through legislations or through
Govt.

Chapter 3

1.11. Results and Discussions

All of the insurance companies in the country are participating in
different investment and service activities. The paper presents all the
activities of the selected insurance companies in the following manner.
Services offered by insurance companies
1. Non life Insurance
1.1. Property Insurance categorized :-
1.1.1 Motor Insurance:- Categories of motor insurance:-

 Motor comprehensive :- insurance policy covers accidental

collision ,Fire external explosion ,overturn and other external damage
 Third party only policy :- insurance covers for accident happens against
third party for property amounting to birr up to 100,000 ETB and for
pedestrian up to 40,000 ETB
 Motor B.S.G :- this cover is extended under motor comprehensive
insurance policy on payment of additional premium . covers ; fire
explosion ,riots, strikes , civil commotions all arising out of the actions
of bandits and guerillas
 Yellow Card Cover ;- provides minimum third party cover to comply
with the law of country visited by insured vehicles in COMESA
 member countries like Djibouti and Sudan Pedestrian Injury or death
or damage to property caused by insured vechile
1. Fire Insurance Policy :- insured property accident raised by fire
2. Burglary and house Breaking insurance policy :- Insurance coverage
related with theft
3. Plate Glass Insurance :-insurance coverage for glass caused any damage
4. Marine Cargo Insurance :- insurance covers loss and damage to the
subject matter insured on “ all risk “ basis from part of loading to final
warehouse /destination .
5. Goods in Transit :- Inland transit insurance covers the insured interest
against theft ,fire ,damage , directly caused by overturning or collesion.
6. All Risk Insurance :- covers the insured for all damages

1.2. Engineering Insurance

1. Contractors’ All risk :- it offers comprehensive and adequate protection
against loss or damage in respect to the contract works , construction plant
and Equipment as well as third part claim in respect of property damage or
bodily injury arising in connection with the execution of building or civil
project
2. Erection All risk Insurance :- EAR insurance provide a very wide cover
almost any sudden and unforeseen loss or damage occurring to property
insurance on the erection site during the period of insurance will be
indemnified.
3. contractor’s Plant and Machinery(CPM ) insurance :- an insurance of
contractors plant and machinery on annual base
4. Machinery Break down Insurance :- it covers unforeseen and sudden
physical loss of or damage to the insured item necessitating their repair or
replacement.
5. Electronic Insurance :- it covers all electrical and electronic system
damages
6. Boiler and Pressures vessel Insurance policy :- it provides cover against
losses or damage ( other than by fire ) to any boiler or pressure vessel and to
other property of the insured .

1.3. Liability Insurance

1. Public liability insurance :- provide cover in respect of legal liability to
third part for bodily injuries and loss of or damage to property.
2. Professional Indemnity :- insurance professional persons or firms for their
legal liabilities to third part arising from their professional error and
omission negligence of their employees
3. product liability insurance :- provides cover in respect of legal liability to
third part for bodily injured to a person or loss of or damage to property
caused by products or goods supplied by the insured .
4. Carrier Legal Liability :- it cover indemnifies the insured against loss of or
damage to the insured property while being loaded transported and
unloaded by the with in the territorial limit stated in the schedule during the
period of insurance as a result of an accident .
5. workmen compensation Policy :- if any employee in the insured’s
immediate services shall sustain death or bodily injury by accident or
occupational disease occurring at the place assigned to him for work and if
the insured shall be liable to pay compensation for such death , bodily injury
or occupational disease under the Ethiopian law.
6. Business interruption Insurance :- Business interruption insurance is
sometimes known as consequential loss or loss of profit. Therefore ,business
interruption insurance exists to meet demand for protection in the event of
some incident happening which disrupts the operation of the business
causing a loss of income and continued expenditure of some unavoidable
costs while the business was not operational .

1.4. Pecuniary Insurance :-

1. Bonds
In addition to the above companies various types of bonds . like Bid Bond
Performance Bond , Advance Payment Bond , Supply Bond , Retention
Bond ,Maintenance Bond .
2. Fidelity Guarantees Insurance Policy :- it covers loss of property as a of
fraudulent act by the employee (S) insured . In the other words , Fidelity
insurance provides compensation to an insure for loss suffered due to fraud
or dishonesty of the employees whose honesty is guaranteed by term of the
policy . thus, the employer can protect himself from the risk of infidelity of
the staffs especially those whose main duty the holding of money or
securities
3. Money Insurance :- Money insurance is one form of pecuniary insurance
which compensates the insured of loss of money as defined here under ,
sustained as result of fortuitous circumstances through the acts of burglary
and /or thieves while in transit or in a locked safe.
For purpose of money Insurance the term Money is defined as cash, bank
notes, currency notes, current postage ,revenue stamp and credit cards .
2. Travel Health Insurance
 Travel Health insurance :- provided to customers who travel to Europe
and schengen states . the insurance covers the customer’s medical expenses
of emergencies only . the company provides the cover in collaboration with
foreign insurance companies
Expenses and circumstances covered by the insurance

 if travelers during their stay in Schengen states or any where in

Europe face accident or acute illness their medical expense up to
30,000 euro will be covered .
Some of the costs to be covered are :
 surgery as a result of accident or acute illness
 Admission to a hospital as a result of accident or acute illness
 Transportation expenses in case the customer passes away
 Covers minor dental sickness up to an amount of 300 euro
 Medical expense up to 50 euro will be covered by the insured
 Customers aged 75 and above are entitled to receive insurance
coverage only for accidents .
3. Life Insurance
 Conclusion
Based on the assessment the following conclusions have been made:
On the third part insurance policy of Vehicle accident has compensation far
below the extent of damage.
There is no awareness among the relevant insurance service users regarding
the provision of the specific insurance types from the insurance companies.
The insurance companies are not involved in the Risk management of the
insured entities’ possible risk involvements.
There is no well outlined sector based insurance provision practice
Recommendation

The insurance companies should increase the third party premium fee in
order to give great attention on the lives of third party who have faced
car accident it has to take in to consideration that human beings are the
most important resources of the country.
The should create awareness about the importance of insurance and the
different services that they provide to the society in an appropriate
manner.
The insurance companies should work with the insured entities in an
integrated manner through assigning personnel to the insured entity in
order to prevent possible risks of pre and post accidents .