Pricing microinsurance products in Ethiopia

A current project in Milliman’s MicroAssist initiative is helping Ethiopian insurance organizations put in place actuarial standards for pricing microinsurance products. Milliman undertook this project in cooperation with the Microinsurance Innovation Facility of the International Labor Organization (ILO).

In the initial phase, we conducted an onsite training of executives and other high-level staff from local insurance companies, microfinance institutions (MFI), and the government regulatory agency, focusing on the actuarial aspects of microinsurance: rating, data sources, and overall actuarial best practices. In the second phase, Milliman consultants developed a pricing framework for a variety of standard products.

As in most third-world countries, issues of economic development pose challenges for the insurance industry. Some companies do not have adequate email or other communication systems in place. Some lack electronic data storage systems and still operate with paper files only. From 1974–1991, a communist regime stifled industrial growth; virtually all of the companies we are dealing with have been formed since then and are still developing their operations. Today’s government prohibits foreign ownership of insurance companies and their products, eliminating the possibility of partnering with American or European companies, with the exception of a few reinsurance arrangements.

On the other hand, the government is encouraging the expansion of microinsurance as a positive social goal. Although concerned about the possibility of excessive profits, regulators are determined not to overregulate in the near future, preferring to stay out of the way so as not to choke off the promise of microinsurance.

To date, the largest players in the industry are the MFIs. These institutions make very small loans to cottage industries and the rural poor, and many of them offer a credit life policy to cover a loan in the event of the borrower’s death. Other players include a state-owned insurance company, a number of private companies, and various cooperatives that are interested in selling microinsurance. Encouraged by relatively high profits the MFIs are earning, these other organizations are looking for ways to enter a market that has been only thinly penetrated, even by the MFIs. All are trying to determine what types of products they should be offering, how to distribute them, and how to price them.

This is where Milliman entered. Because there are no credentialed actuaries in Ethiopia, our role has been to apply our skills to help the Ethiopians develop sound, statistically based pricing structures not only for strengthening the existing credit life products but also for expanding into other microinsurance lines such as group life, disability, and accident insurance. Looking further ahead, Ethiopian organizations are also interested in adding property and casualty products, for example, crop and/or livestock insurance. Those lines, which imply higher risk, are probably for a future third phase of the project.