Tuesday, August 3, 2021

The Requirements to Carry on Insurance Business

Source: Insurance, Banking & Negotiable Instruments Law Teaching Material

Art 656 of the Commercial Code provides that the law shall determine the conditions under which physical persons or business organizations may carry on insurance business. Therefore, we have to refer to other parts of the commercial code and other laws to find out as to who may undertake insurance business and the conditions under which it may be undertaken. 


Accordingly, Art 513 of the code provides that banks and insurance companies cannot be established as private limited companies, i.e., a private limited company cannot engage in banking, insurance or any other business of similar nature. Similarly, Art 6(1) of the Licensing and Supervision of Insurance Business Pro No 86/1994 provides that no person may engage in insurance business of any type unless it applies to and acquires a license from the National Bank of Ethiopia for the particular class or classes of insurance. Furthermore, Art 4(1) and Art 2(3) of the same proclamation provide that such person has to be a share company as defined under Art 304 of the commercial code. 


According to this article, a share company is a company whose capital is fixed in advance and divided into shares and whose liabilities are met only by the assets of the company. The capital of the company to be established as an insurance company must be wholly owned by Ethiopian nationals and/or business organizations wholly owned by Ethiopian nationals, and it must be  established and registered under Ethiopian law and must have its head office in Ethiopia. 


These requirements / conditions in effect prevent foreigners from engaging in insurance business and foreign banks from opening branches and operating in Ethiopia. The most probable reason for this position is the need to protect infant domestic insurance companies which do not have the desired financial strength, knowhow and human resources to be able to compete with foreign banks which have superior capacity in these areas. 


The other condition that a person must fulfill to obtain a license relates to the minimum capital of the company, i.e., it must have a minimum capital   of 3 million Birr if it is applying for license to undertake general insurance business i.e., insurances other than insurance of persons, and 4 million Birr if it is applying for a license to undertake long term insurance business, i.e., insurance of persons and 7 million where the application is to undertake both classes of insurance. Such capital has to be paid up in cash and deposited in a bank in the name of the company to be established as an insurance company.  

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