Ethiopia’s financial landscape is set to undergo significant changes as the National Bank of Ethiopia (NBE) proposes a new directive aimed at strengthening the capital adequacy framework for the country’s insurance industry. The draft directive, which could affects both local and reinsurance companies, is designed to bolster the financial resilience of these institutions amid growing market uncertainties.

The draft directive has introduced stricter capital requirements for all insurance companies and a new framework for assessing capital adequacy ratios (CAR). The policy prescribes varying minimum paid-up capital requirements based on the type of business. Non-life insurance companies must maintain a minimum of Birr 400 million, while reinsurance companies are required to meet a threshold of Birr 500 million. Life insurance companies, on the other hand, must meet a minimum capital requirement of Birr 100 million.

The directive further stipulates that insurance companies must maintain a solvency capital requirement (SCR) representing a CAR of 150% and a minimum capital requirement (MCR) of 100%. This means that companies will need to ensure their capital resources consistently exceed the set thresholds to protect policyholders and safeguard their financial health.

This new draft directive, Insurance Risk-Based Capital Directive No. SIB/–/2025, underscores the National Bank’s commitment to enhancing the transparency and stability of the Ethiopian insurance sector. It establishes clear guidelines for the licensing and supervision of insurance businesses, reinforcing the importance of financial soundness and proper risk management. The directive emphasizes that it is essential for the NBE to receive relevant, reliable, and timely financial and non-financial information from insurance companies to assess their financial stability, managerial effectiveness, and overall performance on an ongoing basis.

The NBE further stresses that ensuring appropriate capital levels is critical not only for the financial health of insurance companies but also for the protection of policyholders. As stipulated by the directive, it is the ultimate responsibility of the Board and Senior Management of each insurance company to ensure that their institutions maintain a capital adequacy level that is commensurate with their risk profiles. The policy holds companies accountable for their own financial strength and stability, requiring proactive measures to meet these heightened capital standards.

In a move designed to enhance the sector’s ability to withstand market fluctuations and insurance risks, the directive introduces a two-tier system for capital. The Tier 1 capital represents the highest quality, most loss-absorbent, and permanent form of capital, while Tier 2 capital includes components like fair value reserves and insurance finance reserves. The NBE has laid out clear limits on how much Tier 2 capital can be used to meet both the Minimum Capital and Solvency Capital Requirements.

The focus on robust capital allocation is part of a wider effort to cushion insurance companies against a range of risks, including insurance, market, credit, and operational risks. To do so, the policy requires companies to maintain separate capital reserves for various risks, such as fluctuations in premium reserves, claims reserves, and catastrophic risks. The risk-based capital requirement will reflect the nature of these risks, with insurance companies needing to hold capital proportional to the exposure in each area.

The new directive also places a stronger emphasis on managing operational, credit, and market risks. For instance, insurance companies will now need to meet specific capital charges for equity, property, and foreign currency risks. This new approach aims to mitigate potential losses resulting from market volatility and counterparty defaults.

Additionally, the policy introduces an operational risk capital requirement, reflecting the growing importance of safeguarding against internal disruptions, such as system failures and management errors.

The NBE has signaled a zero-tolerance stance for non-compliance. Insurance companies that fail to meet the new capital requirements could face a range of regulatory actions, from mandatory recovery plans to a complete revocation of their operating license. The NBE will regularly assess the financial health of insurance companies, requiring them to submit their Capital Adequacy Ratios within set deadlines to ensure ongoing compliance.

The NBE’s directive is a bold and necessary step toward reinforcing the integrity of Ethiopia’s financial sector. By establishing clear capital adequacy requirements, the policy aims to protect both insurers and their clients from financial volatility, helping the sector stay resilient in the face of both domestic and global challenges. The initiative comes at a critical time as the country continues to focus on strengthening its economic framework and ensuring the sustainable growth of its financial institutions.