1.

Introduction
The insurance sector is a key segment of the financial sector in both developed and developing
nations. It plays a crucial role in the economic growth of a country by promoting long-
term savings, transfer of funds, risk management, and development of capital market support
(Jadi, 2015; Shan, 2018). To be more precise, it is a well-established fact that the
insurance sector forms an integral part of the financial sector in an economy and is vital to the
well-being of other sectors, households, and a nation’s overall economy through the
transfer and pool of risks.

1. INSURANCE

1.1. Definition

Insurance is a risk transfer mechanism. Such risk transfer mechanism is established by an

insurance policy, which is a contract whereby a person called the insurer, undertakes against
payment of one or more premium to pay to person, called the beneficiary a sum of money where
a specified risk materializes.

1.2. Basic Principles of Contract of Insurance

 Insurable Interest

 Utmost good faith

 Proximate cause

 Indemnity

 Subrogation and Contribution.

1.3.Classification of Insurance Business

There are two main classes of insurance business:

 Long term insurance business which shall mean insurance business of all or any of the
following classes namely,

• Life

• Annuity

• Pension
• Permanent health

• Personal accident and /or sickness insurance as incidental to any of the aforementioned types
of long term insurance.

 In long term insurance business, the insured policy shall extend to the risk arising out of
death or life, or risks arising out of injury to the person or illness.
 General Insurance business shall mean all kinds of insurance business other than long
term insurance business. In general, insurance, the insurance policy extends to the risks
affecting property or arising out of the insured person’s civil liability.

Insurance is one of the ways you can mitigate and hedge against the risk of
unforeseen losses. While risks lead to rewards, the downside is a possible loss.
Losses can happen due to multiple reasons both on professional and personal
fronts.

 When you start a new venture by investing your savings, you have a chance to
either make a profit or a loss by selling those goods. However, if you happen to
lose the goods in a mishap you lose the chance to sell them at all. While a
business risk is expected and can lead to higher profits, unexpected loss of
goods can only lead to financial loss. Therefore, risks like serious damage to
movable and immovable property, hospitalization and theft and similar
calamities must be insured against.
 Why is Insurance Important?
 Insurance works like a cushion which helps you or your family bounce back
financially after an unfortunate event. Whether it's business or family both can
benefit immensely from insurance.
 1. Distributes Large Risks
 Insurance is a financial instrument. The risk of significant loss due to an event is
borne by a large group of people exposed to the same possibility in a business.
Thus, the losses are distributed over a large group making it bearable for each
individual.
 2. Provides Financial Stability
 Without insurance, it will be extremely costly for businesses to bounce back
after a major loss of inventory. Natural hazards, accidents, theft or burglary can
affect the financial status of a business or a family. With Insurance
compensating a large part of the losses businesses and families can bounce
back rather easily.
 3. Helps Economic Growth
 Insurance companies pool a large amount of money. Part of this money can be
invested to support investment activities by the government. Due to the safety
concerns insurers only invest in Gilts or government securities. On the other
hand, governments can raise funds easily from insurers for large public
projects, which aid in economic growth.
 4. Generates Long-Term Wealth
 Insurance is often a long-term contract, especially life insurance. Life insurance
plans can continue for more than three decades. Within this time they will
collect a large amount of wealth, which returns to the investor if they survive. If
not, the wealth goes to their family.
 Need for Insurance
 Insurance is an essential financial tool that helps in managing the unforeseen
expenses smoothly without much hassle. However, this is not the only reason a
person needs an insurance. Listed below are a few more reasons you need to
buy an insurance:
 1. Tax Benefits
 Any payments received from life insurance plans are completely tax-free if your
investments have met a few simple conditions. Most life insurance premium
payments and investments are tax-deductible. Thus, insurance reduces your tax
liability in the present and future
 . Achieve Retirement Goals
  Insurance plans like guaranteed savings plans and ULIPs are some of the best
retirement saving options available. You can also use deferred annuity plans to
safeguard your post-retirement income when you are close to retirement.
 3. Stress-Free Life
 With the right insurance plan, you can remain stress-free from unforeseen risks
causing major financial damage. Insurance will help you and your families
bounce back to your normal financial life quickly after a mishap. Insurance also
keeps your long-term investments safe from sudden financial shocks caused by
emergencies.

• Parties to insurance contract are-

• Insurer is a person who professionally and for gain carries on an insurance business, i.e.
insurance company to whom the insurable risk is transferred.

• Insured is a person who transfers insurable risk to insurer by paying premium

2. LAW OF CONTRACT

2.1. Definition of Contract

A contract is agreements whereby two or more persons as between themselves create vary or
extinguish obligations of proprietary nature. A contract is a legally binding agreement that is one,
which the courts will recognize and enforce.

2.2. Formation of Contracts

2.2.1. Elements of Contact

There must be an agreement shown by offer and acceptance sustainable at law;

There must be intention to create legal relation;

There must be consideration (in some cases);

The agreement be in the form required by law;

The parties must have capacity to contract.

2.3. Object of Contract

The object of the contract shall be freely determined by parties subject to such restrictions and
prohibitions by law. Object must be;

defined;

possible;

lawful;

morally acceptable

2.4. Form of Contracts

• No special form shall be required and a contract shall be valid where the parties agree.

• Where a special form is expressly prescribed by law such form shall be observed.

• According to Ethiopian Law the following contracts shall be in writing.

a) Contract of guarantee

b) Insurance contract
c) Any other contract in respect or which such form is prescribed by law.

3. THE INSURANCE CONTRACT

3.1. Introduction

An insurance policy is a contract whereby a person, called the insurer undertakes against
payment of one or more premiums to pay to a person, called the beneficiary a sum of money
where by a specified risk materializes.

Where damages are insured the insurance policy shall extend to the risks affecting property or
arising out of the insured person’s civil liability.

Where persons are insured the insurance policy shall extend to risks arising out of death or life
or to risks arising out of injury to the person or illness.

3.2. Formation of Insurance Contract

3.2.1. Parties to Insurance Contract

A. Insurer – Insurance Company

i. An insurance company must be a share company whose capital is fixed in advance and
divided into shares. The liabilities of a share company are met only by the assets of the company.
The shareholders shall be liable only to the extent of their shareholding. A share company may
not be established by less than five members. The capital of a share company that carries on
insurance business must be wholly owned by Ethiopian National and /or organizations wholly
owned by Ethiopian Nationals and registered under the laws of and having its head office in
Ethiopia.

Application to obtain a license to carry on insurance business from the National Bank must be
accompanied by Memorandum and Article of Association, insurance policy forms, feasibility
study, curriculum vita of members of Board of Directors and Chief Executive Officer, bank
certificate of deposit in blocked account, projected financial statement, organizational chart of
the proposed insurer and others.

ii. Memorandum of Association

 The memorandum of association of a share company is the document which defines the
constitution of the company, the scope of its intended objects and its general external
relationship. In accordance with Article 313 of the Commercial Code of Ethiopia, the
memorandum of association must contain the following:-

the names, nationality and address of the members, with number of shareholding;

• the name of the company;

• The head office and branches if any;

• The business purpose of the company;

• The amount of capital subscribed and paid up;

• The par value, number, form and class of shares;

• The value of contribution in kind;

• The manner of distributing profits;

• Any share in the profits allocated to founders and reasons for such share;

• The number of directors and their powers;

• The auditors;

• The period of time for which the company is to be established;

• manner of publishing reports

iii. Articles of Association

The articles are the rules of the company relating to its internal management .The articles are
subject to the memorandum and deemed to form part of it. The articles usually deal with:-

i. share transfer;
ii. calls of meetings;
iii. increase and reduction of capital; meetings;
iv. meetings;
v. directors;
vi. dividends;
vii. audit;
viii. notices;
ix. winding up;
x. Register

Iv. Conditions to carry on Insurance Business

1. The following conditions should be met to carry on insurance business in Ethiopia.

a) The insurer must be a share company;

b) Its paid up capital shall be determined by the National Bank of Ethiopia;

c) It should obtain a license from the National Bank;

d) Its appointed Directors and Senior Executive Officers meet the standard set by the
National Bank;

e) Except Federal Government of Ethiopia shareholding of a person with spouse and/or

with any person who is below the age of 21 related to him by consanguinity in the first-
degree relationship should not exceed 5% of the company’s share;

f) Issue of bearer share and debentures by insurers is prohibited.