The Role of insurance

Companies in the Ethiopian Construction Industry 2013 E.C.

1. INTRODUCTION

1.1 BACKGROUND

The construction industry is a vital sector of economy in any countries of the world. But it is
considered to a highest degree in developing countries around the world. In Ethiopia the
construction industry is one of the tools for the development of the country and it is a blooming
industry. The industry has grown substantially in the last ten to fifteen years. The construction
industry is a risky business due to the unique characteristics of construction projects which can
attributed to the fact that construction projects involve many stakeholders, is subjected to
external environment impacts like weather conditions, it involves a large amount of capital,
different site conditions for different projects, is time and quality sensitive, and also different
complex problems.

So, the major risk managing technique is by risk transfer mechanism and one which is of
immense value. Insurance companies can be used as a risk transfer mechanism by which the
construction stake holders can exchange their uncertainty for certainty. The uncertainty
experienced would include whether a loss will occur, when it will take place and how severe will
it be. This uncertainty makes it very difficult to budget and so the stake holders of the
construction industry seek ways of controlling the financial effect of the risk. Insurance offers
the opportunity to exchange this uncertain loss for a certain loss: the insurance premium. The
contractor agrees to pay a fixed premium and in return the insurance company agrees to meet any
losses which fall within the terms of the policy.

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The Role of insurance
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1.2 PROBLEM STATEMENT

The construction industry is a high-risk business by itself. So, what insurance companies do is
share some of that risk by charging some amount of money in form of premium payment.
However, in Ethiopia the role of insurance companies in the construction industry is not always
clear as why construction insurance exists and how it operates from the perspective of the
construction industry.

1.3 SIGNIFICANCE TO THE STUDY

It is highly believed that the outcome of this research will help to create awareness to each
concerned body over what gaps currently do exist in the industry in relation to insurance
practices and what needs to be done to improve the use of insurance as a risk sharing tool in the
industry. Hence relevant authorities can take action using this research as a guide and also all
parties can be provoked on their share to contribute for the improvement.

1.4 SCOPE OF THE STUDY

Only class 1 consultants and supervisor and grade 1 contractors of all categories (i.e. building,
road, water, specialized and general) will take for collecting data through questionnaire for this
research excluding the rest of the classes and grades since the population size is huge and the
calculation result of the sample size showed it would be a difficult size to manage Study of
Insurance Practices in Ethiopian Construction Industry 2013 E.C AAU through the time period
and budget for this study if all classes and grades may be consider. It is believed that the
responses obtained from those included in the sample size for this study will well represent the
entire population. There are rarely few researches done on risk management and Role of
insurance in Ethiopia construction industry, hence this research will review more in detail on the
subject. It will take a very long time to collect all the data necessary for the research since the

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.
firms are scattered all over the city of Addis and we expect that some of the companies will
willing to return the questionnaire on the set date. Besides the attempt to interview representative
figures I decide to go Ministry of Construction.

1.5. RESEARCH OBJECTIVE

1.5.1 GENERAL OBJECTIVE

Presently, Ethiopia has relatively an extensive program of infrastructure development and it is

growing faster. The construction of new roads, high rising buildings, hydroelectric power
generating plants, water work projects, Airfields etc. are among the major construction activities.
Construction insurance plays an increasingly important role in guaranteeing the success of
projects, with insurers sharing losses resulting from natural disasters and other contingencies.
However, insurance sometimes doesn’t receive the attention it deserves because practitioners do
not have a clear understanding of risk allocation and the strategy of risk management through
insurance. Therefore, the general objective of this research mainly alarms with creating
awareness about the role of insurance companies for those involved the construction sector.

1.5.2 SPECIFIC OBJECTIVES

The specific objectives are: -

 To create the awareness with in the construction industry towards being insured
 To reduce hazards that exists in the construction industry & acquire safe construction
environment
 To investigate the understanding of construction sectors towards insurance companies
 To examine the understanding of stakeholders involved in the construction industry
towards being insured.
 To minimize the risk that will affect the construction sector
 Study the practice of insurance in construction industry in Ethiopia
 Identify the problems & challenges encountered while practicing the insurance policy for
construction

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.
 Assess the practice and defects of insurance practice in the construction sector of
Ethiopia.

1.6 RESEARCH QUESTIONS

The research is conducted to mainly answer the following questions;

1. What is the current status of Ethiopia’s construction sector with regard to the practices of
Insurance coverages of Local contractors and consultants?

2. Is there proper understanding of the importance of relevant insurance policies by construction

firms their clients, law makers and consultants in Ethiopia? Is proper emphasis given to risks
associated with construction projects by all parties involved?

3. What contractual, government authorities and client’s requirements are there so that adequate
insurance coverage are provided by construction and consulting firms?

4. Are there hindrances that firms in the construction sector do face to purchase insurance
policies? What constraints are there for practicing insurance?

5. The efficiency of insurance companies in responding to clients claim and the way insurance
premiums are fixed by insurers and why premiums of policies are expensive?

6. Are there adequate requirements by concerned government authorities and contract conditions
to regulate and support the insurance practice in the construction sector?

7. What needs to be done to improve the insurance practice? And who is responsible for what?

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.

2. LITERATURE REVIEW

The purpose of this chapter is to discuss about the definition of insurance, risk and its
management from the perspective of construction industry and insurance industry, the core
functions of insurance companies, and legal and contractual requirements of construction
insurances. It also examines the practice of risk management through insurance in the
construction industry by evaluating responsibility and liability in construction and discusses
various types of construction insurances that are applicable in the construction industry. The
comprehensive literature review is conducted with an aim to address the objectives of the
research.

2.1 GENERAL

This section discusses what insurance is, its benefits, functions and it cost to society.

What is insurance and insurance Policy?

Insurance is a form of risk management in which the insured transfers the cost of potential loss to
another entity in exchange for monetary compensation known as the premium (invetopedia.com,
2010).

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for
money. It is a form of risk management primarily used to hedge against the risk of a contingent,
uncertain loss. An insurer, or insurance carrier, is selling the insurance; the insured, or
policyholder, is the person or entity buying the insurance policy. The amount of money to be
charged for a certain amount of insurance coverage is called the premium (wikipedia.org,
accessed November 2015).

Insurance is a financial device for transferring or shifting risk from an individual or entity to a
large group with the same risk. Insurance is used to indemnify, or restore, a policyholder to a

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.
pre-loss condition. The individual accepts a known cost, the premium, in exchange for payment
of a large, uncertain financial loss (Dearborn Career development, 2003).

Article 654(2) of the Commercial Code of Ethiopia (1960) provides a legal definition of
insurance policy as follows: - Study of Insurance Practices in Ethiopian Construction Industry
2016 G.C AAU, AAiT, School of Civil and Environmental Engineering Page 8 ―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 a specified risk
materializes. An insurance contract is a contract in which one party (the insurer) accepts
significant insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the policy
holder (IAG, 2011). The details of insurance protection, such as exactly which events are
covered and for how much, are defined in the insurance policy (FCAC, F2011). The insured
receives a contract, called the insurance policy, which details the conditions and circumstances
under which the insured will be financially compensated (wikipedia.org, accessed November
2015).

2.2. CONSTRUCTION INSURANCE

Construction insurance is a practice of exchanging a contingent claim for a fixed payment to

protect the interests of parties involved in a construction project. Construction insurance is a
major method of managing risks in the construction industry. Its primary function is to transfer
certain risks from clients, contractors, subcontractors and other parties involved in the
construction project to insurers to provide contingent funding in time of difficulty. Construction
insurance plays an increasingly important role in guaranteeing the success of projects, with
insurers sharing losses resulting from natural disasters and other contingencies. However,
insurance sometimes doesn’t receive the attention it deserves because practitioners do not have a
clear understanding of risk allocation and the strategy of risk management through insurance.

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.
There is a growing body of interests in construction insurance, supporting interactions between
the construction industry and the insurance industry. However, it is not always clear why
construction insurance exists and how it operates from the perspective of the construction
industry. This paper argues that to provide a convincing explanation on this interaction, one need
to improve the

theoretical and analytic frameworks in four key areas: the nature of construction risks, risk
transfer and insurance mechanism, insurable risks, and perspectives on risks from concerned
parties.

They explain how insurance can be used as a risk transfer tool in the construction industry and
examine the interaction between risk management and insurance. The existing literature on
construction insurance is reviewed in the light of this analysis to identify key gaps in knowledge
and help to focus further the research priorities. A better understanding of construction insurance
can contribute to successful risk management performance on projects.

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.

3. RESEARCH METHODOLOGY AND PROCEDURES

3.1 RESEARCH METHOD

3.1.1 Data source

 Insurance companies

 Construction companies,

 Clients

 Regulatory bodies and other related sources found necessary

 Site visit

3.1.2 Data collection

 Interviews &/ or questioner
 Refer to archives and other related documents
 Site visit
 Case Study
 Observation
 Group assessment
 Expert or peer reviews
 Document review and analysis

3.1.3 Data Analysis and Interpretation

 Quantitative and Qualitative analysis

 As per recommended

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.

3.2 RESEARCH PROCEDURES

1. Definition of Topics
2. Formulating proposal
3. Literature review
 Problem Identification
 Hypothesis Generation
 Hypothesis Evaluation
 Hypothesis Analysis
 Case Building
4. Conclusion and finalizing
5. Thesis Writing
6. References
7. Defense

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Companies in the Ethiopian Construction Industry 2013 E.C.

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The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.

5. EXPECTED RESULTS

The expected results of this research are

 Construction sectors will be able manage their risk

 Insurance companies will be able to identify their drawbacks encountered while
practicing the insurance policy in the industry.

6. BENEFICIARIES

This research will benefit the different stakeholders in the industry

The Client / owner

The Contractors
The Consultant
The insurers

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 The Role of insurance
Companies in the Ethiopian Construction Industry 2013 E.C.

N Activity May June July August

o. W W W W W W W W W W W W W W W
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1 Proposal finalizing

2 Literature review

3 Questionaries’ development

4 Data collection

5 Data analysis

6 Final report organization

7 Draft report submission 

8 Final report submission

7. SCHEDULE

8. BUDGET

No. Item Total (Birr)

1 Transportation cost 1,200.00

2 Expenses for stationery, printing, binding, photo copy, typing 2,000.00

3 Miscellaneous 700.00
Total 3,900.00

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Companies in the Ethiopian Construction Industry 2013 E.C.

BIBLIOGRAPHY (REFERENCE)

1. Advanced Study Group No, B. (1999) Construction Insurance, the Chartered Insurance
Institute, London
2. Construction and Infrastructure Projects – Risk Management through Insurance
John Baartz, Partner Nick Longley, Special Counsel Allens Arthur Robinson
3. Effect of Formalities on the Enforcement of Insurance Contracts in Ethiopia By Fekadu
Petros Addis Ababa Ethiopia
4. Factors Affecting Profitability of Insurance Companies in Ethiopia: Panel Evidence
Abate Gashaw Ayele Addis Ababa University Addis Ababa, Ethiopia May, 2012
5. Insurance and construction project risks: a review and research agenda Junking Liu
School of Management, Tianjin University Tianjin City, 300072 China
6. Role of Financial Institutions in the Growth of Small and Medium Enterprises in Addis
Ababa by Dereje Workie Nigussie February, 2012 Addis Ababa
7. Study of Insurance practices in Ethiopian construction industry by Tigist Gonfa, Addis
Ababa Institute of Technology School of Civil and Environmental Engineering, 2016
G.C

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