Economic Analysis of Ethiopia’s Vehicle Insurance against Third Party Risks

22 Pages Posted: 12 Mar 2018

Date Written: March 8, 2018


Road traffic casualties are major public health challenge which needs sustainable prevention. In comparison with African countries, Ethiopia has least vehicle ownership. However, motor vehicle accident is a cause for death, bodily injury and destruction to properties in Ethiopia. Ethiopia has fatality rate of ninety five traffic car accident deaths per ten thousand vehicles. To tackle this escalating social problem, recently Ethiopia has introduced vehicle insurance against third party risks proclamation. This Article is the modest contribution to economic analysis of Ethiopia’s Vehicle Insurance against Third Party Risk Proclamation. First party compulsory insurance is efficient in many respects, however; when first party insurance fails third party compulsory, though not efficient, is introduced to serve as social insurance. The efficiency of the law is measured whether it provides incentive to individuals to alter behavior. Economic analysis of law combines both positive and normative analysis. The positive analysis suggests that the actual structure of law tends to evolve in the direction of greater efficiency whereas normative analysis suggests that how legal rules ought to be structured to be more efficient. Hence, the primary purpose is to examine the incentive effect of compulsory insurance law. It is argued that this proclamation tackles externality by accident risk and information asymmetry.

Keywords: Compulsory insurance, externality, risk differentiation, adverse selection, moral hazard, cross-subsidy

JEL Classification: K12, K19, G21

Suggested Citation

Dargie, Alekaw Assefa, Economic Analysis of Ethiopia’s Vehicle Insurance against Third Party Risks (March 8, 2018). Available at SSRN: or

Alekaw Assefa Dargie (Contact Author)

Dire Dawa University ( email )

Dire Dawa

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