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

Abstract

Road traffic casualties are a major public health challenge that needs sustainable prevention. In comparison with African countries, Ethiopia has the least vehicle ownership. However, motor vehicle accident is a cause for death, bodily injury and destruction to properties in Ethiopia. Ethiopia has a 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 a 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, it is introduced to serve as social insurance. The efficiency of the law is measured by 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 the normative analysis suggests 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 through accident risk and information asymmetry.