Divergent Views on Local Capacity for Oil Insurance

31 Jul 2013

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 Fola  Daniel, Insurance Commissioner

Insurance experts all agreed on an urgent need to develop capacity for the underwriting oil and gas risks locally, but they differ not only on how to grow the needed capacity but also on the level of improvement in local retention of the energy risks, Nnamdi Duru reports

Worried that the business community in the country is not gaining enough from oil and gas exploration activities across the country, the federal government in 2010 enacted the Nigeria Content Development Act, reserving various levels of participation in businesses emanating from the sector at different times.

The law created the vital opportunity for insurance operators in the country to participate actively in the underwriting of oil and gas risks in the country. Among other things, it provided for 70 per cent retention of business to local operators, including insurance broking, underwriting and reinsurance businesses in 2013.

The insurance regulator, National Insurance Commission (NAICOM) followed up on the law with guidelines for the operations of the oil and gas insurance business to assist local operators to become more active in the oil sector in 2010.
The guidelines insisted that “No person or organisation shall transact an insurance or reinsurance business with a foreign insurer or reinsurer in respect of any life, asset, interest or other properties in Nigeria, classified as domestic insurance, unless with a company registered under the Insurance Act 2003.”

It warned that no insurance risk in the Nigerian oil and gas industry would be placed overseas without the written approval of the commission, which will ensure that the Nigerian local capacity is fully exhausted and that all registered insurers in the country are eligible to participate in any oil and gas insurance business subject to stipulated limitation.

Different Strokes
However, three years after the implementation of the local content law started, experts have differed on the level of improvement in local risks retention, modalities for underwriting oil and gas risks and how to grow local capacity for underwriting this class of business.
Some insurance experts however have expressed worry that while other sectors are reaping the benefits of the local content law, the insurance industry is not smiling to the bank due to lack of human and technical capacity to retain the percentage of oil and gas risks reserved for them by law.

Not Doing Enough
Some stakeholders believe that local insurers are not doing enough by ceding bulk of the businesses to the international market, retaining an insignificant portion of the risks; others think it will be suicidal for operators to take on more of such risks with the prevailing market conditions.

“The insurance industry has not gained from the implementation of the local content law because of the selfishness of some operators, lack of knowledge of the insurance scheme and how to place the risks internationally and how to obtain reinsurance package that will give them leverage to operate.

“Rather than place oil and gas risks in a way to help the local insurance market grow the needed capacity, some operators have continued to undermine the growth and development of the insurance industry by doing otherwise. Oil multinationals have captives through which they regain the premium paid and undercut international premium rates to their advantage. The oil majors are still carrying on as usual,” an insurance expert, Mr. Dan Okehi, alleged.

Reformist Views
Okehi, who is Chairman of Brickred Consult, also pointed out some perceived anomalies in oil and gas underwriting, saying the business is skewed to the disadvantage of the local market by design, using the “quota share reinsurance programme.”

“The problem with quota share reinsurance programme is that available local underwriting capacity was continuously channeled to cover risks categorised under the ‘killer zone’ with the effect that local operators were affected by every claim and as such contributed to all claims on the business.
“Instead of allowing local insurers to take control of the business and float it in line with the excess of loss programmes, the oil operators float the risks in the international market themselves and reserve a little portion of it for Nigerian operators”, he explained.

Okehi therefore canvassed a change from “quota share programme” to “excess of loss programme”; saying using excess of loss programme, locally absorbed risks would be spread across risk layers, possibly with a very small portion of it in the lower layer, called “the killer layer”.
Underwriters participating in this layer share a larger proportion of the risk and premium respectively.

He explained that the local lead underwriter only needs to confirm the percentage of the risks to be retained locally and float the remaining in the international market while ensuring that the portion of the risk absorbed locally is not placed in the lower level of the risk strata, to avoid contributing to every loss or spread that portion across all the layers of the hierarchy to moderate the risk for the local market.

Okehi assured stakeholders that this model would guarantee that all claims from the energy industry would be settled speedily and empower insurers to decide at which stratum/strata of the risk pyramid to participate.

Local insurers would be able to grow their skills and expertise on oil and gas insurance over time and subsequently the inhibitive cost of bringing ancillary professionals to assist in the business would force the local insurers to give jobs to Nigerian engineers, risks surveyors, loss adjusters and other professionals whose experience in oil and gas insurance would grow with time and encourage specialisation in these fields, Okehi reasoned.

Between Lloyds and Local Underwriters
Those faulting the reinsurance arrangement have to realise that a buyer has to choose from available products in the market since he cannot get what he needs, while the seller would only sell what benefits him at the end of the day.

“Don’t forget that the man sitting at Lloyds in London will take a commercial decision that will favour him and you, who want to buy that does not have capacity, can only buy the products that the sellers have to sell. If you create your own products and they are not available, you buy what you see.

“Also the man sitting at Lloyds is taking global risks while the insurer in Nigeria is taking a local risk. The chances of a catastrophic claim hitting local insurers is higher because the man in London has spread his risks to several territories but local insurers are in one territory, and as long as they are not global companies taking inflow from several sources, they will not enjoy the benefits attached to global business.

“Nigerian insurers only take risks from the eight oil companies in Nigeria they are not global companies so I will not encourage them to start taking undue risks. The theory of large number works but the market is too small, it is restricted. Their clientele and the total risk they are insuring are not more than 32 when you take into account the offshore and onshore properties, construction risks, third party, operators’ expenses, etc.
“How then can you generate $100 million capacity when 49 of you are writing just 32 risks? They cannot continue doing this and grow capacity to retain $50 million risk 100 per cent.  When they build capacity gradually, make it available to international companies, they can participate in global businesses. This is the only way to go,” the expert stressed.

Support for Conservatism
Differing with Okehi, another insurance expert, who pleaded anonymity, argued that local insurers were in order in taking only a small portion of oil and gas risks, since they lack capacity.
“Reinsurance is part of insurance and you cannot take beyond your capacity. That we are not building capacity has to do with what investment vehicles are available to the insurance industry to build a solid capacity because each dollar risk is worth N160 and the capacity of a leader at the Lloyds of London market is $150 million.

“What is the size of the Nigerian currency compared to international currencies, what are the investment vehicles available to insurance companies in Nigeria and what is the size of their accounts to shoulder a risk worth N24 billion (N150 million x N160)? So they have to get reinsurance arrangement,” he queried.

“There is improvement but it is coming very slowly. It is not just what you retain but also the number of such policies that are available to you and the number of investment vehicles that are available to you,” the expert stressed.

He also replied those calling for higher capitalisation saying, “If you are growing the business from trading activities, it is a lot better than saying bring this money so that you can retain heavily. What amount of money will a Nigerian company have to take a liability of N24 billion? If there is a blowout and the claim runs into $100 million or N16 billion, what is the net asset value of most insurance companies in Nigeria? So they have to grow substantial capacity gradually.”

Increased Local Retention
While practitioners differ on the level of improvements recorded in underwriting of oil and gas risks in the country, their regulator said local retention in oil and gas insurance business in the country has improved.

The Commissioner for Insurance, Mr. Fola Daniel, said local retention capacity for oil and gas insurance business has risen by over 400 per cent in the last three years; rising from a little below 6 per cent to over 30 per cent.

“The capacity in oil and gas cannot be built overnight; we have a semblance of financial capacity but we don’t have human capacity. So what you call leakages is the developmental thing, it is gradual. Three years ago, the entire retention capacity of the entire Nigerian market was less than 6 per cent but now it is inching towards over 30 per cent. We are making very good progress.”
Meanwhile, NAICOM has been asked to ascertain the depth of oil and gas insurance businesses across the country and determine the expected insurance premium in this regard for the next three years.

“The commission must get statistics of all oil businesses in the next three years in the country and determine the expected premium income, and ensure that at least 50 per cent of this premium is retained within Nigeria,” the stakeholders demanded.

Tags: Nigeria, Featuered, Business, NAICOM

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