Okpue: No Country Has Capacity to Retain Insurance Risk 100%


In this interview with Olaseni Durojaiye, Managing Director of Insurance Brokers of Nigeria (IBN), Olotu Prosper Okpue, shed more lights on the evolution of the insurance industry, how it has impacted the nation’s economy over the years and effect of the current recession on the industry, amongst others

How did IBN entered into this market?

Insurance Brokers of Nigeria was established in 1955 as C T Bowring Incorporated Insurance Brokers. We came into the country working for the Nigerian Port Authority (NPA), then known as Apapa Ports. The Port Administrator at the time who was a Briton, Turner, invited our company to arrange insurance for the quays of the Apapa Ports. For more than 10 years at the time we were the only insurance brokerage firm in the country.

Before that time, there were a few insurance companies like Royal Exchange Assurance and Century Insurance that were doing insurance business in the country. When we came in we introduced the designs of insurance portfolios on behalf of clients and this enabled them to buy insurance packages from the United Kingdom (UK)) to be able to protect the constructions and operations of the Apapa Ports in 1955 until the construction was completed.

Nigerian economy was actually based on infrastructure affordability and diversified agrarian economy, and all through that time our company arranged insurance for most of the facets of the economy.

What was the business space like during the Civil War particularly your industry?

Even as the war was going on, commercial activities were coming up. During that period, the Oodua Group was formed with a lot of investments in real estate through the Wemabod Estates, commerce and the rest; and they formed a company called Glanville Entoven which was an insurance brokerage company in partnership with some Britons – to break the monopoly of Insurance Brokers of Nigeria (IBN).

While the war was going on, the government of Western Region were setting up industrial estates from Ikeja to Ibadan, there were also manufacturing base and small businesses and just as C T Bowring was formed for Federal Government business, Glanville Entoven was formed to harness businesses of the South-western government; and with all of the expansion that were coming up during the time Glanville Entoven was actually harnessing a lot of Western Nigerian government-owned investments.

What were the milestones in the narratives of the insurance industry in the country?

The process was actually kick-started in 1973, with the indegenisation laws that classified certain sectors of the economy into A, B, and C. The financial services sector including banks and insurance was classified as where Nigerians should own majority equity. The law required that a minimum of 60 per cent must be owned by Nigerians, while foreigners owned 40 per cent. This gave a lot of impetus to Nigerian entrepreneurs, some who studied insurance, some others were as fallouts of the enterprise movements decided to set up insurance brokerage firms.

Around the war time too, there was the bill of infrastructure specifically in Lagos during which all the long bridges were built and there was also the cement armada during which a lot of vessels carrying cement stayed for a long time, sometime for 60 days on the sea before they berthed at the Apapa Ports. The upturn of the period of 1973 to 1976 was that there were a lot of business opportunities but all the insurance businesses were coming from London, and were dominated by UK companies. Vessels were coming into Nigeria with goods, Nigeria had a lot of money and was building up bridges, roads and the rest – so some Nigerians saw the opportunity and they felt that why must all the goods coming into the country be insured abroad.

Then the Marine Committee proposed a law that all the goods coming into the country had to be insured locally, which gave birth to the Nigerian Insurance Act of 1976, even though it didn’t define what class of insurance, it still gave a lot of boost to the local insurance industry and the local insurance companies were underwriting. All of these boosted the Nigerian economy, and during that time too, a lot of insurance companies came up.

Before then, there were less than 20 insurance companies in the country, most then UK-owned or affiliated, of course the Civil War created some uncertainties and most of the companies and their home countries had to withdraw their expatriate underwriters and Nigerians who were trained took over their positions. Some companies totally left. The insurance companies around then including Lion of Africa and Century actually boomed in that period.

How has IBN evolved over the years?

Of course because of the indigenisation law we had to change our name from C T Bowring to Insurance Brokers of Nigeria (IBN). Then in 1980, when the Americans bought over our parent company the equities of the British was diluted and the Cross River State Investment Corporation (owned by the old Cross River State) now bought some of it, 10 per cent of the equity was also bought by the Staff Trust Fund so we changed our name to Insurance Brokers of Nigeria to give it a very local look. Mind you, due to the indigenisation laws, the number of insurance brokerage firms increased from less than 10 to more than 20.

But our company has evolved, pre- and post-independent, during the civil war and afterwards. We have continuously followed the history and economy of this country.

It’s economy in the sense that we remained purely an indigenous firm. It’s history in the sense that we’re completely indigenised. The last expatriate left around 1983. There used to be clerks as expatriates in this company but in the gradual process of knowledge transfer, people getting trained and qualified, the company became 100 per cent indigenous in manpower, of course still belonging to the global group called Marsh.

The nation’s economy has over the years faced some ups and downs, austerity measure, Structural Adjustment Programmes and now the recession. How has IBN coped with all of those times?

IBN has faced what I will call system archetype. We started and we were alone without any competition, and then we got to a peak where we have a lot of competition coming into the market. In all of that time we’ve been able to position our business strategically so that we were different from others and remained market leaders in the sector.

We have always strived to maintain basically three things: We are very commercial in our approach, partnering with each and every one of our customers in proffering solutions for their unique businesses and that is why we have legacy clients that have remained our clients from before 1960 till date not because we’re the oldest but because we’ve been very responsive to whatever their needs of their business evolution.

Our clients and their operations are dynamic, they grow, sometimes they grow excessively and the risks that they are exposed to require people to advise them on the kinds of business risks they face.

Second is innovation. We pioneered the consolidation of insurance brokerage in Nigeria. Example is that, where a company has a heterogeneous operations, locations and the rest and whilst our competition were selling classic kinds of insurance packages, we take a total look at the enterprise and design an insurance package that should be able to put all the risks together in one basket; that ensured that the insurance policies that they have is seamless and they don’t have multiple of insurance packages that actually deals with almost the same kind of risks. That has endeared us to a lot of our clients in the course of our doing business.

The third thing that stands us out is that we develop unique kinds of insurance solutions for specific industries that we have clients in. In designing solutions for our clients, we don’t have a book shelf solution; what we do is we work with them to understand the requirements of their business.

What has been the company’s business survival strategy even in the face of increasing competition?

The strategy that stands us out is that we look at the indigenous economy and try to understand what drives the economy. In the case of Nigeria, since 1973, what drives the economy of Nigeria is the oil sector and that sector is dominated by the seven sisters – Mobil, Total, Exxon, Shell, Agip, Texaco, Elf and the others – as the sector was growing the Nigerian insurance sector was unable to provide the kinds of solutions that they require to cover their operational risks because of capacity; the capacity to pay insurance claims, risks of re-insurance that they have and ability to meet the claims because in that sector the frequency of loss occurrence is not much but the impact is always enormous.

For example, if you are exploring a well, you could have a blowout, if it happened, the minimum exposure you are likely to have onshore is a minimum of $50 million to kill the well and there are still other associated pollution losses in case of emission of crude oil into the environment which creates pollution and potential damage to the environment including destruction of properties and loss of lives.

Then what you spend on associated damages might sometimes be three times the amount that you spent killing a well, so by their capitalisation and sometimes skills too, Nigerian insurance companies are limited; so you find that the foreign insurance companies were dominating that business space.

Does that include the Nigerian Insurance Corporation at the time?

The Federal Government established the National Insurance Corporation of Nigeria (NICON) which effectively, by law has a monopoly of insuring all government’s wholly owned businesses and also where the Federal government have interests in; remember that the Federal Government has interests ranging between 60 to 40 per cent in joint ventures with the seven sisters, and NICON, which has the monopoly of all federal government businesses had to go through the foreign insurance companies.

NICON was established with good intentions, professionally run, having re-insurance facilities with known insurance companies globally, of course centered in London and offered the insurance vehicle through which the interests of the federal government in the various joint ventures can be placed; so each fellow had his own insurances.

But in joint venture businesses, the foreign companies are the operators, while NNPC are equity partners; so the insurances were managed individually. So for us, an insurance brokerage firm, we saw a massive opportunity for the insurance industry in that area; fine we don’t have capacity, the traditional insurance companies were basically fire, theft and the likes; but the oil sector is so unique because most of the international oil companies operating in Nigeria are multinationals and have several cross-border operations in several countries so they are able to pull their insurances together.

You may be operating in Brazil, Venezuela, Malaysia, Angola and Nigeria as one company but with joint venture with governments or alone; they have a global cover by which they were able to pull together their business interests all over the world and put it in their own policy. They also have what is called captive insurance companies that are their wholly-owned insurance companies through which they generate their insurance programmes and pay premiums and it becomes cheaper for them and mostly three times efficient. They also have what they called oil bulls, where they put their various insurances policies in a pool in different parts of the world.

In all of this, the national interest was suffering because if for example, SHELL has a deductible of $100 million, AGIP has deductible of $50 million and so on, if anything happens in any of those businesses the international oil companies are well covered whereas the NNPC is generally a loser.

So in 1989, we advised the National Insurance Corporation and the NNPC to consolidate all the insurance policies in all the joint venture companies together so that you have a common deductible for their operations in onshore, offshore and swamp areas; so whether you are in SHELL or in AGIP you have one common terms while the operators could also have one common cover.

We proposed this to NNPC, we’re able to successfully sell the concept to the NNPC with a lot of resistance from NICON because it was no more business as usual, of course at that time the energy insurance market had what we called circles; there is a time when it peaks and the claims are not much and there is a lot of capacity and at other times when it dips and payments were there to be made. With that consolidation we saved NNPC 50 per cent of their insurance cost.

Are you implying that IBN has huge expertise in the oil and gas sector?

That is one of our very strong points. Beyond that, as a solutions provider, we look at unique sectors that we serve or that we should serve and look at what best suites them within the nation’s economy.

In what ways have IBN impacted involvement of Nigerian in the oil sector?

About eight years ago, government decided to allow indigenous companies to participate in the oil industry partly because the big IOCs were working in areas where they have maximum returns on investments and left the fields that are commercially productive but not commercially viable for their own productions to remain dormant, they’ve capped the well heads and you find that in almost all the oil producing areas and that created opportunities for indigenous people who want to invest in the oil sector, then came the government directive to encourage independent oil companies that will operate in marginal fields.

So, the IOCs had to let go some marginal oil feeds and the nation then called for the first bidding for the oil blocks; when they did the bidding for the oil blocks, there were commissions that were to be met, first for commercial capacity then of course the insurance protection required.

By our expertise we know that to go back to an oil well that has been explored, capped and abandoned for several years require some level of expertise and there are risks associated with it. So we gathered all of them together, 28 in number and through workshops educated them on the exposures that they will be facing when they go back to the wells including exposures that are associated with third parties and those that could cause them to lose money in case something goes wrong after they have started producing.

After that we arranged insurance facilities for them outside of London, in the Middle East where there is emerging insurance market. IBN designed the programme and the independent oil companies were coming to us because the laws required them to have insurance covers that included third party liability, accident pollution, cost of control; they all needed to buy insurances to comply with the law and we also helped them in that regard. What we did was rather than for them to come singly, we made them come collectively and buy in a pool at the same time and by so doing we saved them money. Today about eight or seven of them are still in operation and very successful.

How is the renewed restiveness in the Niger Delta affecting the insurance sector?

This is a very difficult period for our clients in that sector because most of them have not been able to go back into operating their sites since February this year when threats to their operations resumed, especially in onshore operations. What is presently going on is unprecedented; in fact many of them have totally shut down their operations since February and that has had serious impact on our operations, coupled with the drop in the international crude oil prices.

A good number of the oil companies are operating at below 30 per cent; some are actually operating at zero level. You cannot pump your crude oil in a place that they may have probably blown up the pipelines and you cannot go to the pipelines to cut and join them because of the same threats; so until there is peace, there is a challenge in that environment.

The government has acknowledged that the country is in recession, how is this affecting the insurance sector?

To start with this economy has been almost a mono-based economy and it has a massive potential of internal market in excess of 180 million people; so if you sell salt, you will make the money, if you sell sugar you’ll make the money but being a mono-based economy there is oil, over the years the downstream sector of the oil industry has been left undeveloped, then suddenly there were intense investments in the oil sector globally, meanwhile the biggest consumers of the product kept their reserves and OPEC member were more preoccupied with how to determine the price of oil.

The English people went to the North Sea and got the same quality of oil as ours, the Canadians went for shale gas, then the Americans decided that it was time for them to get more efficient so demand dropped. There are also those economies that have the population, like India and China, they don’t have the crude oil but they were also investing in alternative source of energy. Then of course there was glut. The price of oil that was going up was actually edging because in Nigeria, till tomorrow, the cost of onshore production of oil is not more than $10, the rest of it is a price determined by edging, storage, taxation.

So everybody was doing the gold rush but none was asking the question: where am I going to sell the gold? Will there come a time when my buyers will reduce their demand for it? The impact is what we’re seeing now.

Nigeria being a mono-economy, we’re not isolated. We’re in real recession because our source of income has diminished by more than 80 per cent. My take: it is affecting the insurance industry.

When America had recession in the last days of President Bush and the early days of President Obama, the recession was caused out of recklessness, especially in the mortgage system, where because the federal government was guaranteeing loans to the sector they were reckless in giving out mortgage loans to companies, then the system collapsed. And, who is going to pay back the loan? The man who guaranteed the loans, which is the federal government.

In Nigeria, the federal government does not guarantee any sector of the economy and since there is downturn in the economy those investors that brought in their money will not watch it waste away in a troubled economy and the tendency is that they will move out.

Working under recession and recovery and why investors are leaving is not just as regards the oil business, it is the interpretation and enforcement of government policies. In practice all the laws are good, businesses need security, defined taxation, complete labour laws and guarantee that profits can go out. Some of these items are available but at this time most of them are undefined.

How would you described doing business in Nigeria?

There are too many policies that affect the businessman. Local taxes, undefined import duties, even when you have international classification codes for goods that come in, there is extreme discretion of the customs officer at the ports that will not let your goods come out in time.

Even when your telephone cover is classified as –for argument sake – 50 per cent, the Customs official will argue with you and tell you that, yes, it says 50 per cent but it is understated. There are so many agencies at the ports that creates bottlenecks, which in turn prevent the businessmen from getting their goods out as quickly as they should, at the end of the day, they struggle to get it out and manage to employ Nigerians, they make little profits then they to go to the CBN to sign out repatriation of dividends then they can’t make it. The next thing he looks out for friendlier environment to work.

One of the criticisms of the insurance industry is alleged lack of capacity on the part of the insurance companies to underwrite huge risks. Do you share this view?

Capacity in the insurance industry comes in several ways. There is the capacity to underwrite, which is how to charge appropriately, capacity to be able to pay claims in the event that the loss happens and of course still able to make profits then capacity to get the right kind of protection.

Capacity depends on the kind of risks that you’re talking about, because insurance is not a business that is domiciled in a country; it is spread all over the world. But if you’re talking of the capacity to retain a risk 100 per cent, I’ll tell you no country has the capacity to retain risk; even America, China, they throw their risks into the global space.

As an insurance company, if there is the need to insure huge risks, there are re-insurance companies that re-insure. There are also insurance companies that accept insurance businesses from other insurance companies on facultative basis.

In the markets that thrive a little bit better, the difference is that their investments and underwriting issues are a little bit more refined; they know the risks that they can retain or invest and the rest they shoot out to the global market.

What are your thoughts on consolidation of the insurance industry?

Consolidation of the insurance companies was a fantastic initiative because at a time the balance sheet of Nigerian insurance companies were dominated by government businesses.