Addressing Human Capacity in Oil and Gas Insurance

The absence of human capacity in oil and gas insurance underwriting has been identified as a major reason for the massive outflow of insurance businesses to the London market, writes Ebere Nwoji

Despite efforts by the federal government and the insurance sector operators to ensure that insurance firms benefit from huge opportunities in oil and gas sector, the industry’s situation could be likened to that of a pauper living in the island of gold.

In spite of the level of business activities going on in Nigeria’s oil and gas sector, insurance industry’s Gross Premium for 2016, remained as low as N380billion while the sector’s contribution to the Nigeria’s Gross Domestic Product (GDP) stood at 0.03 percent against N1trillion premium target and 3percent contribution to the GDP set by the regulator, the National insurance Commission (NAICOM) in 2012.

This is because in the face of activities going on in the oil and gas sector, ancillary services that are supposed to be rendered by indigenous insurers to grow their premium income are taken abroad, mainly to London markets whose premium income continues to maintain upward movement year in year out.

Recent reports by the Nigerian Extractive Industries Transparency Initiative (NEITl), revealed that only about 5 per cent of the oil and gas sector’s insurance business are handled by local underwriters. This is despite federal government’s local content policy, which had targeted 45 percent local underwriting of oil and gas business by the year 2006 and 70 percent local underwriting by 2010.

At a recent seminar for insurers and reinsurers organised by the Nigerian Reinsurance Corporation, the reinsurers complained that despite the local content policy, less than 30 percent of oil and gas businesses in Nigeria are currently written by indigenous firms while the rest still go abroad.

Investigations on the cause of this reveals that lack of capacity in terms of human and finance is often the reason put forward by oil multinationals for taking their businesses to their captive firms or to other giant London insurers.

In fact, few years back, a director in Nigeria National Petroleum Corporation (NNPC) stated that the entire operating capital of all the insurance firms in Nigeria put together cannot insure one oil rig in Nigeria.

Irked by continued loss of businesses to their foreign counterparts, NAICOM, in 2007, moved to address the finance capacity problem by reviewing upward the minimum capital base of the industry with the result that today, most underwriting firms operate with as much as N5 billion, N10billion or even more capital against N3billion minimum requirement.

Ten years after, some new generation and forward looking insurance underwriting firms, have taken it upon themselves to address the human capacity problem through training of staff of insurance underwriting firms and other stakeholders in the oil and gas insurance business.

Wapic Insrance, is one of such firms .Others which have organised such trainings in the past though in other classes of insurance different from oil and gas are, Nigeria Reinsurance Corporation(Nigeria Re), Leadway Insurance Ltd, Sovereign Trust Insurance Plc among others.

Wapic insurance, last week staged an intensive training programme on capacity building for oil and gas insurance stakeholders with the theme ‘Trends in Underwriting Upstream Risk’.

Titled Wapic Inaugural Capacity Building Session for Stakeholders in Oil and Gas industry, the company, successfully attracted oil and gas insurance specialists from London, Mr. Nick Sorgo, Partner Energy Division, JLT Specialty Ltd, London as well as indigenous specialists in oil and gas business such as Steve Odjugo oil and Gas expert and Consultant from Nigeria, Mr. Sina Elusakin, Deputy Managing director Industrial and General Insurance Plc, Mr. Kunle, Omilani, Chairman YOA Consulting, Mr. Paul Atiomo, Senior Manager Energy and Special Risk, African Reinsurance Corporation. These experts bared their minds, ideas and knowledge on how Nigerian underwriters could conveniently play safe in the juicy but high risk profile oil and gas sector.

Sorgo noted that the level of political risks in Nigeria in form of terrorism, kidnappings, piracy and political violence has leaned the chances of Nigerian insurance underwriters getting easy access to foreign reinsurance coverage.

According to him, as a result of this, the London market has tagged Nigerian market high risk profile market.

He said this may increase cost of local reinsurance capacity to retain the risk locally. Currently, Nigerian reinsurers act as frontiers of foreign reinsurers.

Sorgo therefore emphasised the need for Nigerian insurers to draw experience from London markets which he said plays safe in business acceptance.

Stakeholders at the session noted that there is need for increased human and financial capacity in oil and gas insurance in Nigeria but insisted that human capacity building is very critical.

A director, authorisation and policy, National Insurance Commission (NAICOM), Mr. Pius Agboola, who represented the Commissioner for Insurance, Alhaji Mohammed Kari, said that the commission was committed to increasing oil and gas business retention in Nigeria.

He commended Wapic Insurance for the initiative and challenged other firms to emulate the company.

On her part, Wapic Insurance Managing Director Mrs. Adeyinka Adekoya, reasoned that insurance players must play a major role in indemnifying losses in the oil and gas sector to prevent the industry from being handicapped financially after any major loss.

She said: “Due to the nation’s dependence on the oil and gas sector, it is invariably important that one should consider the risks involved both in the offshore and onshore operations.

“The insurance industry, a sub-sector of the financial services sector, provides risk management measures for the petroleum industry and has been identified as one of the pillars of transformation in the industry.”

Adekoya said the aim of the conference was to contribute to an industry-wide understanding of the recent trends and nature of risks peculiar to the oil and gas operations in Nigeria, as well as the latest solutions and risk mitigation measures in addressing such.

She observed that the impact of the drastic fall of crude oil price had made it challenging for the federal government to meet its obligations on joint venture agreements and budgetary commitments.
Furthermore, she said that the NNPC had announced its exit from the JV arrangement paving way for an alternative arrangement, which allows the JV to finance itself by retaining its operating cost among others.

“The implication of this is far-reaching; it would be interesting to see how this affects the landscape of the industry in a few years to come,” she said.

One of the discussants at the session, Sina Elusakin, the Deputy Managing Director, Industrial and General Insurance Plc, said that Nigerian insurers need to be very careful in their risk acceptance especially in the area of facultative risk.

He stressed the need for the insurers to take time to study the risk profile of the business they want to underwrite before accepting such business.

He also spoke on the need for Nigerian underwriters to borrow experience from London market operators in order to play safe and avoid unnecessary exposure to risk that is beyond their capacity.
Some Nigerian underwriters expose themselves to excess loss insurance because of urge to accumulate much premium noting that international players play safer than Nigerian underwriters.

Elusakin also cautioned oil and gas sector operators that indulge in self insurance to look at the cost of risks they keep.

He also advised them to consider their financial capacity to determine their ability to absorb such risks.