Dissecting the Relevance of Oil and Gas Insurance Policies

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Ebere Nwoji examines the impact of the local content policy and the energy and allied risk insurance pool on indigenous insurers in the oil and gas business

The Nigerian Oil and Gas Industry Content Development Act, 2010 “NOGICD ACT” was enacted to enhance the development of local content in Nigeria’s Oil and Gas Industry. The target was to promote indigenous participation in the oil and gas industry.

The NOGICD Act, which was signed into law on April 22, 2010, no doubt has contributed immensely to the growth and development of indigenous capacity in the Nigerian oil and gas industry.

Investigations have revealed that the act has achieved 87per cent level of growth in the operations of some sub sectors.
For instance, the engineering sub sector has achieved as high as 90 percent level of growth; fabrication subsector, 50 percent growth and manufacturing sector with only 20 percent level of growth.

The local content policy requires oil and gas business operators in Nigeria to ensure that local insurers insure at least 10 percent of the risk and the rest taken abroad. It later increased this to 45 per cent and later 70 percent after which the rest can be insured abroad.

To ensure that the local content law is made effective through effective monitoring of business operators, the federal government had set up the Nigerian Content Development and Monitoring Board (NCDMB) to supervise operators and approve businesses to be insured outside Nigeria. The whole essence was to ensure that Nigerian companies take active part in the juicy oil and gas businesses and build capacity through what experts referred to as domiciliation principle.

Domiciliation policy, according to insurance experts is a framework, which enables local players build capacity through a relationship alignment with foreign counterparts who are more experienced and knowledgeable in oil and gas insurance underwriting while playing active part in the sector’s transactions

For the insurance sector, there is mixed feelings on the level of growth achieved in the face of the act. While the broking arm of the industry put the level of growth in the sector in the face of the act at 70 percent, insurance underwriters said the act has achieved less than 30 percent growth in oil and gas business participation for them.

A former president of Nigerian Council of Registered Insurance Brokers (NCRIB) Mr. Ayodapo Shoderu, in his own assessment, said insurance brokers have recorded moderate achievement in handling oil and gas insurance account since the enactment of the local content law.
According to him, they are currently enjoying the patronage of oil industry corporate accounts as well as that of the Nigerian National Petroleum corporation (NNPC) unlike before.

Speaking to THISDAY on the level of success achieved by insurance underwriters shortly before assuming his present position as Deputy Commissioner for Insurance Technical, Mr. Sunday Thomas, who was then Director General Nigeria Insurers Association (NIA) said looking at overall performance of insurers playing in the oil and gas business, the impact of the local content act in their operations has seen some level of improvement.

According to him, local retention has increased over the years from less than 5percent to about 30 percent.
He said though the market was expected to have benefited as high as 70percent, knowledge capacity of indigenous operators has increased within the period.

A researcher in one of the reinsurance firms in the country said in over all, Nigerian content has increased the patronage of the local insurers by international oil companies (IOC) )and other indigenous oil and gas companies.
He however said what often happens thereafter is that most of the insurance companies can’t provide all the needed cover, but take the business and spread it to their counterparts in Nigeria and overseas due to their business limit (capacity) and volatility of oil and gas business. He said this has limited the benefits derivable from the act by indigenous insurers.

Before the act came in place, insurance industry operators have been agitating for inclusion in the insurance of oil and gas in the country. The business has always been taken abroad by oil multinationals who prefer to use their captive firms in their home countries than using Nigerian insurers.

They often cited low capital base of the industry as a major impediment.
According to them, the initial capital base of all the insurance companies put together cannot insure one oil rig of an oil firm.
This is one of the reasons for upgrading of the minimum capital base of the industry to N3 billion for general business, N2billion for life underwriters, N5billion for composite and N10 billion for reinsurance companies to tackle the low capital base problem.

After this, the issue of capacity of the indigenous firms came up, but the indigenous insurers had argued that it was not acceptable excuse for starving them of the much needed juicy oil and gas account. They argued that in those countries they take the businesses to, no single insurance firm insures any business alone but share it among themselves according to each company’s capacity adding that if the businesses were given to them in Nigeria they can equally share it among themselves.

An insurance expert and former Managing Director International Energy Insurance, Mr. Jacob Erahbo speaking on this, argued that there is nothing those foreign firms they push their businesses do that Nigerian underwriters cannot do.
He argued that by giving those excuses, oil multinationals in the country, were just deceiving themselves.
It was in the process of these arguments and agitations that the idea of local content act came into being and was signed in April 2010 with a mandate by federal government to see to increase in local content in oil and gas business to 45 percent and later to 70 percent.

But even with the act in place, insurance industry did not commence benefiting from it immediately .On its part, the National Insurance Commission did not rest on its oars.
A lot of efforts and pressure was put on the oil industry operators by the insurance industry.
The National Insurance Commission (NAICOM) in its effort in this regard, released the guidelines on oil and gas insurance.

Also, the industry had a few years back established the Energy and Allied Risks Insurance Pool of Nigeria (EAIPN),to enable indigenous insurers participate in the insurance of oil and gas businesses in the country and take charge of insurances of oil industry multinationals operating in the country which have for years remained the preserve of foreign insurers.

The pool was planned to take off with $20m capacity fund as planned by the regulator with each participating company in the pool paying $250,000per line.
Prior to the formation of pool in the years past, the insurance industry within Nigeria and across the African region had experimented on three major oil and gas insurance pools with the intention of increasing their participation in the juicy oil and gas business.

These are the NOEIP pool established by the then federal government owned NICON Insurance Corporation in 1995.The pool was established through the Nigeria Insurers Association with the intention to increase local retention of oil and gas risks and prevent capital flight through the retention of premium locally.
The NOEIP pool, which was later transferred to Niger Insurance after the privatisation of NICON could not see the light of the day despite all efforts to make it work by the members.

There were also the FAIR Pool, and the African Oil and Energy Insurance Pool which were established with the objective of increasing retention capacity of the insurance industry in Africa, curb capital flight by way of reinsurance premium from the continent, develop technical capacity for oil and gas insurance on the continent, as well as exchange information among others. The effectiveness of these towards increasing the participation of African insurers in the huge highly technical and juicy oil and gas business is still questionable as greater portion of the business is still insured by foreign insurance operators

In other words, these pools obviously have not achieved their objective of ensuring that indigenous insurers secure more opportunities in participating in the oil and gas insurance in the industry inaugurated 14 insurance companies to operate the Technical Management Board of the Energy and Allied Risks Insurance Pool of Nigeria (EAIPN).
The industry hoped that inauguration of the EAIPN will help operators retain capacity in oil & gas underwriting, curb capital flight and grow the local market in energy and allied risks underwriting.

The companies include, Leadway Assurance Company limited, Custodian & Allied Insurance Plc, Aiico Insurance Plc, Lasaco Assurance Plc, Royal Exchange Insurance Co. Ltd, Consolidated Hallmark Insurance Plc, and Sovereign Trust Insurance Plc.
Others are Linkage Assurance Plc, Industrial And General Insurance Plc, Nigerian Agric Insurance Corporation (NAIC), Sterling Assurance Company Limited, Prestige Assurance Plc, NEM Insurance Plc and NSIA Insurance. Commissioner for Insurance,
The board, had Mr. Wole Oshin of Custodian and Allied Insurance as its chairman.
According to Oshin, the pool took off with 14 subscribers, who contributed 40% of their subscribed lines amounting to USD 4,000,000.00.

He expressed optimism that other insurance companies that have expressed their interest in the Pool, will later subscribe to the Pool.
According to Oshin, Africa re-emerged as the manager of the Pool after a rigorous selection process.
From insurers’ comments on their performance in the oil and gas business since the enactment of the local content Act in 2010 and inauguration of the pool in 2015, tremendous improvement has been achieved.

This could also be seen from a recent data released by the NIA on the performance of 38 firms that participated on oil and gas business between 2012 and 2016.
According to NIA, the firms in the year 2016 raked in N54,130 billion gross premium from oil and gas insurance business.

The above figure was gross premium income got by 38 underwriting firms that played in the oil and gas class of business in 2016.
According to the report, out of this, a total of N38.8 billion was ceded as reinsurance to both local and foreign reinsurers while N15.9 billion was retained as net premium.
Ranking the above insurance firms which participated in oil and gas underwriting between the period 2012 to 2016,
The report shows that Leadway Insurance Ltd, maintained the lead for the five year period .

In 2016, the company raked in N11.625 billion to beat 37 other underwriters.
In 2015, the company raked in N6.55billion, in 2014, it madeN7.719billion, in 2013, N16.969billion and N17.614 billion in 2012.
The insurers said this is just the beginning of good things coming the way of the industry adding that in more years to come they stand to improve on this adding that if the trend continues, insurance industry in Nigeria will be better positioned to take its pride of place in the finance services sector.