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Oil and Gas Insurance: Still some Grounds to Cover

By Patience Saghana
With less than six months to the 2010 deadline when insurance companies will be underwriting at least 70 per cent of risks in the oil and gas sector, not much ground has been covered in spite of efforts put in place by the sector to meet up with the target.

Daniel
Daniel

The government had set a target of 45 per cent local content by 2006, and 70 per cent by 2010. The implication of this is that apart from effective participation of Nigerian companies in the exploration, production, processing, marketing and distributive activities in the oil and gas industry, a large chunk of all insurance risks associated with oil and gas business, including prospecting, exploration, drilling, construction, shipping, distribution, marketing, and transportation ought to be undertaken locally by registered insurance companies in the country yet the industry is robbed of its right to exhaust local capacity each passing year under some lame excuses by Nigerian National petroleum Corporation (NNPC).

Mr. Remi Babalola, Minister of State for Finance regretted the minimal impact of the insurance sector on the local content policy in the oil and gas sector but government compunction about the whole issue is just in words.

Babalola admitted that the insurance industry in the country has indeed enhanced their capacities to cushion capital flight from the nation. He said, “In spite of the successful recapitalisation of the insurance companies, energy risks are still substantially placed abroad and the local industry seems to be confronted with significant hurdles preventing full participation in oil and gas insurance.

“The government believes that the NNPC should be at the forefront of those supporting and encouraging the attainment of the local content targets for the industry, as it has done for other sectors.

“In line with the Vision 20-2020 focus of this administration, the Nigerian insurance industry should be able to participate optimally in the domestic energy sector. The government believes that Nigerian insurance companies should be at the forefront of the development of an African energy insurance market.”

He however challenged players in the industry to demonstrate to government and the multinational oil companies that they possess the capacity and workable strategies to achieve and sustain the local content targets in the industry.
Mr Odunayo Bammeke, General Manager, in charge of Insurance of the Corporation had said that out of the available risk in the oil and gas sector, with a corresponding premium income of $224 million, Nigerian underwriters had been able to retain about 33 per cent; about N33 billion of the total risks exposures.

However, the amount is at the exclusion of other risks in the Nigerian National Petroleum Corporation which currently stand at $32 billion. The Nigerian underwriters had been able to absorb 42.5 per cent as at 2007 and 52.5 per cent as the end of the 2008 financial year and 48 percent in 2009.

According to him, after two years of pursuing the Nigerian Content Policy objectives, the content level has grown from below 10 per cent to approximately 40 per cent in the first quarter of 2009. “There has been significant growth in opportunity and corresponding advances in indigenous capacity, arising from guidelines issued to the industry on the specific work scope to be performed in Nigeria and this cuts across all sectors of the industry.

Of the 48 per cent local content on NNPC-CIP this year being led by Leadway Assurance, only 19.5 per cent was shared among 39 local insurance companies. Where is the remaining 28.5 per cent? Is it that Leadway Assurance shouldered the balance of 28.5 per cent all alone?

Operators’ views
Mr. Jimoh Ibrahim, core investor in NICON Insurance Plc and Nigeria Reinsurance Corporation strongly believe that the Nigerian insurance industry has substantial capacity for oil and gas business n the country, arguing that the NNPC only came up with excuses to rob the nation’s insurance industry of their right to exhaust local capacity.

According to him, “Oil and gas insurance can be fully domesticated in this country. Nigerian insurance industry can underwrite it successfully. Insurance industry in Nigeria is still the best in the world. They are run by professionals”.

“The Nigerian National Petroleum Corporation should wake up. If you tell me that Nigerian insurance industry does not have the capacity to bribe, I will agree with you but not to tell me that insurance companies in this country do not have the capacity to underwrite oil and gas business. That is a white lie,” he said.

The Managing Director of the Mutual Benefits, Mr. Akin Ogunbiyi said the estimated assets value of all oil operators, including the NNPC, both in the on-shore and off-shore operation, as well as the West African States Oil and Gas Pipeline Project, is about $95.6 billion.

The breakdown shows that the total assets value of NNPC, the International Oil Companies (IOCs), Pan Ocean Petroleum Development and Eleme Petrochemical Plant, Port Harcourt, in the on-shore operation alone are about $33.6 billion, while those of the off-shore operation were estimated at $52 billion.

Further breakdown shows that NNPC has assets value of about $28 billion in both on-shore and off-shore operations, while oil giant, Shell Petroleum Development Company of Nigeria (SPDC), has an asset value of about $960 million on-shore and about $6.5 billion off-shore including the Bonga field project.

Also, Mobil producing according to him has on-shore asset valued at about $1.2 billion, and off-shore asset worth about $4.2 billion.

It is also estimated that the third largest oil producer in Nigeria, Chevron, has an on-shore asset value of about $ 700 million, with off-shore asset hitting about $3.3 billion. It was also revealed that Total/Elf asset value in the on-shore is about $320 million, with about $2.95 off-shore. Agip Oil Company/Eni Corporation has an on-shore asset value of about $1.2 billion and an estimated $1.6 billion asset off-shore.

Addax Petroleum is said to have an estimated on-shore asset valued about $278 million, while Pan Ocean has about $38million asset value on-shore.

The Nigeria Liquefied Natural Gas (NLNG) is said to have an estimated off-shore asset value at about $5 billion, while Eleme Petrochemical has estimated asset value of about $964million both on-shore an off-shore. It was revealed that the West African Gas project is valued at about $10 billion.

Mr. Jacob Erarbor, Managing Director and Chief Executive, International Energy Insurance (IEI) Plc, said the insurance industry had a good run last year despite the effects of the global economic meltdown due to the good measure of confidence that policyholders and investors have in the sector as a result of the consolidation and recapitalisation exercise in the market, as insurance companies gathered the financial muzzle to retain a large proportion of business within the Nigerian market.

According to the IEI boss, “Government has directed the ministries, parastatals and agencies to insure their assets and pay appropriate premium. The National Insurance Commission (NAICOM) is doing a good job to support the industry in the implementation of the provisions of the Insurance Act as regards compulsory insurance. What we are hoping is that the regulator and government will continue to support the industry in order to sustain the progress already made.”

In the same vein, Mr. Gbenga Afolayan Chairman of Goldlink Insurance Plc, said that both the public and government are becoming more and more aware of the fact that insurance is the bed rock of any modern economy.
He said, “Insurance companies have been doing very well in settlement of all genuine claims in the industry, there is no reasonable insurance company that will refuse to honour obligations to his clients, there is zero tolerance for claims payment.”

According to him, “NAICOM, the Commissioner for Insurance and the government are in full support of the industry to enable the sector to play its role effectively in the economy. Also, he explained, the value of assets has been on the rise so also is the premium income; adding that in the next few years the industry will continue to witness expansion and growth.”

Mr Adeyemo Adejumo, Managing Director of Continental Reinsurance Plc, Adeyemo said that as the capital base of Nigerian firms had been increased, more of them were taking advantage of the government local content policy which mandates oil firms to give preference to local insurance firms in the insurance of their assets ahead of foreign insurance firms.
He said, “We are able to support the government policies especially on the local content policy, which seeks to increase the number of Nigerian firms participating in the oil and gas and aviation sectors.
“Government wants to see more Nigerian insurance and reinsurance firms underwriting risks in the sectors and we could not have done this without the recapitalisation. So, you will notice that these days, more Nigerian underwriting firms are involved in the businesses,” he added.

Nigerian Insurers Association Position
The Director-General of the Association, Mr. Ezekiel  Chiejina,  said that apart from the recapitalization exercise which increased the capital base of insurance companies and strengthened them for global competitiveness with improved capacity to underwrite Insurance of Oil & Gas, most insurance companies have reinsurance treaties with ‘A’ rated international companies further increasing their ability to underwrite special risks.

The huge capital available notwithstanding, insurance companies have taken steps such as setting up full-fledged oil and gas departments staffed with professionally trained and qualified oil and gas underwriters.

For instance, the industry wrote a total gross premium income of N165.5 billion in 2008 as against a gross premium of N100.6 billion in 2007, representing an increase of 63.5 per cent in spite of the crippling effects of the global economic meltdown.

Also, the industry during the period paid claims to individuals and corporate organisations amounting to N53.3 billion as against N35.2 billion the previous year, an increase of 51.4 per cent.

Besides, as a result of the injection of fresh funds during the recapitalisation exercise, capitalisation of the insurance sector increased from less than N200 billion in 2007 to over N670 billion at its peak last year.

The Association is fully convinced that Insurance Companies have the capacity to underwrite the required local content of oil and gas risks in line with the Federal government’s expectations and as we approach 2010 when the local content Insurance is expected to move to 70 per cent, efforts are underway to ensure that insurance companies take up the entire 70 per cent of Insurance risks in oil and gas.

NAICOM
Mr Fola Daniel, Commissioner for Insurance believed that consolidation has the potential to improve efficiency in an industry if it results in poorly performing firms exiting the market, either through, voluntary or involuntary withdrawal or through, mergers and acquisitions.

Insurance commissioner stated, “Look at oil and gas insurance, we fashioned out a regulation and we are saying that for any company to do oil and gas, it must have N7 billion but the statutory minimum is N3 billion which means that for any company to be a minimal player in the oil and gas business, it needs more than 100 per cent of the minimum capital. When you look at oil and gas, having an asset base of N7 billion is still a drop in the ocean”.

In spite of all the remarkable development in the Nigeria insurance market, the insurance regulator believes that the proportions of the insurance markets are small due to low premium income compounded by the generally poor attitude of the people towards insurance services.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.