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A shot in the Foot

By Patience Saghana
Attempt by insurance companies to actively participate in the nation’s oil and gas business is being short-circuited as some members now work towards the dissolution of the association formed to actualize the idea, Patience Saghana reports

The various pools formed by the Nigerian insurance industry in order to have a good grip of the nation’s oil and gas insurance are now headed towards the rock as certain forces not only work to render them inactive but members of the various pools have started to push for their dissolution.

Some of the pools include the Nigeria Oil and Energy Insurance Pool (NOEIP), Energy and Special Risk (ESR) and Association of West African Energy Insurers (AWAEI). All of these have been established for more than five years yet they cannot boast of business ceded to them.

With 23 member companies of the pool, NOEIP’s main objective was to underwrite oil and energy business from Nigerian, West Africa, and other parts of Africa as well as overseas. It is also to provide additional capacity in the Nigerian insurance industry.

The idea of ESR which has ten members and five companies still under consideration for membership was mooted by Mr. Dolapo Balogun during his tenure as the Chairman of the Nigerian Insurers Association (NIA) six years ago.

AWAEI is made  up of underwriters in the Republics of Benin, Ghana, Nigeria and Togo who decided to come together by way of pooling resources to participate in all energy and other related large risks within the sub-region.

The Association came into being when a member of the Togolese market saw an advert in respect of the plan to build a West African Gas Pipeline Project to run from Nigeria, Benin through Togo to Ghana with the aim of supplying Nigerian Gas to industries in these countries.

With Mr. Kodjo Locahas the President General Assembly of AWAEI,  the pool’s board held its seventh technical meeting on 30th May 2006 whilst a steering committee chaired by Mr. Johnnie Wilcox was formed with the aim of writing the West African Gas Pipeline Project.

The committee was constantly in touch with the managers of the West African Gas project who reserved about 15 per cent of the business to the local markets.

AWAEI’s committee estimated that the sub-region should pull a capacity of at least US$10 million. Nigeria market is expected to contribute at least US$3.5 million and Ghana US$1.5 million in the first instance while a sub-committee was formed to undertake marketing visits to Benin and Togo to urge them to join the Association for the benefit of their respective companies and their national economies.

From Nigeria, the pool targets businesses from the NNPC, Joint Venture Companies and the Nigeria Liquefied Natural Gas Limited. From Benin: Companies that would benefit from the gas project and consumers of the gas.

In the same vein, AWAEI ticked Ghana’s National Petroleum Corporation, Thermal plants 1 and 11, Tema Oil Refinery, Tema Petrochemical and other companies that would benefit from the gas project. From Togo, the pool eyes companies that would benefit from the gas project and companies that are likely to come up as a result of the gas project while it opens its doors to other West African countries such as Serra Leone, Sao Tome and Principe.

AWEI expected that a minimum capacity required is US$2million. This can be enhanced by the purchase of XL protection to limit the Pool’s exposure while also increasing the capacity to US$10 million on absolute basis.

In the course of its assignment, the committee has solicited for the support of the four markets (Benin, Ghana, Nigeria and Togo), received the cooperation of the Commissioners of Insurance of the markets and made submission to the ECOWAS Fund at its Headquarters in Lome. The Fund pledged to support the association.

The Federal Government expressed solemn concern over the inadequate participation of indigenous companies in the provision of insurance for oil and gas investments in the country.

It was in view of that that the federal government directed both the National Insurance Commission (NAICOM) and the Nigerian National Petroleum Corporation (NNPC) to review the situation in conjunction with the indigenous players in the insurance sub-sector, with a view to developing appropriate strategy to ensure their optimum participation in the business.

Nigeria government loses as much as $10 billion annually as a result of the inability of Nigerian players to participate effectively in the provision of insurance services for most of the assets in the nation’s oil and gas industry.

The minister of State for Finance, Remi Babalola, said that the present administration’s effort to boost the capacity of the domestic insurance companies in the oil and gas industry was in line with the government’s policy of raising local content in the sector.

Mr. Babalola while addressing insurance operators on capacity building and local content development said the Federal Government is committed to encouraging NAICOM to pursue more positive and creative initiatives towards meeting the local content objectives and targets.

The government had set a target of 45 percent local content by 2006, and 70 percent 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, all insurance risks associated with oil and gas business, including prospecting, exploration, drilling, construction, shipping, distribution, marketing, and transportation would be undertaken locally by firms registered with Nigerian insurance underwriting companies.

The Finance Minister expressed his dissatisfaction about the present level of participation of insurance companies in the plum business bewailed, “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.

He decried, “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.”

Mr Godwin Wiggle, Managing Director of Linkage Assurance Plc Africa continent had witnessed sustained macroeconomic growth across the continent driven largely by high oil and commodity prices and more stable governments.

2006, he recalled, was the third consecutive year in which Africa recorded an average GDP growth in excess of 5 percent adding that stable governance has come periods of relative discipline and consistency in fiscal and monetary policy, leading to a renewed global interest in Africa as an investment destination, and spurring a new class of domestic retail and institutional investors across the continent.

Wiggle believed that strong macro-economic performance could create a greater pool of underlying insurable assets on the continent. In South Africa, which accounted for more than 75 per cent of premium income on the continent, growth in premiums exceeded 15 per cent in 2006.

“Faster growing economies on the continent are demonstrating faster growth in premium income, Angola, Kenya and Nigeria for example (Africa’s fastest growing insurance markets) have each demonstrated GDP growth in excess of six percent per cent per annum over the last two years, with Angola’s economy expanding by about 15 per cent in 2006, Kenya by about 6 per cent and Nigeria by over 6 percent”.

The bigger opportunity for the Nigerian insurance market is the forecast that the Nigerian economy will grow over the next 10 years, the potential growth in the insurance sector is even higher. On the assumption that the Nigerian economy grows at a rate of 13 per cent pa over the next l0years, the insurance sector should grow a nominal rate of 35 per cent per annum. The Nigerian insurance market could become bigger if the key initiatives that both the government and NAICOM have put in place are followed to the letter.
Vice-Chairman of Sovereign Trust Insurance Plc, Mr. Seun Ajayi, said the future of the Insurance business in the country was bright, especially with the government’s enforcement of 45 per cent local content policy in the oil and gas industry, which will significantly boost insurance income.

He said, “Over $400 million is expected to be generated as insurance premiums by the industry in the next two years. This transformation will not just increase the fortunes of insurance business but will also throw up new scenarios and opportunities”.
According to him the industry recorded total premium paid by oil and gas companies operating in Nigeria in 2007 in excess of $650 million.

After meetings with oil multinationals in the country early this year, NAICOM directed all oil and gas insurance businesses to be placed 100 per cent with Nigerian registered and domiciled insurance companies. The NNPC, which should have been the lead among the oil firms, in giving the local companies a chance in this business set its criteria for pre-qualification to bid for its oil and aviation asset stating that any company must have a net asset of not less than N5billion and which NAICOM has pop up to N7billion.

But NNPC which should encourage local insurance companies to adequately participate in the oil and gas insurance said the local market does not have the required capacity for the big business.

The Group General Manager, Insurance, NNPC, Mr. Odunayo Bammeke, was quick to state that the insurance companies in the country still does not have the requisite capacity

According to him, the magnitude of the value of risks that are involved in the integrated activities of the sector is such that the domestic Nigerian insurance market participation is very insignificant.

Bammeke said that some figures to think about in the current state of the Nigerian insurance industry indicate that oil and gas related risks exposure (excluding NNPC account) stood at $101.14 billion (N11 trillion); the corresponding premium is $224 million; about 33 per cent gross is retained in Nigeria, that is $33 billion risk exposure.

Whereas, net asset of 40 recapitalised insurance companies as at December 2007 is N177 billion or $1.5 billion. NNPC oil assets have MPL of $1 billion with underlying sum insured of $32 billion (excluding wells and third party liability); 42.5 per cent of the NNPC CIP was retained in Nigeria in 2007, 52.5 per cent in 2008.

Quote
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.


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