By Patience Saghana
The misery surrounding a single company taking the Â Â Â shine off a number of other insurance companies on an account that was co-insured may just be a time-bomb waiting to explode any time soon as operators are determine to unravel it. The ruckus of a lead insurer taking all the glory for an account that had a good number of companies is still a gloom yet unfolded by the nation insurance sector.
Co-insurance companies had tabled the grievances to the Nigerian Insurers Association (NIA) which often celebrate only the lead underwriters even in the bodyâ€™s Annual report and Accounts to address and correct the error as it were and list out all insurance companies on any of co-insured accounts
Co-insurance arrangements are measures that the Nigerian insurance companies have adopted even at the market level with a view to achieving full utilisation of the market capacity.
Co-insurance consists of sharing an insurance contract among a number of companies, allows the local market to use its optimum capacity, particularly in markets with a large number of insurers like the nationâ€™s insurance industry but unfortunately, the practice is enthralled with local rivalries among the insurers where even the lead insurer tries to outshine the others.
Co-insurance arrangements also exist in Egypt , India , the Philippines , Ghana and Thailand with encouraging experiences but the same cannot be boldly observed by the countryâ€™s local market.
For instance, seven insurance companies insured Nigerian Bottling Company (NBC) for N 58 billion in 2008/2009 from which claims arose and Royal Exchange Assurance took all the glory for.
A breakdown of the N 58 billion premium charged revealed that Royal Exchange led with 47.5 per cent with N 27.7 billion premium of the N 58 billion; Leadway Assurance has 20 per cent with a premium of N 11.6 billion; Cornerstone Insurance, Law Union and Rock Insurance and Custodian and Allied Insurance had a share of 7.5 percent each, with a premium of N 4.3 billion apiece whilst Staco Insurance and Zenith Insurance had five percent share with N 2.9 billion premium each.
Of the N 6.9 billion claims paid on the 2009/2010 NBC account for material damage to its Benin Factory, Royal Exchange coughed out N 3.241 billion and a consequential loss of N 563 million thanks to reinsurance whilst the other six companies balanced it up.
Mr. Olutayo Borokini, Acting Managing Director of Royal Exchange General Insurance Company Limited, said that on the schedule of insurance cover for the NBC facility, Royal Exchange led the consortium of co-insurers with 47.5 per cent.
He disclosed that while the claim was being investigated, two interim payments amounting to N 2 billion were made to the insured, out of which Royal Exchange contributed N 950 million in addition to a sum of N 52.464 million paid by Royal Exchange to the professionals that worked on the claims. Borokini said that the N3.8 billion payment represents the biggest single insurance claims settlement in the history of insurance in Nigeria.
He said Royal Exchange General demonstrated its strength and ability to honour its financial obligations and protect the interest of its various corporate or individual clients in either the private or public sectors of the Nigerian economy.
â€œOurs is a commitment to genuine partnership based on trust and integrity. These are the core values instilled by the founders of Royal Exchange, which have continued to drive the operations and strategic direction of our company,â€ Borokini stated.
Financial Vanguard bore witness to how insurance companies on that account ran up and down to make sure that they all contributed their own quota to the NBC claims for which Royal Exchange has crowned self.
For 2010/2011 NBC account, ten insurance companies are on the account that is being still led by Royal Exchange Assurance with a premium income of N 374.912 million premium paid.
The ten insurance companies on the NBC 2010 accounts are – Royal Exchange Assurance of Nigeria as lead insurer; Leadway Assurance Company; Custodian and Allied Insurance; Law Union and Rock Insurance Plc; Cornerstone Insurance Plc; Staco Insurance Plc; Zenith Insurance Company; Aiico Insurance; Nem Insurance Plc and Unitrust Insurance increased the percentage from 0.05 charged for the 2008/2009 to 0.45 percent for the 2010/201 insurance year.
Analysis of percentage share per each of the ten co-insurers showed that Royal Exchange led with 25 percent; Leadway, 22.5 percent; Custodian and Allied 10 percent; Law Union and Rock 10 percent; Cornerstone, 7.5 percent; whilst Staco, Zenith, Aiico, Nem and Unitrust have 5 percent each.
The issue of the lead insurers crowning selves over every other co-insurers is an industry wide disorder as the nationâ€™s insurance companies are also leading in top five oil accounts on the continent with N 24.6 billion.
Analysis the top five oil insurance accounts in the continent showed that Lasaco Assurance Plc is leading the USAN oil fields with a premium income of $82,922,706.67 (N12.4billion); LeadwayÂ Assurance is holding the ace with the Nigerian National Petroleum Corporation (NNPC) with $48,598,716.47 (N7.2billion) and OML 58 insurance account of $3,138,012.71 (N470.7million) along with foreign underwriter, HSBC; and Guarantee Trust Assurance (GTA) leads on Total Insurance account with $5,939,094.69 (N890,9million) whilst the Kosmos (Tullow) insurance account is being lead by SIC Insurance Company, Ghana and RKH Insurance Services meaning to say that other co-insurance companies in those accounts are not given attention.
Local Content: Operators ready to capture $ 14.6 bn capital flight
With an estimated annual spending of $18 billion Â Â Â going into the Nigerian oil and gas industry, only about 20 per cent or $3.6 billion of that amount is domiciled in Nigeria whilst the Nigerian insurance operators are ready to capture the balance of $14.4 billion that goes out of the country.
Operators in the insurance industry are in high spirits over the Nigerian Oil & Gas Industry Content Development Act 2010 which received presidential assent on April 22, 2010 to address the glitch.
The Act states that â€˜No insurance risk in the Nigerian oil and gas industry shall be placed offshore without the written approval of the National Insurance Commission which shall ensure that Nigerian local capacity has been fully exhausted.Â There shall be a succession plan which shall provide for Nigerians to understudy each incumbent expatriate for a maximum period of 4 years. At the end of the 4 year period the position shall become occupied by Nigerians. Additionally, Nigerians are to be given first consideration for employment and training in any project executed by any operator or project promoter in the Nigerian oil and gas industryâ€.
Mrs Dieziani Alison-Madueke, Minister of Petroleum Resources noted that the implementation of the Act will be a major investment opportunity for local and international investors that will benefit from the commercial incentives it guarantees.
Alison-Madueke said, â€œIt will certainly create employment for our teeming youths in the Niger Delta and other parts of the country as well as set the template for expanding the concept into other sectors of the economyâ€.
â€œDirective No 21â€ of the Federal Government which is the summary of the major component of the local content policy with regards to the insurance industry. Following this directive is an additional empowerment for the industry regulator, National Insurance Commission (NAICOM) to guide the orderly transaction of business in this area. It says, â€œNAICOM-verified gross underwriting capacity of Nigerian registered insurance companies must be fully utilized to the satisfaction of NAICOM to maximize Nigerian Content before ceding risk offshore.â€
It is imperative to note that the last recapitalization announced by government was in pursuance of this local content policy and to help insurance companies raise the needed capital to do business in this area. Initially, much resistance by oil multinationals to local underwriting of their operations stems from inadequate capital as well as lack of skill in oil and gas underwriting.
Ernest Nwapa, the Group General Manager, Nigerian Content Division of the Nigerian National Petroleum Corporation (NNPC) acknowledged the tremendous progress recorded since 2003 in governmentâ€™s effort to promote local content in the industry through collaboration approach of domiciliation, saying that if government does not sustain the momentum in the pursuit of the policy, it risks going back to the pre-2003 era.
Nwapa said that prior to the introduction of the policy, the industry was faced with the challenge of low capacity, resulting in the importation of virtually all goods and services used by the operators, saying that currently the country accounts for 35 percent.
Mr Shawley Coker Chairman of Petroleum Technology Association of Nigeria (PETAN) asked rhetorically, â€œHow can you achieve 50 per cent local content by 2010, when you have not built the foundation to receive 30 per cent of it?â€ he asked. â€œHow do you want to achieve 70 per cent?â€
Coker asked further, â€œyou should have started yesterday, that is 10 years ago, to get to 70 per cent by 2010. Right now as I speak, Nigeria is still not prepared for it. That is why we are addressing you today; to tell government not to say what it is not acting on.â€
Some of the challenges facing the Nigerian Content are:Â Capacity;Â Quality; Capital;Â Size of indigenous companies; Infrastructure; Role played by International Oil Companies (IOCs) and foreign oil service companies; Challenging regulatory framework e.g lack of implementation, consequences of breach
Mr. Prosper Okpue,Â Managing Director/CEO of Insurance Brokers of Nigeria in a paper titled: Matters Arising in Nigerian Energy Insurance Market, Challenges and Recommendations, said:
â€œIf we must be sincere to ourselves, our local content insurance industry has not developed any mechanism to evolve appropriate local content initiatives that will create value for their shareholders other than the excitement that the 45 per cent local content target for 2007 will bring dollar windfall to their balance sheet without consideration of the real potential catastrophic claims of energy exploration and exploitation operations.â€
Okpue is of the view that absence of skills for this specialized area is lacking and if Nigerian underwriters must participate, they must move beyond raising capital and acquire the necessary skills. But till date, Okpue pointed out that most insurersâ€™ and brokersâ€™ involvement in the national oil company, NNPC, is largely based on political connections. In conclusion, he advised that local content be interpreted carefully to ensure that the market does not sink.
He stated that for financial capacity,Â most companies have realized that N3 billion and N5 billion represent a small percentage in dollar terms of what is actually required to write a significant proportion of the oil risks, adding that there is increasing move to raise additional capital. Even with the overall market capital base, much needs to be done. For instance, a typical oil production platform may be valued at US$500 million.
Mr. Olusola Ladipo-Ajayi, Group Managing Director, Lasaco Assurance Plc said that the local content had not yet given the insurance industry any form of control on the policies issued under the Nigerian local content policy.
â€œThe insurance contracts are still largely dominated by foreign underwriters. This is because of our own capacity problem. Therefore, they dictate the terms and conditions, rates and standards,â€ he said.
On local content implementation challenges, he said, that the business in Nigeria was having a problem of interpretation as to what constituted local capacity.
Ladipo-Ajayi explained that three issues had been identified; â€œthe first is if the local capacity is the net retention of all insurance companies in Nigeria put together. The second is whether the net retention and the reinsurance treaty available to the local underwriters, which is considered as the local capacity. The third is that the net retention, reinsurance treaty, local reinsurances and everything available to the insurance companies in Nigeria by the way of concession should be considered as the local capacity.
According to him, â€œThe local content policy is suffering from the problem of interpretation and every one takes it from their own perspective. Some of those who insist that the local content should be limited to the net retention of the insurance companies in Nigeria are saying that since the treaty capacity is obtained abroad, it is no longer local content.â€
He said 70 per cent of oil and gas could only be retained by local operators if the insurance industry was allowed to develop along the best line of international practices.
According to him, â€œit is to encourage the companies in the local insurance industry to access the reinsurance facilities available abroad.
â€œRestriction hampers our ability to arrange these reinsurances because everything is based on the law of large number.
Lasaco Assurance boss noted, â€œIf you are not able to introduce many risks, you are not going to be able to access the reinsurances. When we are participants in the international market, it opens windows to the Nigeria insurance industry. At least, they can gauge our ability on our performance in what we introduce into the international market.
From here, there could be an element of reciprocity. You may not achieve this overnight; butÂ â€œI donâ€˜t think that question should be entertained. The reason is how many policies are written in that class of insurance that we need to raise our capital base. Even if we increase our capital base hundred folds, it will still not be enough to underwrite all the businessesâ€, he said.
â€œThere is no way we can limit the businesses in Nigeria to the country alone. All over the world, insurers still have to deal with international reinsures since insurance is an international business. I am not saying that the Nigerian insurance industry has the capacity to retain 70 percent of the risks emanating from the oil and gas sector, but we would have access to international reinsures.â€
He stated, â€œFrom our own experience at LASACO Assurance, we started and built our special risk portfolio in the oil and gas insurance business. In the last five years, we have also been able to groom a team of young men and women, who have become versatile in the business. Oil and gas insurance is not a rocket science. With adequate exposure, people can learn it. It is just a matter of applying the same basic principles of insurance to the peculiarities of the oil and gas sector.
The NAICOMâ€™s guideline on oil and gas risks had as its overall framework, the monitoring of offshore insurance as provided in section 72 of Insurance Act 2003.
And item 6 of the guideline stipulates â€œfor efficient monitoring and adherence to these guidelines, each company (oil and gas and all energy-related companies) shall make available to the Nigerian Content Division (NCD) of NNPC (where applicable), DPR (where applicable) NAPIMS (where applicable) and NAICOM, full details relating to any insurance package being proposed together with the identities of proposed co-insurers not later than 90 days prior to the anticipated attachment of such policies.
Failure to adhere to the guidelines by insurers is punishable with sanctions. The same applies to oil and gas companies. However, the situation today is that no company has been punished for ceding risks abroad neither has NAICOM sanctioned any oil company for taking its insurance overseas.
Speaking on behalf of the IOCs, Mr. Mutiu Sunmonu, Managing Director of Shell Producing Development Company (SPDC) stated that the IOCs should have a higher referral limit of more than the N10 million which it currently operates upon. Sunmonu explained that Shell was proposing N65 million as this is aimed at fast- tracking the projectsâ€™ tenure and it will enable the avoidance of the conventional bottle-necks attached to getting approval for projects.
Specifically, Sunmonu stated that it does not help the nation in any way if heavy bureaucracies are attached to projects which are only within the limits of N10 million,Â while other countries are getting bigger projects executed with less stress attached â€œand in view of this, we are proposing that the limits be increased to N65 million,â€ he enthused.
Local content is not a Nigeria invention; it obtains in all oil- producing countries.
Mr Ezekiel Chiejina, Director General of the Nigerian Insurers Association (NIA) said insurance companies had the requisite financial muscle to underwrite oil & gas risks, and had been doing so.
Chiejina noted 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 rated international companies which had further increased their ability to underwrite special risks.
â€œThe 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,â€ he said.