NIA, local oil & gas insurers defend NNPC rates

By Patience Saghana & Dania Onozure
Nigeria insurance practitioners have strongly defended the rational behind the acclaimed high rate of the Nigerian National Petroleum Corporation-Consolidated Insurance Policy (NNPC-CIP) just as the BP oil spill has jerked up insurance rates by 50 percent.

The nation’s insurance operators under the aegis of Nigerian Insurers Association (NIA), at a press conference held in Lagos recently, said that the body’s attention was drawn to various reports over $363.80million inflated premium of NNPC-CIP.

Chairman of NIA, Mr Olusola Ladipo-Ajayi said, “Our response is that the pricing of insurance cover is greatly determined by several factors which relate to the level of risk taken by the provider of the cover (the insurers).”

Some of the factors for considerations in pricing as highlighted by Ladipo-Ajayi included the probability of loss; the total amount of liability that may arise in the event of a loss; the level of safety mechanism in place; reactions of the global insurance market to a particular risk in a given period and claims clauses.

He explained that the rates are usually determined by the UK market which covers a large chunk of the risks for that, he elucidated that local insurance companies had little or no part to play in influencing the rates charged.

According to him, “The rates applied were determined in the London market and not by our members who cover a small proportion of the risk.

It is standard practice for those who take the larger proportion of a risk to dictate the terms for others to follow. As we have indicated above, the policy was issued based on terms and conditions acceptable to reinsurers at the premium charged. Our members in the Nigerian market are bound to follow the lead of those who bear the greater proportion of the risk. Besides, NNPC has a well established insurance and legal department that would normally check those policies at inception.”

However, local insurance companies may not have heard the last of increase in pricing big risk as reinsures around the world have hiked prices for offshore energy-related insurance premiums by 50 percent following insurance industry losses of up to $3.5 billion (2.4 billion pounds) from the BP oil spill in the Gulf of Mexico.

Total insured losses from the worst oil spill in US history are expected to be between $1.4 billion and $3.5 billion, although losses would be significantly higher if BP had purchased liability insurance instead of self-insuring its risks through its captive insurance programme, said Moody’s.

Insurers and reinsurers have publicly reported at least $611 million in estimated losses arising from the event, with losses reported coming primarily from the global reinsurers, who sustained the majority of net losses, and from Lloyd’s and Bermuda market players, according to the report from Moody’s. Like larger oil companies, BP is self insured for clean up costs, in its case through captive insurer Jupiter Insurance Ltd.

Mr James Eck, Moody’s vice president (senior credit officer) said the event will have a meaningful impact on the market for offshore energy-related insurance coverage, with early reports indicating a 15 to 25 percent increase in property coverage for rigs operating in shallow waters and up to 50 percent higher for deepwater rigs.

“With hurricane season approaching, any additional losses in the Gulf of Mexico this year could further bolster pricing for this subclass. Likewise, pricing for offshore energy liability insurance is sure to trend higher as insurers and reinsurers take stock of their losses and re-evaluate the complex risks associated with drilling in deep waters, said.

Deepwater Horizon is the largest single oil drilling rig loss since the 1988 Piper Alpha platform disaster in the North Sea, which resulted in approximately $3.6 billion of insured losses, said Eck.