As year 2012 gradually draws to a close, there are fears in the insurance sector that re-insurance rates for oil and gas risks could scale up in 2013, as companies pursue the renewal of their businesses in the New Year.
The fear may not be unconnected to the fact that oil and gas insurance claims for this year has been huge even as insurers are still grappling with how to settle most of them.
Consequently, insurers are bracing up for the worst, and hoping that things get better in the long run.
Managing Director of Lasaco Assurance Plc, Mr. Olusola Ladipo-Ajayi, said that oil and gas business is now open and the people are coming to see the nature of risks involved and are coming to terms with it. “I believe the business will improve, competition will also force foreign re-insurers to relax their terms and conditions, if only the experience is good, but if the market continues to be harsh as it is now, that is if the experience continues to be bad, we may still have to live with it for some time.”
It will be recalled that Commissioner for Insurance, Fola Daniel, said that the effect of an increase in offshore premium rates on the insurance industry is that “our purchase of re-insurance cover will become more expensive, because for a re-insurer that paid several billions as claims against few hundred of millions he collected from you, if you want to buy renewal for next year, it will be very expensive and we have seen that happen in the local market.”
According to Ladipo-Ajayi, the National Insurance Commission, NAICOM, therefore restricted local insurance firms participation in oil and gas risk to five per cent retention of their respective shareholders’fund.
The measure taken by NAICOM, according to Ladipo-Ajayi, may have also been influenced by the hike in rates by more than 50 per cent, and hardening of conditions and terms for accepting businesses from the local market by the world re-insurance companies this year.
Under such scenario, many of the underwriting companies could not purchase re-insurance cover for retention of large proportion of the businesses. This has led to loss of business opportunities to foreign underwriters.
Re-insurers act as financial backstop to insurance companies helping to pay for big claims in return for part of insurers’premium. They underwrite more than 60 per cent of the risks carried by the underwriting firms.
Ladipo-Ajayi, said that most of the businesses are still going abroad because of the high frequency of claims portfolio in the oil and gas underwriting.
According to him, “We are having more claims outstanding now and that is giving NAICOM some concern, hence the commission has insisted that we maintain the rules of not retaining more than five per cent of shareholders’ fund.”
He explained that the new rule, to a large extent, restricts the capacity of the market but with a risk as volatile as oil and gas, insurers should not be too much in a hurry to bite what they cannot chew.
“Most of the insurance companies are better off now in the business than we were five years ago. The knowledge gap has been bridged because, a lot of the people have undergone training locally and abroad in the special risks oil and gas sector,” Ladipo-Ajayi said.