High oil, gas risks cripple retention capacity
Despite the existence of the Nigerian Oil & Gas Industry Content Development Act of 2010, which empowers local insurers to underwrite up to 40 per cent risks in the oil and gas sector, operators still cannot carry more than five per cent of such risks, Sweetcrude has learnt.
According to a special report by A.M Best Company, Nigerian insurance companies still act as fronts to international insurers in the underwriting of oil and gas risks.
The report stated “Considering the scale of corporate risks such as oil and energy projects in the region, and the desire for additional expertise, Nigerian insurers tend to act as fronting companies, retaining less than five per cent of each risk.”
“Nigeria’s insurance regulator, the National Insurance Commission, NAICOM, and the Nigerian Oil & Gas Industry Content Development Act of 2010 are encouraging increased domestic retentions for energy risks. However, given the high values of these risks, insurers cannot retain significantly greater levels,” The report said.
A.M. Best believes that, given the expected demand for insurance driven by the oil and energy sector, particularly in West Africa, there is potential for higher levels of risk retention locally or regionally
. “Increased capacity, however, is unlikely to materialise by relying exclusively on higher amounts of capital. Greater technical expertise and increasingly sophisticated underwriting skills, a more developed regulatory and legal framework, and increased access to international retrocession markets are key ingredients in achieving increased retention levels,” the report said.
According to A.M Best, insurers operating within Africa rely heavily on re-insurance in particular for corporate risks, although some regulators are encouraging higher retention ratios.
“As in other emerging insurance markets, such as those in the Middle East, insurers in Africa commonly act as fronting vehicles, ceding the majority of risks. African insurers rely on local, regional and international re-insurers. Regional re-insurers include Africa Re and ZEP-RE.”
While stating that some African countries have national re-insurers, like Morocco (Societe Centrale de Reassurance – SCR), Algeria (Compagnie Centrale de Reassurance), Kenya (Kenya Re), Tunisia (Societe Tunisienne de Reassurance) and Ghana (Ghana Re-insurance Co.), the report said that in some countries such re-insurers benefit from compulsory cessions.
“In some countries, national reinsurers benefit from compulsory cessions, although to some extent these are being phased out in the region. Subsequently, re-insurers are attempting to expand their portfolios internationally. For example, Ghana Re, which is wholly owned by the Ghanaian government, saw its market share fall from 92 per cent in 2008 to 86 per cent in 2010 following the repeal of its compulsory legal cessions in 2008. Before 2008, Ghanaian cedants were obligated to cede 20 per cent of all treaty business to Ghana Re.”
Despite compulsory cessions being removed in some African countries, A.M Best noted that reliance on re-insurance for corporate risks in the region remains high. “In Nigeria, for example, market leaders Custodian and Allied Insurance and Leadway Assurance Co. have total gross premiums written (GPW) of less than USD 110.5 million.