By Rosemary ONUOHA

Immediately the Local Content Act, 2010, which empowers local insurers to underwrite up to 40 per cent of risks in the oil and gas sector, became operational, insurers got busy in taking up risks in the oil and gas sector.

Accordingly, local underwriters took up the challenge with a lot of enthusiasm with the notion that oil and gas business means more premium income for operators. Unfortunately, rather than unite, oil premium tended to divide the industry. The selection process for brokers and companies that will underwrite government investments and other interests in oil and gas was arbitrary and less than transparent.

But two years down the line, the enthusiasm seems to be fading fast, because so far, the volume of claims that have emanated from the oil and gas sector which insurers have had to settle has been huge.

The present situation

The present situation in which insurers have found themselves, is one of exasperation, because the oil and gas risks are maturing so fast and while underwriters are still struggling to settle one, another one comes calling.

Confirming this, Managing Director of Consolidated Hallmark Insurance plc, Mr. Eddie Efekoha said that the enthusiasm on the part of insurers, which greeted the local content Act is going down as a result of quick maturation of risks and subsequent claims emanating from such risks.

“As a result of the risk crystallizing earlier than expected, players are beginning to exercise caution, so that they do not burn their fingers which could possibly affect shareholders’ fund,” Efekoha noted.

Efekoha added that the oil industry was supposed to maintain the momentum that started with the local content project, but this could not be, because there has been a little bit of caution flowing from the few incidents that have happened so far, because the claims emanating from those incidents, no matter how small they were, are huge in terms of amount.

The setbacks

The local content initiative, as laudable as it seems, encountered series of setbacks in the insurance sector, particularly when some practitioners continue to act as conduit pipes for ceding of risks to foreign underwriters.

According to Mr. Lanre Laoshe, an insurance expert, some practitioners continued aiding oil companies operating in the country to break rules and regulations guiding oil and gas risk underwriting for their selfish gains.

Laoshe said that ordinarily the oil majors want to play by the rules, but some local operators who want to cut corners force them to do otherwise.”Sometimes these oil majors operating in the country want to obey the laws guiding oil and gas risk underwriting, but we always find a reason for them not to.”

The development, Laoshe said, made the oil companies to see the practice as the standard norm in the industry, thereby throwing crumbs to Nigerian insurance companies while taking the huge chunk of oil business abroad leading to capital flight.

For Prof. Joe Irukwu, an insurance expert , the level of discipline on the part of insurance operators, dropped drastically despite enabling laws which they can capitalise on. Irukwu said “Presently there are enabling laws to guide the practice of insurance, but it is so sad that the level of discipline has dropped drastically despite these laws.”

For Chairman of Sovereign Trust Insurance Plc, Dr. Ephraim Faloughi, the dominance of foreign firms in the insurance of oil and gas risk businesses created a structural weakness in the system.

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.

The way forward

So far, the huge risks are beginning to weigh down the local insurers and if the trend is allowed to continue, could impact negatively on their bottom-line at the end of the financial year.

Consequently, to guard against this negative trend, Efekoha said that the insurance industry needs a firmer and stronger oil and gas insurance pool arrangement, adding that the pool arrangement is necessary to help the market have a bigger bite of the businesses coming from the oil and gas sector.

According to Efekoha, the first pool should be the initiation of the National Insurance Commission, NAICOM, and the second by way of some operators coming together in a kind of syndicate arrangement that would not be initiated by NAICOM or the Nigerian Insurers Association, NIA.

For Irukwu, insurance practitioners must ensure that they abide by the laws guiding the profession. He said that the popular saying by international oil companies that Nigerian insurer’s lack capacity to underwrite oil and gas risk is false because they are merely talking for their pockets just to encourage capital flight.

Irukwu stressed that the country truly have the capacity to cover up to 70 per cent of oil and gas business  in accordance with the local content law, however, underwriters must ensure that they actually carry the risks and not act as fronts for international underwriters as has been the case all along.

In his words “These people that keep saying that we don’t have capacity are only talking for their pockets and the operators in the insurance sector must actually underwrite and not front for the captive insurers of these oil majors.”

Deputy Commissioner, Technical, of NAICOM, Mr. Ibrahim Hassan, however said that insurance operators must discard the unhealthy attitude of struggling to gain a share of premium from oil and gas business at all cost.