By Rosemary ONUOHA

The local content initiative of the Nigerian government has fuelled economic development and demand for energy infrastructure projects in the oil and gas sector, due to the mandatory requirements for the domestication of a large portion of oil and gas risks locally, before transferring these risks internationally.

It will be recalled that the Local Content Act 2010 effectively states that 70 per cent of all businesses coming out of the oil and gas sector must be insured in Nigeria – for example, engineering, building of infrastructure and insurance needs. Therefore, local insurers are expected to absorb 70 per cent of all risks arising out of the oil and gas segment.

Accordingly, as part of efforts to play big in the sector, Nigerian insurers are embracing mergers and acquisition.

The Nigerian market

The country’s oil and gas risks result in very volatile growth in Gross Premium Written (GPW), but low retention ratios.

Although, Nigeria has the biggest insurance market in West Africa, with total premium of USD 1.6 billion in 2011, insurance penetration is modest at 0.6 per cent. The sector has seen regulatory induced consolidation driven primarily by higher capital requirements. But in recent times, having seen the need to retain most of the big ticket risks locally, operators are embracing mergers and acquisition.

The sector witnessed the successful merger of Custodian & Allied Insurance Plc and Crusader Insurance Plc only recently. Also; Universal Insurance Plc and African Alliance Plc have sent a notice of intent to merge their operations to the Securities and Exchange Commission, SEC. Although, the planned merger between Cornerstone Insurance Plc and Linkage Assurance Plc was called off by shareholders of both companies, the companies are mapping out other strategies to increase capitalisation.

The financial crisis also contributed to merger and acquisition activity, as the Central Bank of Nigeria, CBN, passed a directive ordering all deposit money banks to divest their non-banking interests or form a holding company structure. For example, Mansard Insurance (formerly Guaranty Trust Assurance) was a subsidiary of Guaranty Trust Bank until 2011, when Assur Africa Holding purchased GT Bank’s 67.7 per cent holding.

According to the Commissioner for Insurance, Mr. Fola Daniel, there is room for further mergers and acquisition as Nigeria is considered under-insured, given her large population of 165 million.

The future

Nigerian insurers tend to have relatively low retention levels, especially, in respect of energy risks, owing to their relatively modest size and capitalization, compared with international standards. However, it is believed that the Pension Reform Act, 2004, which makes group life insurance compulsory for companies employing more than five people, is likely to drive further growth in premium.

So far, insurance buyers are attempting to exhaust the local capacity before placing insurance business overseas. Moreover, foreign participation is relatively low in the insurance sector, as NAICOM does not permit foreign companies to own more than 40 per cent of a Nigerian company.

Nigerian insurers are developing appropriate business plans to deploy increased capital.

Before now, insurers in Nigeria can take considerably longer than other players in the financial sector to close their annual accounts; however, such practice is being discouraged by NAICOM. The mandate from the regulator is that all insurers must submit their last financial account by June of the following year and the operators, to a large extent, are complying.

The federal government of Nigeria, also mandated that all publicly listed companies adopt International Financial Reporting Standards IFRS, which experts believe should improve the transparency of listed companies.