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Low capacity, dearth of local airlines hamper growth in aviation insurance

Contributes less than 1% in insurance premium

By Rosemary Onuoha

THE Nigerian insurance sector may continue to witness a lull in aviation business, as low financial and human capacity, huge risk exposure, and dearth of local airlines in the aviation sector continue to put underwriters away from aviation business.

Financial Vanguard investigations show that while industry Gross Premium Written, GPW, of 18 insurance companies for the 2017 financial year stood at N309.8 billion, total aviation revenue for the year was a paltry N4.2 billion which represents a 1.3 percent contribution to the GPW.

Meanwhile analysis of the oil and gas portfolio of companies show revenue of N40.7 billion which represents a 13.1 percent contribution to the GPW.

Governor Ifeanyi Ugwuanyi of Enugu State, on Tuesday, August 23, 2016, led other eminent dignitaries of the state to the ceremony marking the landing of the first international cargo aircraft at Akanu Ibiam International Airport, Enugu, courtesy of the Ethiopian Airlines.File Photo

While aviation insurance happens to be a huge revenue earner for advanced insurance markets, operators are of the opinion that revenue from aviation business will continue to elude the Nigerian insurance market as long as foreign airlines dominate the Nigeria aviation sector.

Industry analysis

Analysis of industry performance shows that while the top players barely partook in aviation underwriting, the moderate players were more active in the business segment. Leadway Assurance with the highest GPW of N84.2 billion for the 2017 financial year, did not partake in aviation insurance, even as its oil and gas revenue stood at N12.8 billion.

Custodian and Allied Insurance which came next made GPW of N43.1 billion, but its aviation business was just N39 million, less than 0.1 percent, while its oil and gas portfolio was N1.8 billion.

Coming third in the industry ranking with GPW of N32.1 billion, Aiico Insurance Plc did not partake in aviation business for the year under review but made N1.3 billion in oil and gas underwriting.

Reinsurance firm, Continental Reinsurance made GPW of N29.6 billion but did not reinsure any aviation business. Its oil and gas portfolio stood at N2.1 billion.

Though leading the industry in the aviation business, Axa Mansard Insurance Plc with N333.7 million on aviation business against its total GPW of N26.8 billion was still hugely below the proportionate share of oil and gas underwriting which produced N6.1 billion.

On the other hand, leading other companies with more participation in aviation was Sovereign Trust Insurance at lower industry average GPW of N8.5 billion. Its aviation portfolio stood at N881.7 million, over 10 percent proportionate share of the total GPW, but its oil and gas business was N3.3 billion.

Consolidated Hallmark Insurance Plc was next with low GPW of N5.7 billion, but with over 10 percent aviation business content at N580.5 million while its oil and gas revenue stood at N1.2 billion.

Prestige Assurance GPW was N3.8 billion with aviation revenue of N574.2 million while oil and gas revenue was N285 million.

Linkage Assurance recorded GPW of N4.1 billion with aviation revenue of N521.4 million while oil and gas business was N1.5 billion.

Law Union and Rock Insurance made GPW of N4.3 billion with aviation revenue of N420.5 million while oil and gas revenue was N1.1 billion.

Operators’ reaction

Managing Director of Boff & Company Insurance Brokers, Mr. Jide Agbeja, said that many insurance companies shied away from underwriting aviation because of the peculiarity and the technicality involved.

He said, “Many underwriters lack the competence to professionally underwrite aviation. Also, very few of them have reinsurance facilities in place, so what many of them do is to take a proportion of aviation risk on their net treaty. You see them taking only about 0.5 percent or one percent on any aviation portfolio.

“Also insurers shy away from it because the claims are catastrophic in nature and can run into hundreds of millions of dollars. Remember that liability limit is always high on aviation insurance  because of the probability of a huge loss in the event of a claim.

“In addition, there are not many aviation companies that have assets and liabilities to insure in Nigeria, so underwriters cannot spread their risks much in that regard. When you are earning $500 and $200 per cover, and they ask you to come and pay a claim of $1 million, it is just not commensurate.

“Until we have more aviation companies and more aviation assets to insure, that is when underwriters will spend money on training their staff.   If you go and train your staff with a lot of money and he/she comes back and don’t have many policies to underwrite, it is like a waste but it should not be seen as a waste. It should be seen as training them for the future. That is the reason why many insurance companies shy away from aviation portfolio.”


Technical area


Speaking on the condition of anonymity, a managing director said, “The aviation business is a technical area. Oil and gas insurance is also a technical area. However, because we produce oil and gas here, coupled with other aspects of oil and gas businesses going on in Nigeria, there is an urgent need for insurers to underwrite oil and gas.

“But it is not so for aviation because we don’t have the kind of competence as we have in the oil industry. The aircraft are not manufactured here and most of them are not owned by Nigerians.

“Also, aviation business is governed by various conventions and Nigerian insurers are not used to most of them. Recall that some underwriters were deep in aviation insurance in the past but got their fingers burnt when claims crystallized. It was serious problem because in some instances, it took years for such claims to be settled.

“Another major setback to aviation insurance is that local consumers bargain for ridiculous premium discounts to a level where it cannot cover claims when accidents happen.

“Aviation law stipulates that in the event of death resulting from an aircraft accident, each victim will be compensated to the tune of $100,000. Unfortunately, at a point in time in Nigeria, people were negotiating to pay reduced premium that could only pay compensation of $10,000.

“And even at that they wouldn’t want to pay the premium that is payable outside the shores of Nigeria. So when people refuse to cooperate with the insurance sector by not paying the right aviation premium, coupled with the fact that it is not a highly profitable business, companies have ignored that aspect of underwriting.

“Moreover, aviation insurance is not a localized business because no insurance company in Nigeria has the capacity to pay the type of claims that come up on aviation accident when it happens.”

Former President of Chartered Insurance Institute of Nigeria, Mr. Sunny Adeda said, “We don’t have many airlines in Nigeria but there are many aspects to oil and gas business. The oil companies are there, Nigerian National Petroleum Corporation, NNPC, is there and so many affiliations to the oil sector.

“Unfortunately, some of the aircraft you see in Nigeria are not even registered in Nigeria. Some of them are on lease. Just as you lease a car, you can lease an aircraft. So if you lease an airplane, you won’t go and insure it, it is the owner that will insure it. That is the reason why the oil portfolio is bigger than aviation portfolio. Aviation is a dollar denominated policy.”

Head, Special Risks, of Continental Reinsurance Plc, Mr. Bashir Akinsiki, said, “Companies need to have financial and technical capacity as well as the appetite to underwrite aviation business. However, oil and gas is more lucrative than aviation when it comes to rating. “Oil and gas assets are far more priced than aviation asset because oil and gas business is more diversified than aviation.”

The way forward

On the way forward, Agbeja said that for aviation business to improve in the country, government need to create a conducive atmosphere for businesses to thrive.

Agbeja said, “There must be a conducive atmosphere for private companies to go into the aviation industry. Government must encourage investors. For instance, Virgin Airlines withdrew its services from Nigeria sometime ago.


Aviation premiums


“If Virgin were still running Virgin Nigeria, the sector would have been more robust, but government breached their agreement so Virgin just withdrew and left.

“Government must be sincere, stick to wordings of all agreements and encourage local, regional, and international participation in investing in aviation. When there are more aviation companies and airlines around, underwriters will then be interested in training their staff knowing full well that they will make a lot of money from aviation premiums. Right now the premiums are low, the number of aviators are small, number of airlines are small and exposure is high. So it is not attractive.”


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.