NAICOM moves to address the worrisome problem of low participation of local insurers in the lucrative Oil and Gas business

NAICOM moves to address the worrisome problem of low participation of local insurers in the lucrative Oil and Gas business

The National Insurance Commission, NAICOM, the apex regulatory body for the insurance sector in Nigeria, says it is committed to increasing insurance penetration in the country. To this end, the Commission has been designing ways to increase insurance premium via the Market Development Restructuring Initiative, MDRI. The initiative aims at enforcing all compulsory insurance policies as provided in the Insurance Act 2003.

One vital sector of the economy NAICOM is focusing on is oil and gas. The Commission has just released guidelines for oil and gas insurance, in pursuant of the provisions of the Insurance Act 2003 and the National Insurance Commission Act 1997. NAICOM collaborated with the Nigerian Content Development and Monitoring Board, NCDMB, on fashioning the guidelines to ensure compliance with relevant provisions of the Nigeria Oil and Gas Industry Content Development Act 2010.

According to the guidelines, no person or organisation shall transact an insurance or reinsurance business with a foreign insurer or re-insurer in Nigeria in respect of any life, asset, interest or other properties classified as domestic insurance unless with a company registered under the Insurance Act 2003. All insurance arrangements, agreements, contracts or memoranda of understanding relating to any operation or transaction in the Nigerian oil and gas industry shall be in conformity with the Insurance Act 2003 and other relevant provisions. Also, no insurance risk in the industry shall be placed overseas without the written approval of the Commission, which shall ensure that Nigerian local capacity has been fully exhausted.

Local capacity is the aggregate capacity of all Nigeria-registered insurers and re-insurers, which shall be fully exhausted prior to any application for approval to re-insure any Nigerian oil and gas risks overseas. An insurer’s capacity for oil and gas policies shall be the net retention of that insurer, plus its re-insurance treaty capacity. The re-insurance treaty capacity of a consortium of insurers is also acceptable. Any other re-insurance facility, other than treaty is equally acceptable as an insurer’s capacity, provided there is evidence that the risk has a cover provided by an acceptable security.

Where the re-insurance capacity is provided by a foreign re-insurer, it shall be with a company having a minimum Financial Strength Rating, FSR, or “A-” Standard and Poor’s or “A” A.M. Best. Any insurance company or reinsurance broker intending to re-insure/place any oil and gas risks abroad must apply for approval-in-principle and subsequently letter of attestation and certificate to re-insure abroad.

Stakeholders welcome the development. They argue that despite a directive that empowers the industry to have dominance in oil and gas business, only 33 per cent is so far underwritten by local insurers. The business in oil and gas insurance is in excess of $101bn, meaning that only $33bn is undertaken by local insurers. By this, the country is losing about $68bn to foreign insurers annually.

How prepared is the insurance industry for this big ticket transaction given the numerous challenges the sector is exposed to? Mr. Ibrahim Hassan, Deputy Commissioner, Technical, at NAICOM believed that the Nigerian Oil and Gas Content Development Act 2010 will boost the performance of the industry as virtually all insurance-related services in the oil and gas sector are now to be rendered locally. The Act provides, inter alia, for 40 per cent, 70 per cent and 100 per cent minimum local retention in marine, non-life and life insurance services respectively in the nation’s oil and gas industry. Only a small portion of these businesses is presently retained in the country. NAICOM intends to capture them 100 per cent locally in the long run.

Good as the local content policy appears, the insurance sector is exposed to series of challenges – inadequate capacity to underwrite big risks, lack of expertise in special risks, under-capitalisation and non-definition of local capacity in the Local Content Act, among others. Mr. Fola Daniel, Commissioner for Insurance and NAICOM’s Chief Executive Officer has canvassed for risk-based capital to address the problem of under-capitalisation. He said insurance firms would be asked to recapitalise in accordance with the risks they are taking. Experts attribute the low participation of local insurers in oil and gas underwriting to their low response to claims settlement. To this end, Daniel has vowed to withdraw the operating licences of insurers that default in the payment of the oil and gas insurance claims. The success of the guidelines hinges on the attitude of the operators, as adherence to them would help reposition the industry, Daniel noted.

Guinea Insurance plc may have no problems cueing into the fresh challenge. Guinea’s core investor is an active player in the oil and gas business and is repositioning it to explore the abundant opportunities there. Mr. Emeka Offor, chairman of the insurance company disclosed it intends to set up a unit to oversee the sector. Its managing director, Soji Emiola, applauded government and NAICOM for opening up opportunities in oil and gas underwriting via the local content policy. Emiola expected insurance firms to leverage on it.

Mr. Sunday Thomas, Director-General of the Nigerian Insurers Association, NIA, believed the local content law has the potential to generate over 30,000 jobs in the next five years. Thomas is optimistic the law will transform the industry from a major importer of goods and services to one that sources a substantial proportion of its inputs locally to support operations and thereby empower Nigerians. While positing the policy will afford the local market the opportunity to increase capacity, he warned that a lot of manpower training would be required.

Mr. Rotimi Olukorede, Executive Director, General Business at GNI Insurance plc is worried about what he called the greed of some insurance companies which are believed to be well-positioned as to edge out many disadvantaged others who are yet to benefit from the policy. He wanted the regulator to ensure local capacity is exhausted before all the business are ceded out. Companies, he advised, should be given the opportunity to gain experience and expertise in the oil and gas business.

Mr. Olusola Ladipo-Ajayi, chairman, Nigeria Insurers Association, is sure the policy will promote healthy competition, although foreign firms could still dictate oil and gas insurance rates. According to Ladipo-Ajayi, rates applied in oil and gas businesses are determined by insurers in the London market which control a large chunk of the business. It is a standard insurance practice for those who take the larger proportion of a risk to dictate the terms of any business. Unfortunately, local insurers cover a small proportion of risk in the oil and gas sector.

“Our members in the Nigerian market are bound to follow the lead of those who bear the greater proportion of risk. The pricing of insurance cover is greatly determined by several factors which relate to the level of risk undertaken by the provider of the cover. Among the factors to be considered in pricing are the probability of a loss, the total amount of liability that may arise in the event of a loss, the level of safety mechanism in place and reaction of the global insurance market to a particular risk in a given period and claims clauses,” Ladipo-Ajayi remarked.

Kunle Omilani, managing director of Y.O.A. Insurance Brokers noted that since the skills required for the exploration and production of oil are regarded as highly technical, the skills for assessing and insuring the risks associated with this activity must also be highly technical. So insurers need to develop their people, their operations and their financial strength if the policy must work. It is clear that compliance will be difficult to achieve in the short, medium or long term in the absence of a uniform and widely accepted framework. Omilani wants insurers and other industry operators to meet the requirements specified in the guidelines and to adopt and implement best practices before they participate in the oil and insurance business.

Industry operators agreed the Act has greatly empowered insurance brokers. Section 49 of the Act states that oil operators, project promoters, alliance partners and Nigerian indigenous companies engaged in any form of business, operations, or contract in the Nigerian oil and gas industry, are required to insure all insurable risks related to its oil and gas business, operations or contracts with insurance companies through an insurance broker registered in Nigeria under the provisions of the Insurance Act 2003.

To guarantee compliance, sub-section (2) provides that each operator shall submit to the board of NAICOM a list of all insurance companies and insurance brokers through which insurance covers were obtained in the past six months, the class of insurance covers and the expenditure made by the operator.

Brokers’ qualification to participate in the initiative is, however, not made easy. Prospective insurance brokers are expected to have an office in, at least, one of the oil producing states and shall file such evidence with NAICOM. The broker must possess a current professional indemnity policy with a minimum limit of liability of N100 million. The broker must have, at least, one experienced staff in the oil and gas insurance business in its employment.

Consortium bidding may be allowed for insurance brokers holding the current licence of the Commission, but subject to some conditions. For instance, all consortia/syndicates shall have a contracting leader who will bid on behalf of their members. A selected broker that fails to secure placement of the risk at the quoted terms shall be disqualified from participating in subsequent oil and gas bids for a period not less than three years.

Participation of a captive in its parent company’s insurance business shall be subject to prior satisfaction of the local capacity just as captives shall only participate to provide added capacity to local insurers. Any captive willing to provide re-insurance capacity to a local insurer must meet the minimum financial rating under the guideline. A captive is a company wholly owned by the parent company and restricted to writing the insurance business of its parent company only.

No foreign loss adjuster shall attend to any claims in the Nigerian oil and gas sector without the express permission of the Commission on such terms and conditions as may be stipulated in the approval. And the foreign loss adjuster shall handle the assignment with and in collaboration with, at least, one loss adjuster registered in Nigeria.

Re-insurance arrangements approved by NAICOM shall be constructed as part of an insurers’ capacity provided it is structured to protect aggregate losses on any event with maximum retention of not more than five percent of an insurer’s shareholders’ funds. Retention under any treaty or other re-insurance arrangement shall be aggregated on an annual basis and shall not constitute more than five percent of shareholders’ fund for operational risks and 2.5 per cent of shareholders for construction risks.

All insurers and brokers participating in oil and gas shall be required to institute a process of manpower development and render annual progress returns to the Commission. Evidence of submission of annual progress returns on manpower development shall be a requirement for bidding with effect from next year. All insurance businesses shall be transferred on gross premium basis only and no discount shall be paid out except as prescribed by law.

Claims shall be administered in accordance with the standard insurance practice, except that in the case of a consortium, settlement of claims shall be the sole responsibility of the leader. Interestingly, provision was made for conflict resolutions. Where there is conflict between stakeholders on any requirements in respect of insurance matters in fulfillment of the provisions of the Nigeria Oil and Gas Industry Content Development Act 2010, the Commission shall clarify the matter within the ambit of the Insurance Act 2003, and may do so in collaboration with NCDMB.

Stakeholders believe that with effective implementation of the guidelines, the industry could meet its target premium income of over N1 trillion by 2012, increase its contribution to the country’s gross domestic product, GDP, check capital flight and create job opportunities. This is, indeed, an acid test for NAICOM; as insurance experts agree, will take a strong regulatory will to achieve these goals.

—Clement Oriloye

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