Daily Independent (Lagos)
Sola Alabadan
18 November 2008
Out of the Nigerian oil and gas risks exposure amounting to $101.14 billion (about N11 trillion), about 33 per cent amounting to $33 billion is being retained by the indigenous insurance companies, says Managing Director, NNPC, Abubakar Yar'Adua. This figure excludes NNPC account.
Yar'Adua, who disclosed this during the Champion Insurance Day lecture in Lagos, stated that the Nigerian insurance industry lacks the financial wherewithal to participate actively in the juicy oil and gas underwriting. He presented a paper titled "Local Content Development in Nigeria's Oil and Gas Industry."
Yar'Adua, represented by Odunayo Bammeke, Manager, NNPC, said the question is that does the insurance industry have the required capacity to underwrite oil and gas risks? adding that the answer is an obvious no.
As the premium payable on these oil and gas risks amounted to $224 million, the nation's insurance industry loses $151 million (about N16.1 billion) since only 33 per cent of the risks amounting to $33 billion risk exposure is retained in the country.
Although the last recapitalisation in the insurance industry resulted in the increase in the net assets of the 40 companies operating in the country to N177 billion ($1.5 billion) as at December 2007, he said this is still relatively low.
NNPC oil assets, he noted have MPL of $1billion with underlying sums insured of $32 billion excluding well and third party, pointing out that only 42.5 per cent of the NNPC Consolidated Insurance Programme was retained in the country in 2007 and 52.5 per cent in 2008.
To meet future challenges, he advised that the insurance companies must think of increasing their capital base significantly beyond the present level voluntarily so as to retain more risks locally.
The NNPC boss also recommended that the insurance industry should adopt risk based capitalization by creating separate balance sheet for each class of the business.
As there are a number of insurance companies qualified to underwrite oil and gas risks, there should be an effective use of co-insurance to pull capital, while local reinsurance companies should be seen to be providing adequate treaties to insurers, he added.
He further charged insurance operators to develop relevant skills such that pricing or risks could be done in the country, adding that insurers should also avoid unhealthy competition that erodes the potential profitability of the companies.
Yar'Adua, however, warned that customer service and product innovation should not be sacrificed on the alter of local content.
Even with the retention capacity of local insurers averaging 33 per cent, he stated that the acid test of a good insurance company is the ability to pay claims promptly, stressing that the response of the market when the need to pay claim arises will be important to the future growth of the industry.
Meanwhile, Minister of Finance, Shamsuddeen Usman, has lamented that substantial part of the risks emanating from the nation's oil and gas industry are still being underwritten by foreign insurance companies.
Usman stated that the local insurance industry is being confronted with all manner of hurdles preventing it from fully participating in oil and gas insurance.
While the government has set a local content target of 45 per cent in 2006 and 70 per cent in 2010, the minister said even though the country has recorded appreciable progress in other areas, the performance of the insurance industry in this initiative has been dismal.
The overall aim of the local content policy of the Federal Government in the energy sector is to enable Nigerians develop and maximize the potentials for local companies participating in the business of the sector.
He therefore charged operators in the local insurance industry to rise up to the occasion by building capacity to underwrite the energy risks, while also undertaking a major review of their operations.
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