Underwriters lose 90% risks to foreign investors as local content flops 

The nation’s insurance sector may be far from meeting the local content agenda of the Federal Government, as indications emerged that it is currently loosing about 90 per cent of the big risks in the economy to foreign underwriters.

Consequently, there is not only a huge capital flight from the economy, but also lower risk retention capacity and inability to take up the big risks.

The Guardian reliably gathered that the situation has made the nation’s insurance industry the weakest link in the financial services sector, contrary to what happens in other climes, where the sector amasses strong asset base for major projects, especially infrastructure.

Investigations also revealed that the lack of full implementation of the Local Content Act in insuring oil and gas risks has made the sector lag behind, compared to its peers globally.

The law stipulates that states that 70 per cent of all businesses coming out of the oil and gas sector shall be insured in Nigeria, including engineering, building of infrastructure and other insurance needs, however due to factors beyond immediate control of the industry, it is currently far from the target.

These factors include deep actuarial study and understanding of Nigeria’s oil and gas industry, financial capacity, availability of reinsurance market at optimal cost benefit to Nigeria and non-enabling environment.

Industry facts showed that if the Local Content Act is fully implemented, it would boost the insurance sector’s contribution to the Gross Domestic Product (GDP) from less than one per cent, as it is currently, to a significant figure.

Beside the local content law, it was also discovered that the bigger issue is low capitalisation, which limits the capacity of local operators to play in the big underwriting league of the oil and gas, aviation and maritime sectors.

The industry stakeholder who spoke to The Guardian said that despite the local content policy that has been in place, insurance companies are yet to fully take advantage of the Act to wrestle a major chunk of the underwriting business from the grips of foreign counterparts.

The Managing Director of Continental Reinsurance Plc, Dr. Femi Oyetunji, affirmed that Nigerian insurers presently insure only about 10 per cent of such risks, while the rest is insured abroad.

Oyetunji, maintained that Nigerian insurers’ tendency for relatively low retention levels in respect of energy risks is also largely responsible, admitting that while the industry needs the local content policy, however, “the policy is not yet in full session”.

According to him, owing to their relatively modest size and capitalisation, compared with acceptable international standards, the Local Content Act will have little or no effect, since bearing and underwriting risk in the oil and gas sector requires huge capital investments outlay.

“The big risks in the sector are all owned by multinationals with head offices in United States, China and Europe. So they will be more comfortable dealing with companies from their own base.

“If the local content policy were not in place, I can assure you that most of us will not be in business now because the size of the balance sheet of some of the big global insurers would have placed them in vantage position to write everything that is there.

“Insurance business is a global thing. These overseas companies are international ‘A’ rated players so everything seems to work against African companies. Nigeria is doing well in terms of making sure that local capacities are exhausted before any risk is externalised.

“Africa is going through tough times and most African economies depend on commodities. Commodities’ prices, be it copper, gold, or crude oil, have gone down, so the economies have been affected and when economies are affected, you have a downturn and the first causality has always been insurance. So, we have seen a lot of reduction in interest in insurance.

“We have seen asset values going down; we have also seen a new risked coming to the fore front which is risk of currency fluctuation. Nigeria has been negatively impacted,” he said.

The Chairman, Nigerian Insurer Association (NIA), Tope Smart, told The Guardian that implementation of local content act in insurance industry has reduced premium flight and improved the financial position of operators and industry as a whole.

But he stressed the need for full implementation of the Act, to drive the insurance industry to the desired level, noting that expectation “is one thing and reality is another” and urged insurers to only accept what their financial position- balance sheet) and reinsurances can accommodate.

Speaking in the same vein, an industry’s analyst who also spoke to The Guardian on anonymity, described the Local Content Act 2010, as a novel initiative of the then administration that has impacted in the insurance sector, but yet to fill the huge gap in big risk underwriting.

He said that prior to the implementation of the Act, the industry has very little retained or underwriting premium in oil and gas.

“As a matter of fact, we have little of no knowledge in underwriting oil and gas. We barely have a handful of semi experts in NICON Insurance trained only to document session to London and America market. The advent of the law has seen a geometric increase in underwriting knowledge and practical sessions in oil and gas Insurance.

“Today practically insurance companies participate in oil and gas insurance. The significant increase in our gross premium income in the last five years came majorly from oil and gas.

“That the expectation of the law is that we should write 70 per cent of the premium in Nigeria, however due to factors beyond immediate control of the industry, we are far from the target”, he said.

With the sector contributing 0.6 per cent to Nigeria’s GDP, it contributes about 15 per cent in South Africa. Meanwhile, Ghana’s insurance market is projected to hit $600 million next year from $400 million in 2014, based on Oxford Business Group’s (OBG’s) projected annual growth rate of 8.5 per cent and Nigeria’s total premium is currently about N300 billion (equivalent to $108 billion).

However, another analyst who also preferred anonymity, affirmed that the expectations of stakeholders from insurance remain mirage, as insurance operators, using excuses ranging from ordinary to the absurd, have been unable to deepen insurance penetration, with many others remaining incapable of getting share of insurance businesses from foreign controlled companies.