Local insurers lose 90% of big risks to foreign firms
• Operators link survival of sector to govt’s policy
The nation’s insurance sector may be far from meeting the local content objectives of the Federal Government as it is currently losing 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 lower risk retention capacity and inability to insure the big risks.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 insurance sector constitutes the strong asset base for major projects, especially infrastructure.
The Guardian learnt that the lack of the full implementation of the Local Content Act in insuring oil and gas risks has made the sector to lag behind compared to its peers globally.
If the Local Content Act is fully implemented in the country, it will boost the insurance sector’s contribution to the Gross Domestic Product (GDP) from less than one per cent as it is currently.
Even at that, the bigger issue is low level 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 sector contributes 15 per cent to GDP in South Africa, just as the Ghana’s insurance market is projected to hit $600 million next year from $400million in 2014 based on Oxford Business Group’s (OBG’s) projected annual growth rate of 8.5 per cent.
The OBG’s 2017 report cites a January 2016 survey as saying that Ghana has the highest potential for growth in insurance premiums, and the least in terms of risk in sub-Sahara Africa. Insurance penetration, which is below two per cent of the population, measured as a percentage of GDP, underpins the vast but yet to be exploited potential.
Industry stakeholders who spoke with The Guardian said despite the local content policy that has been in place, insurance firms are yet to fully take advantage of it in order to wrestle away a major chunk of the underwriting business from foreign firms.
If the sector is able to underwrite the big risks, it would not only add value to the economy but increase its contribution to the GDP.As an oil and gas producing and exporting country, insurance experts argued that the economic development of Nigeria, coupled with the demand for energy infrastructure projects in the oil and gas industry should be enough to sustain the insurance sector.
The Local Content Act 2010 effectively states that 70 per cent of all businesses coming out of the oil and gas sector be insured in Nigeria. These include engineering, building of infrastructure, and other insurance needs.
However, an analyst who preferred anonymity affirmed to The Guardian that expectations that stakeholders would utilise the Local Content Act to boost insurance business in Nigeria have not been met, as insurance operators, using different excuses, have been unable to deepen insurance penetration, with many others remaining incapable of getting a share of the businesses from foreign-controlled companies.
Nigeria which has the biggest insurance market in West Africa with total premium of over N300 billion is grappling with insurance penetration of a modest 0.6 per cent, and the Local Content Act has not been able to drive the sector into high performance.
Explaining the situation, the Managing Director of Continental Reinsurance Plc, Dr. Femi Oyetunji, said Nigerian insurers currently insured only about 10 per cent of such risks while the rest are insured abroad. He blamed underwriters’ tendency for relatively low retention levels in respect of energy risks.
According to him, owing to their relatively modest size and capitalisation, compared with acceptable international standards for insurance companies, 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.
Oyetunji said: “The big risks in the sector are all owned by multinationals with head offices in U.S., 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 would 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 internationally ‘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. We have seen a lot of reduction in interest in insurance.
“We have seen asset values going down; we have also seen a new risk coming to the fore front which is risk of currency fluctuation. Nigeria has been negatively impacted. In fact what we see is that some of these risks are now being offered to us from outside Africa.”
No comments yet