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Why 90% local insurers lose big risks to foreign underwriters

By Bankole Orimisan
14 August 2020   |   4:09 am
Before the nation’s insurance industry can contribute significantly to Nigeria’s economy, government must implement policies that enable local insurers to thrive.

• Operators tie sector’s survival to govt’s policy
• Insurers doubt FG’s N1 trillion premium benchmark

Before the nation’s insurance industry can contribute significantly to Nigeria’s economy, government must implement policies that enable local insurers to thrive.

Industry analysts, who made the observation, also called for implementation of six compulsory insurances to increase penetration and acceptance in the country.

Investigation by The Guardian revealed that the failure to fully implement the Local Content Act in insuring oil and gas risks had made Nigerian insurers to lag behind their peers globally.

Experts said if the Local Content Act had been fully implemented, it would have helped the sector to contribute more to the Gross Domestic Product (GDP) instead of the meagre 0.6 per cent contribution.

The low capitalisation of most local insurers too has put a spanner in the wheel of full implementation of the local content act as foreign underwriters continue to dominate risk business in lucrative sectors, such as oil and gas, aviation and maritime sectors.

But with the September 30, 2021 recapitalisation deadline given by the National Insurance Commission (NAICOM) to all insurance companies to upgrade their capital to a new threshold, it is hoped the development will, in the long run, boost capacity of insurers to retain more risks in the local market, thereby, increasing their income level.

The ongoing recapitalisation exercise stipulates that operators with composite licence must upgrade their capital base from N5 billion to N18 billion; life insurance are required to increase their minimum capital requirement from N2 billion to N8 billion, amounting to 400 per cent increase. Similarly, general insurance companies are to raise their capital base to N10 billion from N3 billion while Reinsurance firms will now need N20 billion minimum capital to operate in Nigeria.

The sector contributes 15.4 per cent to GDP in South Africa, just as Ghana’s insurance market is projected to hit $600 million next year, while the sector in Nigeria, being the giant of Africa, can only contribute 0.6 per cent to its GDP.

Industry stakeholders, who spoke with The Guardian, said despite local content policy that had been in place, insurance firms had yet to fully take advantage of it to take a major chunk of the underwriting business from foreign firms.

As 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 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 spoke on condition of anonymity, told The Guardian that expectations that stakeholders would utilise the Local Content Act to boost insurance business in Nigeria had not been met as insurance operators, using different excuses, had been unable to deepen insurance penetration, with many others remaining incapable of getting a share of businesses from foreign-controlled companies.

Speaking on this situation, the Managing Director of Continental Reinsurance Plc, Dr. Femi Oyetunji, said Nigerian insurers insured only about 10 per cent of such risks while the rest were insured abroad. He blamed it on underwriters’ tendency for relatively low retention level 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 required huge capital investment outlay.

Oyetunji said: “The big risks in the sector are all owned by multinationals with head offices in the 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 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.”

The immediate past chairman, Nigerian Insurers Association (NIA), Tope Smart, told The Guardian implementation of local content act in insurance industry had reduced premium flight and improved financial position of operators and industry as a whole.

He stressed the need for full implementation of the Act, to drive the insurance industry to the desired level. Speaking in the same vein, an industry’s analyst, who also spoke to The Guardian on condition of 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 had very little retained or underwriting premium in oil and gas. “As a matter of fact, we have little or 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.”

IN another development, insurance managers have expressed doubt over the realisation of the Federal Government’s N1 trillion premium benchmark for the industry in the current financial year.

The doubt is based on the challenges facing the economy, especially the insurance industry. With compulsory insurances virtually non-existent, operators feel the possibility of meeting the target is still remote.

Recall that at the Nigeria Insurance Summit in December 2014, government said it planned to grow the sector’s premium, which was then N300 billion to N1 trillion in 2017, and N5 trillion in 10 years.

Recently, the Nigerian Insurers Association (NIA), revealed the volume of business written by the industry rose to N490 billion in 2019, a 15.55 per cent over 2018 level of N413.8 billion.

The immediate past Chairman, NIA, Tope Smart, at the virtual 49th Annual General Meeting (AGM), explained that despite the challenging business environment last year, the industry performed its role of financial intermediation and business restoration in line with its mandate.

Following this development, stakeholders said low penetration and activities of racketeers remained major hindrances to the realisation of the N1 trillion target.

In an interview with The Guardian, operators maintained that current realities made the target too ambitious, especially when viewed from the fact that the industry’s total premium income was still below N500 billion.

Nonetheless, they said income could increase if government enforced compulsory insurance policies and increased sensitisation of citizens towards embracing insurance.

Insurance and actuarial expert, Dr. Pius Apere, described the N1 trillion threshold as unrealisable, saying: “What plans did government put in place to achieve this in the industry?’’ According to him, before this could be achieved, government needed to implement some of the insurance laws such as compulsory insurance law with strict compliance.

Similarly, the Executive Secretary, the Nigerian Council of Registered Insurance Brokers (NCRIB), Fatai Adegbenro, said the low penetration of insurance policies made it absolutely impossible to achieve the mission.

“Sincerely speaking, I do not think it is realistic enough because the penetration of insurance is still very low in the country. But that is not to say we are not trying. I am optimistic that we can improve on what we already have as the total premium income of the industry.”

The Managing Director, Law Union & Rock Insurance PLC, Mayowa Adeduro, said, the plan could not be achieved because it remained a plan without necessary structural, legal and regulatory alignment toward achieving the goal. “Nothing has changed outside the paper; the industry structure remains the same; the Insurance Act and NAICOM Act remains the same and no executive order was pronounced to give teeth to the vision. Seven years after, we have barely added N150 billion to the figure then.”

The Managing Director, Universal Insurance Plc, Ben Ujoataonu, who also held that the target was not feasible this year, observed that it could only happen if all the stakeholders worked together.