Oil Insurance: Tough regulations hinder indigenous players
Despite the huge business opportunities offered by the Nigeria Content Development Act 2010, foreigners still have firm grip of the risks emanating from the nations oil and gas sector.
Unarguably, the Act paved way for enormous opportunity for the local players, however its strict nature has perpetually made Nigerians second fiddle players to their foreign counterparts.
Origin of oil business in Nigeria
The discovery of crude oil in Nigeria in 1956 at Oloibiri village presently Bayelsa in 1958 led to Nigeria joining the league of world oil producing countries.
has indeed placed Nigeria among the most popular nations of the world. Consequently, in 1958 Nigeria joined the league of world oil producing countries.
However, despite the strategic importance of the oil business Nigerians were generally shut out of the business as preference were made for the foreigners-against them.
The nations insurance industry was also marginalized as local underwriters for over 20 years were excluded in the business on the ground of dearth of capacity both technical and financial until in 1975 when the then Federal Government owned NICON Insurance Corporation started oil and gas underwriting. Still a reasonable chunk of the business were still handled by foreigners. Worried by the development, local operators then continue to lobby with the government to come with modalities on how to address the issue.
Nigeria Contend Development Act 2010
Following the pressure from the local players, the Federal Government in April, 2010 came up with Nigerian Content Development Act 2010 which was enacted by the National Assembly the same year. Subsequently, guideline on how the business should be run was equally released.
The Act provides 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.
Oil and Gas Insurance Guideline
Following the enactment of the Nigeria Contend Development Act 2010, the insurance regulatory body, the National Insurance Commission (NAICOM) in same year released guidelines to ensure full compliance to the law.
According to the guidelines: No person or organization 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.
The guideline also insisted that 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.
It further stated that 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 of any Nigerian oil and gas risks overseas.
It maintained that 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.
In addition the directive stated that all insurance brokers holding current licence of the commission and with a current professional indemnity policy with a minimum of N100 million line of liability to take care of liabilities arising from wrong advices to clients, shall be eligible to participate in the business, it warned.
Capacity Requirement: Local players were restricted to only five per cent of their shareholders’ fund.
Regrettable however, more than three years after enactment of the Act, indigenous players are yet to reap the desired gains from oil and gas exploration. This, they said was as result of strict nature of the Act. Some of them who spoke on the ground of anonymity said the Act has even made things difficult for them going by level of capacity required.
They argued that while it is true that operators are presently offered risks worth 70 per cent for them to decide based on their level of capacity the quantum to underwrite, but the idea of insisting that independent company must not underwrite any risk or risks in excess of five percent of its shareholders’ fund does not favor the sector.
According to them restricting independent firms to only five per cent of their shareholders’ fund indirectly rendered them financially incapable.
Energy and Allied Insurance Pool of Nigeria (EAIPN) .
But determined to be relevant in this critical business, underwriters under the aegis of the Nigeria Insurers Association (NIA) recently signified interest that they want to revive the defunct insurance sector oil and gas pool, now to be officially known and recognized as Energy and Allied Insurance Pool of Nigeria (EAIPN) .
It is believed that if the insurance companies can pull their resources and expertise together, they will regain the necessary capacity to surmount all restrictions in order to enjoy the golden opportunity provided through the local content Act.
“Nigeria has the comparative advantage in the production of Oil and Gas. We will therefore fast track the process of re establishing the Oil & Gas Insurance Pool so that the industry can reap the full benefit of the Nigerian Local Content Development Act”, said the new NIA Chairman GUS Wiggle while delivering an acceptance speech during his investiture as the associations chairman in Lagos recently.
Premium Flight and Impact on GDP
There is no doubt that Nigeria has being losing billions of naira to these foreign countries. Premiums that were supposed to accrue to the sector are slipping away year in year out. It is appalling that, before 2010, despite directive of the local contend policy which empowers the insurance industry to have dominance in oil and gas business, only 33 per cent was so far underwritten by local operators, the sector, thereby losing a whooping 67 per cent to foreigners to the detriment of the nations growth and development, job creation and contribution to the Gross Domestic Product ( GDP).
But industry watchers believe that instead lamenting the dominance of foreign operators, the Nigerian insurance practitioners should be investing in the process and structures that will enable them to compete favorably with their counterparts in advanced economies. The sector should equally be investing in training as a means of acquiring new skills.
Culled from Fortunes Magazine