‘Foreign firms dictate oil and gas insurance rate’

‘Foreign firms dictate oil and gas insurance rate’ Former Chairman Nigerian Insurers Association (NIA) Mr Olusola Ladipo-Ajayi, has said in spite the local content policy, oil and gas insurance rate is still dictated by the London market. Ladipo-Ajayi, said in Lagos that the rates applied in oil and gas businesses are determined by insurers in the London market who control larger chunk of the business. He noted that local insurers cover small proportion of risk in the oil and gas sector, adding that it is the standard insurance practice for those who take the larger proportion of a risk to dictate the terms of any business. He said: “Our members in the Nigerian market are bound to follow the lead of those who bear the greater proportion of risk. The pricing of insurance cover is greatly determined by several factors which relate to the level of risk undertaken by the provider of the cover. Among the factors to be considered in pricing are the probability of a loss, the total amount of liability that may arise in the event of a loss, the level of safety mechanism in place and reaction of the global insurance market to a particular risk in a given period and claims clauses.” Commissioner for Insurance, Mr Fola Daniel, said it is worrisome that despite the directive that empowers the industry to have dominance in oil and gas business, 33 per cent is underwritten by local insurers. He called on insurers to rise to the challenge and ensure they take full control of the opportunities provided by the Local Content Act. His words: “Directive 21 relating to insurance industry required all projects and operations in oil and gas industry to demonstrate strict compliance issued by NAICOM as part of technical evaluation requirements for insurance or reinsurance contracts. It also required that NAICOM verified gross underwriting capacity of Nigerian registered insurance companies must fully maximise Nigerian content before ceding risk offshore. “Despite the said directives, the insurance industry failed to attain the desired local control as the bulk of the business in oil and gas was still being insured by foreign firms. Going by statistics available at Nigeria National Petroleum Corporation (NNPC) account is in excess of $101billion, out of which only 33 per cent $33billion is retained.” He said that with the coming into effect of the Local Content Act 100 per cent, 70 per cent, and 40 per cent of all life, non-life and marine insurance risks in Nigeria oil and gas industry must be placed with insurers in Nigeria and no risk can be placed off-shore without the written approval of NAICOM, adding that the mandate is to ensure that Nigerian local capacity has been exhausted. “Unlike the Local Content Directives, the Act has created a formal organ for the enforcement of its provision by the establishment of the Nigerian Content Monitoring Board and has it an offence to fail to comply with the provision of the Act,” he added. Deputy Commissioner, Technical, NAICOM, Mr Ibrahim Hassan, said the industry has no doubt received development impetus by the Nigerian Oil and Gas Content Development Act 2010, adding that virtually all insurance related services in the oil and gas industry are now to be rendered locally and that accordingly, section 50 of the Act provides that no insurance risk in the Nigeria oil and gas industry shall be placed off-shore without the written approval of the NAICOM as the Commission is required to ensure that Nigerian local capacity has been fully exhausted. “The Act failed however, to define local capacity, and this is a fundamental omission. Is local capacity equal to the net retention of all insurance companies in Nigeria put together? Is it net retention plus reinsurance treaty available to the local underwriters, or is it net retention plus reinsurance treaty plus local reinsurances?5 In the absence of any statutory definition, what constitutes local capacity is only open to conjecture. This challenge may be overcome perhaps, by the making of a regulation by the Commission. “The Act has also greatly empowered insurance brokers. By section 49, all operators, project promoters, alliance partners and Nigerian indigenous companies engaged in any form of business, operations, or contract in the Nigerian oil and gas industry, are required to insure all insurable risks related to its oil and gas business, operations or contracts with an insurance company(s) through an insurance broker registered in Nigeria under the provisions of the Insurance Act 2003,” he said.