Forex risk: Insurers transfer over 60% oil & gas businesses abroad

AT the backdrop fragile foreign exchange market, Nigeria’s insurance firms may have resorted to massive transfers of their oil and gas businesses abroad.

Financial Vanguard findings reveal that this practice has escalated in the past five years leading to over 60 percent of their businesses in this sector ceded to foreign insurance firms, which exceeded the limit of 30 percent stipulated by the country’s local content law. In 2022 alone, 64 percent was transferred.

Data obtained from the National Insurance Commission, NAICOM, showed that between 2018 and 2022, insurers attracted N501.3 billion oil and gas business but ceded N307.5 billion or 61 per cent to their foreign counterparts.

The local content law stipulates that 70 percent of all insurance risks associated with oil and gas businesses must be insured in Nigeria with registered Nigerian insurance companies. The oil and gas businesses include prospecting, exploration, drilling, constructions, shipping, distribution, marketing, and transportation.

Insurance operators who spoke to Financial Vanguard, however, explained that the massive depreciation of the naira since 2018 as well as increasing difficulty of accessing foreign exchange makes it difficult to comply with the requirement of the local content law. The official exchange rate rose to N495.2 per dollar last week, from N361.3 in 2018. The parallel market rate rose to N750 last week from N363 in 2018.

According to the insurance operators, the oil and gas business is transacted in dollars and once the Naira depreciates, retention comes down while the value of the risk goes up. They also cited the low capacity of insurance companies in Nigeria as many companies are still grappling with a relatively low capital base to engage in oil and gas business.

The industry regulator, NAICOM, has also noted that the oil and gas portfolio has remained a challenging angle in the market owing to its nature of enormous capital and professional requirements.

These challenges, according to them, triggered the upward trend in the share of oil and gas business exported by insurers from 50.9 per cent in 2018 to 64 per cent in 2022. In 2018, insurers attracted N82.2 billion oil and gas premium income, but ceded N41.9 billion or 50.9 per cent to the foreign counterparts.

In 2019 the local market attracted N94.7 billion oil and gas premium but ceded N37.9 billion or 60 per cent to foreign insurers.

In 2020, the local market attracted N91.9 billion oil and gas premium but exported N56.8 billion or 64 per cent to their foreign counterparts. In 2021, oil and gas premium income was N106.8 billion. The local market retained N37.9 billion while N68.9 billion or 65 per cent was ceded abroad.

In 2022, premium income for oil and gas business stood at N125.7 billion. The local market retained N45.1 billion while N80.6 billion or 64 per cent was ceded to foreign insurers.

Insurers’ comment

Speaking on the situation, Managing Director/Chief Executive Officer of International Energy Insurance, Mr. Olasupo Sogelola, stated that the dollarization of the oil and gas business is having a huge impact on local retention.

Sogelola said: “Oil and gas business is a dollarized account; our retention is in naira. Once the exchange rate goes up, your retention comes down. You cannot retain the same business when Dollar was N300 and when it has almost become 800. If your shareholders funds’ is in dollars, then you will not bother because you will still be retaining the same amount of oil and gas business that you are retaining because it is a dollarized account.

“For example, if my capacity is 10 million dollars and I am supposed to take a two million dollar premium business, I would have measured it against my dollar capital base. But if I am to measure 10 million dollars against a N10 billion business, first I have to convert N10 billion to dollars to get the actual dollar I have. In that regard, can I take two billion dollars business? No, because all my N10 billion is not more than 12.5 million dollars. So that is why our local retention is dropping. That is why the market is losing business to the international world because once dollar price goes up, it affects that.”

Sogelola also stated that the dollarization of the oil and gas business affects claims payment as it forces insurers to pay higher claims.

He said: “Claims are also affected because the claims that you have incurred that you have not paid, by the time it crystallizes, you will pay at a higher rate. For example, my company has a lot of claims in dollars. We have paid everybody in naira but we are just paying the dollar claims little by little. Due to the rate of exchange, I cannot just dip my hands into my pocket and bring out all the dollars and pay off one day. So I schedule it to make money for my shareholders and the company. That is the situation.

Sogelola noted that the industry must undergo recapitalisation if it hopes to increase retention of oil and gas business locally.

He stated: “The capital base of insurance companies is also a factor to consider if there is intention to improve retention.

“When talking about capital base, you must look at the entire industry capital base. NAICOM knows the capital base of every company, they know the shareholders’ funds of everybody. When they add it together and convert it to dollars, then that is the actual capital base we have in Nigeria. Can that capital base carry the 70 per cent stipulated for oil and gas?

“Also, our oil assets are so large. The value is not changing because it is in dollars. So, put the entire industry capital base against the entire oil and gas asset, we can’t do 70 per cent. In fact, if we are doing 30 per cent before, we should be dropping to 10 per cent now.”

Also speaking, Deputy Managing Director, Technical, Anchor Insurance, Mr. Adebisi Ikuomola, said that participation in oil and gas business is actually reducing. However, full participation can only be guaranteed if the exchange rate for the dollar comes down or insurers’ capital base goes up.

He stated: “In response to the high level of premium export emanating largely from oil and gas related risks, Nigeria use laws and regulations to drive local participation through graduated domestication of these insurances. However, there is still a long way to go.

“Despite the local content laws and regulations established in Nigeria, insurance companies are yet to fully take advantage of the opportunity to effectively position themselves as major players capable of leading foreign firms in the underwriting of oil and gas business.

“The mandates to companies in the upstream petroleum sector to cede their insurance business to local insurers, is in line with efforts to maximise the participation of local insurance companies in the oil and gas sector.”

Meanwhile NAICOM on its part stated that the decline in participation of oil and gas business is ascribable to its specialty nature measured against the sector’s underwriting and carriage capacity with regards in this kind of risk.

NAICOM stated: “Beyond the economic need of capital and professional enhancements in the industry, the urgent need for local content law enforcement cannot be over emphasized, to ensure for justifiable retention levels for all kinds of special risk Insurances including. The recapitalisation measure of the Commission is much handy in this regard to create the enabling carriage capacity especially in special risks segment of the industry.”

Way forward

On the way forward, Sogelola noted that the insurance industry must attract more capital.

He said: “The industry must attract more capital to increase capacity in underwriting oil and gas business. For example you have a lot of Nigerian businesses doing well outside, they need to come back with money, invite them in, bring them to capitalize our insurance companies.

“The honest truth is that NAICOM has got to move the capital base up. That will help us by regulation. Although few people are against recapitalisation but if NAICOM does the analysis, the more we expand the better for us. NAICOM should give us ample time to recapitalise the companies and not the system where they will just announce that ‘you must recapitalise before 31 December’. Such methods will kill companies.”