Offline furtune

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THE desire of government for the attainment of 45 per cent local content target for the insurance industry in Nigeria may be defeated following pronouncement by the Nigerian National Petroleum Corporation (NNPC) that the industry does not have the required capacity to underwrite the risks in the sector.

The Group Managing Director of NNPC, Mr. Abubakar Yar'Adua made the position clear in a lecture he delivered at the 12th Champion Insurance Day/Luncheon in Lagos when he declared that the obvious question was, "does the insurance industry have the required capacity? The answer is an obvious no."

The NNPC boss, who was represented by Ayo Bammake, group general manager, Insurance, NNPC, gave available profile of capacity in the insurance industry which ruled out the domestic insurance companies from the juicy risks.

According to him, Oil and gas related risks exposure (excluding NNPC Account) stood at $101.14 billion (N11 trillion). The corresponding premium is $224 million; about 33 per cent is retained in Nigeria that is, $33 billion risks exposure.

Whereas the net asset of the 40 recapitalised insurance companies as at December, 2007 is N177 billion or $1.5 billion.

Also, NNPC oil assets have MPL of $1 billion with underlying sum insured of $32 billion (excluding well and Third Party); 42.5 per cent of the NNPC CIP was retained in Nigeria in 2007; 52.5 per cent in 2008, while Brass LNG project estimate $9 billion.

On what should be done to address the challenges, he said that the industry must be commended for the efforts in the past two/three years in terms of training of employees to acquire competence in oil and gas underwriting. The concluded recapitalisation is equally a step in right direction, he said.

Said he, "statistics above indicate over exposure when risk exposure level is related to the total net asset bearing in mind that technically only about five to 10 per cent of the net asset could be used to support a class of business."

However, in meeting future challenges, he said, the industry must think of further recapitalisation, adopt risk based capitalisation (create separate balance sheet for each class of business); effective use of coinsurance to pull capital; local reinsurance companies providing treaties, develop relevant skills such that pricing of risks could be done in Nigeria; and avoid unhealthy.

Competition that erodes the potential profitability of the companies.

According to him, customer service and product innovation should not be sacrificed on the alter of local content; Insurance remains a global business and Nigeria cannot afford to be left out.

According to him, the attained level of retention (average of 33 per cent) is commendable but the acid test is when claims mature. The response of the market at this time will be important to the future growth of the industry, he said.

However, the Minister of Finance, Dr. Shamsudeen Usman in his keynote address at the occasion with the theme "Local content development in Nigeria's Oil and Gas industry. The Insurance perspective " directed the Nigerian National Petroleum Corporation (NNPC) and National Insurance Commission (NAICOM) to work out modalities for partnering with domestic insurance companies to develop appropriate strategies for their participation in the energy sector.

The minister regretted that in spite of the successful recapitalisation of the insurance companies, energy risks are still substantially placed abroad and the industry seems to be confronted with all manner of hurdles preventing them from full participation in oil and gas insurance.

Represented by the Commissioner for Insurance, Fola Daniel said the strategies should ensure optimum participation of insurance companies in the domestic market to gradually grow capacity.

Besides, partnering with the industry will help the sector to meet the set target of 45 per cent in 2006, increasing to 70 per cent by 2010 and develop the required human capital for local participation in the energy sector by Nigeria insurance companies, he said.

Said he, "the local content development programme is a major policy thrust for this government which, if properly implemented, can enable Nigerian firms build capacity, grow the economy and create jobs. The government views with concern any sector that is not living lip to expectation."

Managing the 45 per cent target, he said, should be the concern of the Nigerian insurance industry and their reinsurance should be regarded as legal cession to the Nigerian insurance market.

Acccording to him, no foreign market be it South Africa, United Kingdom, United States of America, has the capacity to underwrite the entire risks emanating from its territory. What is done, usually is to retain a reasonable proportion of the risk, while spreading the remainder through reinsurance.

The responsibility of the insurance industry, he said, is to demonstrate to the government and multinational oil companies that it has the capacity and workable strategies for achieving and sustaining the 45 per cent target, as well as assuring the stakeholders that claims obligation would be met in a timely manner.


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