Transcript Document

POTENTIALS AND CHALLENGES OF DEVELOPING OIL
AND GAS REINSURANCE MARKET IN NIGERIA
Presented by: Adewale Adewusi
Asst. Director, Retrocession, Research, Statistics & Development
OVERVIEW
 Introduction
 Oil & Gas insurances: Potential for growth
 Beefing up local capacity to ensure success of Local
content Act
 Forces impeding the development of Reinsurance
Market
 Advantages of a viable local reinsurance market
 Conclusions
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INTRODUCTION
 It is a pleasure to be given the honour to speak on a very topical issue.
 Nigeria is the highest oil producer in Africa producing 2,211,000 gallons of
oil per day.
 At the turn of the 21st century, Oil majors still arranged the bulk of their
insurances abroad.
 With the advent of the Nigerian Oil & Gas Local Content Development Act
(2010) and guidelines issued later in the year by NAICOM, the insurance
industry is set for a boom in Oil & Gas insurance income.
 A viable local reinsurance sector is important to the success of the local
content law and by extension the survival of a home grown oil & gas
insurance sector.
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OIL INSURANCES IN NIGERIA: POTENTIAL
FOR GROWTH
 The first Oil Mineral Act (1914) vested the administration and control of oil
affairs in the colonial government.
 Oil was discovered in commercial quantity in 1956 in Oloibiri in Bayelsa
State. Nigeria is the 12th highest oil producer in the world and the 4th largest
exporter.
 In 2010, 30 insurance companies wrote US$171.67 million from the sector
out of which US$113.97 million was ceded to reinsurers. Africa Re gave
capacity to over 25% of the cessions.
 Further, about half of the Energy underwriters had net premium/SHF ratio
below 3%, which shows growth potential. The industry average was 4.3%
in the year under consideration.
 Standard and Poors’ recommends an optimal net retention of 1% - 3% of
SHF, while Aon Benfield recommends 3% - 6%.
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BEEFING UP LOCAL CAPACITY TO ENSURE
SUCCESS OF LOCAL CONTENT ACT
 The Nigerian Oil & Gas Local content Development Act (2010) allows
insurance companies to participate up to 70% in local energy insurances.
However due to capacity constraint, this is not yet feasible.
 NAICOM’s guidelines defines local capacity as the aggregate capacity of all
Nigerian registered insurers and reinsurers which should be fully exhausted
prior to any application for approval to reinsure any Nigerian oil and gas
risks overseas.
 In 2010 according to NIA records, 4 underwriters wrote net incomes from
the energy class corresponding to between 10% and 21.9% of SHF. These
percentages are too high. NAICOM has stipulated henceforth, that insurers
would not be allowed to write for their net accounts > 5% of their SHF.
 In addition to the proposed US$20m capacity of NOEIP, the local
reinsurance capacity to support the Nigeria market would be in the
neighbourhood of US$200m.
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FORCES IMPEDING THE DEVELOPMENT
OF LOCAL REINSURANCE MARKET
 The local insurance industry ‘s capacity is limited. Among players in the Oil
& Gas sector, the cumulative SHF is US$ 1.36 billion (2010). At 5% it can
only keep for its net retention, US$68 million.
 Before the Local content Act, local insurers wrote about a third of total
insurance energy exposure (Excluding NNPC’s - US$101 billion). In 2011,
the sector generated about US$320 million and should grow 10% p.a.
 It is therefore an imperative that a viable secondary market that deploys
sufficient capacity must exist to support the primary insurance industry
grow in energy insurance sector.
 However, there are only 2 local energy reinsurers in Nigeria; Africa Re and
Continental Re .
 Can 2 or 3 local players be said to be enough?
 If a Nigerian member of the AOEP reinsures part of its risks with the AOEP,
would NAICOM okay it as local capacity? When WAICA Re grows big enough
to be an energy player, how would their capacity be treated?
 If the proposed NOEIP capacity is local, why not the more tested AOEP?
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FORCES IMPEDING THE DEVELOPMENT
OF LOCAL REINSURANCE MARKET
 Cedants that undergo financial interactive rating with the likes of S&P or AM
Best may have a capital charge against them for reinsuring with an unrated
reinsurer/Pool. If this reality has slowed down the likes of AOEP, then
NOEIP should brace itself as well.
 Markets worldwide are moving away from minimum capital regimes
towards Risk based capital regimes. Rating agencies no longer use a one size
fits all approach to measure capital adequacy. Hopefully, the much expected
Insurance decree will align in this direction. What does this mean to the
primary and secondary carrier of risk?
 Appetite for risk would be curtailed by the riskiness of acceptances or
capacity needed.
 A number of not so sound insurers may have to stop writing Special risks.
 The above could stifle growth in the number of players in the primary
market. New venture capital may be difficult to find considering the state
of the global economy and financial markets.
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FORCES IMPEDING THE DEVELOPMENT
OF LOCAL REINSURANCE MARKET
 Inadequate industry analytics/technical skills: If the international markets
must follow the lead of the local market, it must show strong
analytics/Technical skills. XOL covers are still arranged abroad and are
skewed against the local market.
 Deductibles are set so high that unless a catastrophe occurs, reinsurers will
not be called to pay.
 Line slips allow for anti-selections since they can still reject certain risks
offered.
 Strong skills would give leverage to the local market to restructure covers
fairly and allow outright treaties as against line slips.
 Appetite for risk would be curtailed by the riskiness of acceptances and
thereby capacity needed.
 A number of not so sound insurers may have to stop writing Special risks.
 The above could stifle growth in the primary market. New venture capital
may be difficult to find considering the state of the global economy and
financial markets.
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ADVANTAGES OF A VIABLE LOCAL
REINSURANCE MARKET
 Definitely there are many advantages derivable from a healthy local
reinsurance market. A few of them are as follows.
 The industry should become strong enough to lead risks ceded out.
 The primary insurer would benefit from local reinsurers technical expertise.
 Expertise can be transferred abroad.
 Reinsurance arrangements would be more balanced and better priced in
accordance with local circumstances.
 Profits will be invested in the local market.
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CONCLUSION
 The Nigerian Insurance industry is now of age, with the last bastion of
untouchables being removed. Oil & Gas insurances-the last frontier-has
finally been opened up to the local market.
 NAICOM, the regulator has responded rightly with guidelines to ensure the
success of the Local Content Act.
 The industry awaits the promised risk based capital regime which should
allow for product differentiation. Further, all top energy insurers
/reinsurers/Pools would be expected in the next few years to be rated by
internationally recognized rating agencies.
 Finally, while the primary energy risk carriers must be well capitalised in
line with regulations and rating requirements, the number of secondary
suppliers of local capital should be increased to include other
Pools/reinsurers such as the AOEP, FAIR Pool, WAICA and Nigeria Re when
they qualify for such acceptance.
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THANK YOU
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