Wednesday, April 28, 2010

Nigeria: Operator Urges Oil Firms to Patronise Local Insurers

Sola Alabadan

Oil firms operating in the West African sub-region have been urged to allow the local insurance companies participate actively in the underwriting of their oil and gas risks so as to grow the local capacity.

Ken Aghoghovbia, Regional Director, West Africa, Africa Reinsurance Corporation, gave this charge while presenting a paper at the West Africa Insurance Companies Association (WAICA) conference in Ghana recently.

He stated that the insurance sector in Anglophone West Africa is well positioned to offer its services to the oil and gas industry, pointing out that in spite of their generally low capital base and competency, there is an ever increasing eagerness of local underwriters to underwrite oil and gas risks.

According to him, "It should be appreciated that sustainable market growth can only be assured with the growing of local capacity alongside expertise. For a baby to grow, he must be taught and taught well. He must learn to live and work with others. Most importantly, the baby must learn by himself what is safe and what is dangerous".

While saying that there is a need for harmonious working relationship between the international operators and the local insurance market, Aghoghovbia cautioned the oil and gas underwriters not to equate higher retention with higher profit.

He was speaking against the background of the fact that virtually all the oil majors have their own captive insurance companies. Exxon-Mobil, Total, Shell and Chevron have Ancon Insurance Company, Omnium Insurance and Reinsurance Company (OIRC), Solen Versicherungen AG (SVAG) and Heddington Insurance Limited (HUK) respectively.

A pure captive is a company formed to insure only risks of its parent company as is often the case in the oil industry. Some of these oil companies also subscribe to a joint captive insurance company, mainly to cater for instances where insurance cannot be reasonably obtained from the commercial insurance markets.

With particular reference to Nigeria, he said with the increased capital base of insurers since 2007, the knowledge base of the industry has grown following the frequent training and exposure to international brokers and underwriters.

Besides, insurance companies have set up oil and gas desks to bid for the insurance of major oil risks, even though they are not yet in a position to quote on these risks. He stressed that the bid process has, however, exposed participating insurers to writing risks at less than the pure risk rate, as the leader of the consortium often demands extra commissions even where a fee has been paid to him by the operator. "Should a claim occur, the participating insurers would still have to pay the same amount as an international insurer writing the same share, whereas they received a smaller amount of premium for the risk," he lamented.

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West Africa
In Ghana, a National Insurance Companies Consortium was formed to manage the oil and gas portfolio. The consortium is open to all members of the Ghana Insurers Association underwriting non-life business.

With the formation of the consortium, all insurances would be placed locally and reinsured to international markets. The reinsurance commissions received are set aside to cater for all the expenses of handling the business, training of the market on oil and gas business and building reserves to facilitate higher market retention.

As the existence of the consortium does not encourage eagerness on the part of insurers to get the business at all cost, he said the growth in market knowledge of the business may be at a slow pace since the participating insurers in the consortium would not have the personal drive to urgently acquire the relevant knowledge and underwriting skill.

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