At the backdrop of the persistent depreciation of the naira, insurance companies are now transferring more of their oil and gas businesses abroad through offshore reinsurance policies.
The local insurance firms are believed to be hedging against losses or depreciation of their premium income.
But industry experts said the foreign exchange (forex) crisis is also eroding the capital base of local insurers while aiding huge capital flight.
Financial Vanguard analysis of activities in the insurance sector reveal that premium income ceded offshore in the first quarter of 2024, Q1’24, skyrocketed by 94.5 per cent year-on-year, YoY, to N95.11 billion from N48.9 billion recorded in Q1’23.
This is even as 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.
Further breakdown of the figures show that oil and gas premium income stood at N132.01 billion in Q1’24, however, insurers ceded N95.11 billion offshore while only N36.9 billion was retained, indicating only 28.1% retention.
The oil and gas businesses include prospecting, exploration, drilling, constructions, shipping, distribution, marketing, and transportation.
However, experts are of the opinion that the negative trend where insurers cede more businesses offshore is likely to continue as long as the foreign exchange (forex) crisis persists.
Further breakdown of the industry data show that in the full year ended 2023, oil and gas insurance premium was N167.8 billion while N113.1 billion was ceded offshore with only N54.7 billion was retained, indicating 25.2 retention.
In 2022, oil and gas premium income was N125.7 billion while N80.6 billion was ceded with only N45.1 billion retained, indicating 35.9 per cent retention.
According to the National Insurance Commission, NAICOM, the oil and gas portfolio, lamentably, remained a challenging angle in the market owing to its nature of enormous capital and professional requirements.
Experts react
Speaking on the situation, Managing Director of Universal Insurance Plc, Mr. Ben Ujoatuonu, said that the exchange rate crisis has reduced insurers’ capital when valued in dollars and most insurance companies are like post office transferring capital to reinsurers.
He stated: “The exchange rate has created a whole lot of issues in the oil and gas business and all dollar denominated businesses. First, it has reduced our capital because when you take N3 billion and do the conversion to dollars at about N1500, you will see the level of capital that is left.
“Underwriters are required to retain risk based on five per cent of shareholders funds denominated in naira. Let’s assume that shareholders funds is N10 billion, five per cent of N10 billion is N500 million as your deductible retention, when you take N500 million and convert it to dollars, it’s next to nothing. What it means is that you will now be ceding out more of the businesses to reinsurers than what you will retain. So insurers have turned almost to post office. And companies also don’t have the required capital because the capital has been eroded in terms of retaining the business.
“So, the exchange rate has really affected the development and growth in the oil and gas business in Nigeria because if the reverse is the case, what will happen is that Nigerian insurers will retain more and less of the premium will go out. But with what we have now, what the entire market will retain will be less than even what one insurance company can keep because of the challenge of exchange rate. And we don’t see the situation abating anytime soon”.
Also speaking on the impact of the forex crises on insurance industry, Chief Client Officer of Axa Mansard Insurance, Mrs. Rashidat Adebisi, said that due to the foreign exchange crisis, the cost of repairs have gone up.
She stated: “The harsh economy is affecting every industry in the country with the insurance sector not left out. With the fluctuations in the foreign exchange, the repair cost of vehicles and other things have gone up.”
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.
Sogella stated: “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 N1500. 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.”
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