Amidst the ongoing devaluation of the naira, an increasing number of insurance companies are shifting their oil and gas operations outside by use of offshore reinsurance contracts.
The local insurance companies are thought to be hedging against potential losses or declines in their premium revenue.
However, industry analysts claimed that while facilitating massive capital flight, the foreign exchange (forex) crisis is also weakening the capital foundation of regional insurers.
The first quarter of 2024 saw a 94.5 percent YoY increase in premium income ceded overseas, from N48.9 billion in Q1’23 to N95.11 billion in Q1’24, according to a financial analysis of insurance sector activity.
This is the case notwithstanding the local content law’s requirement that Nigerian insurance companies with a registered office in Nigeria insure 70% of all insurance risks related to the oil and gas industry.
A closer look at the data reveals that oil and gas premium income was N132.01 billion in Q1 of 24; however, insurers lost N95.11 billion offshore and only kept N36.9 billion, or a retention rate of just 28.1%.
Prospecting, exploring, drilling, building, shipping, distribution, marketing, and transportation are all part of the oil and gas industry.
Experts believe that as long as the foreign exchange (forex) crisis endures, insurers will probably continue to outsource more of their companies abroad, which is a negative trend.
An additional analysis of the industry data reveals that the premium for oil and gas insurance was N167.8 billion for the entire year that concluded in 2023, of which N113.1 billion was ceded offshore and only N54.7 billion was kept, suggesting a 25.2 retention rate.
Oil and gas premium income was N125.7 billion in 2022; however, N80.6 billion was lost and only N45.1 billion was kept, or 35.9% retention.
Unfortunately, the oil and gas portfolio continued to be a difficult selling point in the market because of its high capital requirements and expertise needs, according to the National Insurance Commission, NAICOM.
Speaking about the situation, Mr. Ben Ujoatuonu, Managing Director of Universal Insurance Plc, stated that most insurance companies transfer capital to reinsurers like post offices, and that the exchange rate problem has lowered insurers’ capital when valued in dollars.
“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,” he stated.
Speaking about how the foreign exchange crisis has affected the insurance sector, Mrs. Rashidat Adebisi, Chief Client Officer of Axa Mansard Insurance, added that repairs have become more expensive as a result of the issue.
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 about the situation, Mr. Olasupo Sogelola, Managing Director/Chief Executive Officer of International Energy Insurance, said that local retention is being severely impacted by the dollarization of the oil and gas industry.
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 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.”
