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Monday, 21 May 2018

How Africa Loses $5.5b Premium Yearly To Capital Flight



Africa loses over $5.5 billion insurance premium yearly to capital flight. A chunk of this comes from the lack of capacity of insurers to fully underwrite the oil and gas industry. This is without recourse to the untapped capacity of underwriters on the continent. But at the 45th Conference of African Insurance Organisation in Accra, Ghana, government regulatory agencies, insurers and other stakeholders brainstormed on how to halt the trend.

The revelation jolted operators and regulatory agencies in the African insurance industry. A disturbing statement by the Ghanian President Addo Dankwa Akufo-Addo at the just concluded African Insurance Organisation (AIO) that Africa loses a whopping $5.5 billion in insurance premium yearly to capital flight. Capital flight, according to President Akufo-Addo occurs despite the fact that the capacity of underwriters in the continent are not fully exhausted.

Another report, the 2018 Bulletin of the AIO, also showed that capital flight, took away over 90 per cent of premium income in Africa.

The huge capital flight, the report added, left the shores of the continent to Europe, America and other parts of the world, and it occured majorly from oil and gas class of insurance business and in oil producing countries.

They are Nigeria, Angola, followed by Algeria, Egypt and Libya. Others are Congo Republic, Sudan and South Sudan, Equatorial Guinea, Gabon, Chad and Ghana.
According to the report, these markets jointly produced 7, 210,000 barrels per day in 2016, with Nigeria, Angola and Algeria producing 70 per cent of the top 10 markets’ output.

The report identified the lack of capacity in areas of skills and funds within the industry across the region as some of the factors responsible for the capital flight.

It was in an attempt to halt the huge capital flight that African government regulatory agencies in the insurance industry, insurers and other stakeholders gathered in Accra, Ghana, recently. It was the 45th Conference & General Assembly of the African Insurance Organisation (AIO).

The conference provided the much-needed platform to cross-fertilise ideas on how to stem the financial haemorrhage in the continent’s insurance industry.

President Akufo-Addo set the ball rolling by expressing fear over capital flight and called on other African leaders to join hands to end the menace and help develop their economies.

The loss of about $5.5 billion premium to capital flight, he said, has continued to deprive the industry of necessary development and contribution to the economy.

The President, who was represented by a Senior Minister, Hon. Ken Ofori-Atta, said the problem was not about capacity within the continent, but the lack of inter-regional cooperation and collaboration.

He urged underwriters and regulatory authorities to take it as a continental challenge and ensure that no insurance business leaves the shores of Africa without being fully exhausted.

He also asked them to take their responsibility to support government by deepening insurance penetration and providing long term fund for investments that shape the destiny of Africa for greatness.

Reasons for capital flight

Assistant Director Statistics, Research and Business Development, African Reinsurance Corporation, Mr. Adewale Adewusi, said local energy insurance expertise was limited on the continent, while capacity was a problem among domestic African reinsurers because of the huge oil exposures, especially upstream.

Adewusi, who confirmed that capital flight represents over 90 per cent of premium income in Africa, spoke on the operations of the African Oil & Energy Insurance Pool (AOEP), which was set-up in 1989, to increase local capacity in the continent.

At the 13th General Assembly of the AIO in Bujumbura, Burundi, on June 20, 1986, Adewusi said it was resolved that an African Oil & Energy Insurance Pool be established to address the capacity constraint facing the African energy sector.

His words: “The pool commenced operations in 1989 with objectives to create capacity within African oil, gas, petrochemical and energy related insurance risks emanating from Africa with a view to reducing foreign exchange outflow.

“It was also to provide adequate insurance cover to match the rapid technological advancement of individual African countries and to further ensure that oil companies operating in Africa are charged competitive premium rates in order to enhance profitability and stabilise the African oil insurance market.

“Pool also sought to create the manpower capacity and acquire technical expertise in the insurance of oil and gas related risks, through a systematic manpower development.”

Adewusi said other objectives of the Pool were to disseminate technical information to members of the pool on issues affecting oil and energy insurance risk; give technical support and advice to insurance companies operating in Africa on matters relating to risk management and insurance of oil and energy related risks.

According to Adewusi, the early years were very challenging for the pool, as its yearly premium income was well below $I million. Also, most members were clearly not committed to its success mainly because of lack of confidence in the survival of the Pool.

He noted that the Pool also suffered a cash crunch as there were no funds available for marketing, existing and potential members in the oil & energy sector.

Adewusi pointed out that in 1997, the managers knew that they had to find a way to turnaround the fortunes of the Pool or it would simply collapse.

“The business module was critically reappraised and key functions such as marketing, underwriting, processing of premiums and claims handling were examined. The outcome of the study was that risks were better priced, processes were more efficient and genuine claims were promptly settled.

“The funds were managed by astute financial managers approved by Africa Re. Gradually, as confidence in the Pool improved, membership increased and subscribed capacity rose to adequate levels, he said.

Other challenges

Adewusi further stated that excess capital remains dedicated to the sector, irrespective of loss levels in different sub-sectors of the industry, resulting in premium rate cutting, year-on-year.

In addition, he said there were recent large losses to the pool, which in 2016 and 2017, for instance, suffered three huge losses. They include the damage to the offshore Tullow rig in Ghana on February 18, 2016; Abu Dhabi National Oil Company (ADNOC) refinery loss in Abu Dhabi on January 11, 2017; SIR refinery loss of $40.81 million.

Adewusi said the Pool was able to recover from these losses because of a build-up of prior years’ profits as well as the estimated recoveries from the 2016 and 2017 reinsurance programmes, which hitherto had been loss free.

“There are also threats to the top line going forward, which brought about restriction on refinery exposure, emergence of Nigeria’s Energy & Allied Pool (EAIPN) in 2015; and potential country energy Pools. African markets like Mozambique, Uganda and Tanzania are preparing to operate energy pools as soon as the operating environment is viable,” he added.

The expert, however, said the AOEP has evolved over the years into a viable capacity provider to the African energy market.

He said recent settlement of huge losses also attests to this fact, adding that even though there are a number of challenges to the growth of the Pool, aggressive and informed marketing as well as prudent underwriting, going forward, would ensure that the pool remains in business providing the much needed local capacity.

Federal Government’s position

The Nigerian Government through the National Insurance Commission (NAICOM) said it was aware that insurance practitioners fail, neglect or refuse to consider and fully utilise relevant in-country capacities of insurance/reinsurance institutions such as pools, reinsurers and other approved local/recognised insurance capacities prior to applying for approval to cede certain proportion of some risks off shore.

In a recent circular by NAICOM, the Federal Government insisted on the utilisation of in-country capacities of Nigerian insurers, reinsurers and pools prior to foreign facultative insurance.

Commissioner for Insurance, Mohammed Kari, said in some situations where the pools, insurers or reinsurers are offered participation, the institutions are either offered minimal proportion below their capacity or informally restricted and, or compelled to accept lower than their respective capacities for the purpose of justifying cession of the risks off shore.

“This is unethical practice and it undermines our collective resolve to ensure full utilisation of available in-country capacity in line with domestication and the local content policy. It contravenes extant insurance laws and regulations and shall therefore, not be tolerated henceforth,” he said.

Kari said in addition, the Commission had observed that some insurance institutions have inappropriately arrogated to themselves the authority to unilaterally exclude some insurers over alleged outstanding claims.

According to him, all insurance institutions are required to ensure that Nigerian insurers, reinsurers and pools in the Commission’s records must be offered and allowed to willingly decide the proportion of the risk they wish to accept, subject to their respective capacities, before any application for approval for offshore placement.

“All recognised reinsurance treaties/arrangements and additional capacities offered by local reinsurers/pools must be fully utilized before excess consideration for offshore replacements. All off-the-system or informal directives to co-insurers, local reinsurers and pools to accept lower than their desired available capacities are hereby prohibited.

“Please ensure strict compliance as we would not tolerate any breach of these rules. Failure to do so will hence forth result in the imposition of appropriate regulatory actions as well as declinature or rejection of such requests,” Kari warned.

For the Executive Secretary, Nigerian Content Development and Monitoring Board (NCDMB), Simbi Wabote, insurance companies need to consolidate to be able to underwrite bigger risks in the oil and gas sector.

He stated that the industry lacked the capacity to undertake big ticket transactions like provision of brokerage services for insurance covers of project size of $3 billion.

In a presentation to insurance industry chieftains at a forum in Lagos, Wabote urged insurers to consolidate to form joint venture partnership consortium with local and international outfits that can present formidable funds and capacity for huge transactions.

He said: “This will present opportunities for growth of insurance industry, although there are challenges militating against the industry such as lack of capacity to undertake big ticket transactions. There are several modalities that could be adopted to surmount this challenge.”

Wabote said the Nigerian content level was meant to create 300, 000 direct jobs and retain over $14 billon income, out of the $20 billon spent yearly on oil and gas industry.
“We have developed a 10-year transformation road map to drive the delivery of the mission. The plan sought to increase income to the Gross Domestic Product (GDP) and facilitate export of Nigeria’s goods and services to regional markets,” he said.

The NCDMB boss stated that the country’s vision was to achieve 70 per cent value retention within the next 10 years.

“We have sectorial working groups within the Nigerian local content including banking, insurance and others. And these teams of experts within their sectors formulate the strategy with which they engage the board for implementation,” he said.

While reiterating the need for the insurance industry to consolidate on joint partnership or venture with local and international outfits, he said this was necessary because they can’t do it alone.

“We are mindful of the fact that if every African country in sub-Saharan Africa decided to do local content, and wanted everything to happen in their country, it would become sub-optimal. Part of their strategy, is to encourage sub-regional integration,” Wabote emphasised.
CEOs, experts speak

Group Managing Director, Continental Reinsurance Corporation, Dr. Femi Oyetunji expressed worry that African insurance companies, including reinsurance firms are too small.

He lamented that Nigeria, an oil and gas producing country, has no energy underwriting specialists.

He said: “We don’t have big companies. The insurance companies that cut across the continent, including reinsurance companies, are too small. Insurance requires investment, which is not usually in the short term. You don’t start seeing returns until it is between five and seven years.
“We need to consolidate to be able to attract talents from outside Nigeria. Without the big size companies or financial muscles, we won’t be able to do it. It is painful that Nigeria, an oil producing country, does not have energy underwriting experts. The energy classes are one of the biggest for almost all companies but there is no energy underwriting. These are skills you need to get from the London market, pay for it and bring to Nigeria. This is what we need in the country.

“I said this 10 years ago and if we had brought two or three energy underwriters from the London market, they would have trained at least 20 in our market and we would be underwriting energy in our market and this is my vision for the industry not just in Nigeria but in Africa.”

The Deputy Vice Chairman, Nigeria Insurers Association (NIA) and Managing Director, NEM Insurance Plc, Tope Smart, agreed with the Ghanaian President on the need for collaboration within the continent to end capital flight in the industry.

He expressed the belief that a kind of committee should be set up by the AIO in order to forge a united front for a good collaboration to happen in Africa.

“We need more of collaboration in Africa to prevent most of the premium going abroad. We need to collaborate from region to region, western, eastern and central regions in Africa. I believe that within Africa, we can have the capacity we are looking for all over the world.

“We can have it in Africa, but we must collaborate before the issue can be addressed.

“The collaboration must, however, start from the AIO. We are all here at the Conference talking and looking for a way out but I believe strongly that the collaboration starts from us, from this AIO,” Smart said.
AIICO Insurance Plc Managing Director, Mr. Edwin Igbiti, said regulators and operators cannot run away from finding an end to capital flight, judging from the level of development. “Capacity has to be built, which takes time. Apart from monetary capacity, there is skills capacity,” he said.

Igbiti pointed out that insurance is a worldwide cover and business in the sense that the principle of doing business is to spread risk. And risk, he said, is spread worldwide. “But one of the experts from Lloyds just told us at the conference that Africa on their own cannot get developed if they don’t spread their risks abroad and this is what we should all look at,” he said.

He also pointed out that the issue is that there is deliberate capital flight and this is what operators and stakeholders should come together and fight against.

He said: “Deliberate capital flight is that if we have capacity, why are you trying to feed other people and be living on commission? This is what our regulator is trying to curtail by all means.”

The Managing Director, Sunu Assurances Nigeria, Morufu Apampa, said the issue of capital flight is a major one, which is why NAICOM should be commended in the area of local content.

He said in the last 35 to 40 years, oil and gas in particular has ceded out so much to the foreign market.

He asked rhetorically: “But what do we get back in return? We even pay out most of the claim. In terms of capability or capacity, how far have they helped the market? They have not been able to help because they are benefitting from us so they want it to continue.”

Apampa, however, said with NAICOM’s position and other key players too, training their people, forming strategic alliance, Africa is trying to see how it can retain most of the account.

“We want to develop our capital in the market in order not to allow capital flight to go on because the more we allow that, the more we keep giving our money to them without getting anything in return,” he stated.

He also said the problem is not fully a capacity issue, recalling, for instance, that there was a major claim that happened last year and another that happened three years ago, which were pollution claims that cost over $20 billion in Mexico.

“The price of insurance is not just what happens in Africa alone, it is global. So, a single loss over there will also affect us. In terms of capacity, one single oil rig will be huge. So, when we say capacity, for now we don’t really have it and that is why NAICOM has come up with the issue of capacity such that your capital will determine what you take,” Apampa said

He said the second one is capability and capacity. According to him, last year, a major thing happened when Munic Re and Swiss Re pulled out of the Nigerian market because of two major risks from two major multinational companies.

“They pulled out because they said we are not doing proper underwriting. Our rates and premiums are going down while claims are going up. It is only in Nigeria that all other things keep going down while claims are going up. This is not too good for our business. We need to up our game and see what we can do better,” Apampa said.
He expressed optimism that with NIA’s position in terms of checking position on rates and insisting that operators keep the adequacy of their rates, things will get better.

“If you check our shares on the stock exchange, they are penny stock and they are even going down. We cannot get appreciation in value until there is increased profitability, not just to shareholders but to all stakeholders,” Apampa said.

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