It is not cheap to insure an aircraft. For this reason insurers can only underwrite about 30 per cent of aircraft registered in the country. To take up such huge business, they have to team up with foreign partners. But, the Group Managing Director, Standard Alliance Insurance Plc, Bode Akinboye, believes with the right pricing, more insurance firms can participate in airline business. In this interview with KELVIN OSA OKUNBOR, he speaks on the factors that determine the cost of aircraft insurance and sundry issues.
Why do local insurance firms lack capacity to carry the risks of airlines?
It is not true because capacity is relative. Insurance is an international business, so if I approach you today, I have reinsurance companies behind me, which have retrocession-aires (reinsurance companies,which reinsure reinsurers) behind them. It is a long chain. So, every business you take from Nigeria can find its way to the United States, United Kingdom (UK), Russia and even find its way back into Nigeria. This is the result of collaboration with foreign reinsurance companies.
What really is the problem?
The truth of the matter is that there is no capacity to handle airlines, the capacity can be put in place and there are laws that enable the insurance companies through our regulators to put the necessary capacity in place. Insurance is a game of large number and unless you get the large number, it is impossible to get the large pool of fund to handle those heavy claims. Another factor is pricing. The public wants top quality services from the insurance companies, but they do not want to pay the right price. You cannot get what you don’t pay for. Nigeria is one of the few markets where you can get the cheapest form of insurance. In UK, US and Canada, average premium you pay as a first time driver is about 25 percent of the value of your car. In Nigeria the premium can be as low as 3.5 per cent. This needs to be monitored and controlled otherwise quality service delivery in insurance industry will be difficult to sustain.
Why do local and foreign insurance companies share the risks to insure aircraft in Nigeria?
Most aircraft in Nigeria are on lease, so the lessors have global insurance covers with their international insurance companies, but to comply with the Nigerian laws, airlines still have to pass it through a local insurance company. Any insurance company that takes up a business knows that we are in business of risks management. You have to look at your balance sheet and know how much of those risks you can retain and bring other insurance companies to join hands with you. If they cannot carry it, you take it to the international market. The truth is that there is no business that is too big for the insurance world to take-up and as long as you give it to an insurance company that knows its onions, they will know how to place that business in the global market. This is because it is a global network and that is where the strength of insurance is. Every business you take, you have to find a formula where you take the portion you can absorb and give the rest out to others both locally and abroad. With that, there is no business that you cannot place with insurance companies.
Why is the cost of insuring an aircraft so high in Nigeria?
This is because of claim experience. There have been a series of aircraft accidents in Nigeria and the environment is also not safe. These are what drive rates. We look at different factors before we know how much we want to charge. The rates are not determined by us, the rates are determined by foreign reinsurers who take the bulk of the risks. For most aircraft in Nigeria, we retain maybe 20 to 30 per cent risks; the remaining is insured abroad. That is how the market is because aviation is a specialised risk. It is not just for anybody. Inside the aircraft, we have complex equipment and these are not as straight forward as insuring a motor vehicle. There are special risks that need to be handled by experts. As long as we are still developing the know-how in Nigeria, we still have a lot to learn from our counterparts abroad. We just have to take the one we can absorb and give the rest to the international market.
Why do Nigerian airlines do monthly insurance?
Every sector is looking for survival and aviation has its own challenges. So, in an attempt to save costs and manage liquidity, they want to buy insurance in the right size so that they can use and pay, but the requirements for aviation is very strong that you must have insurance throughout the year, non-stop otherwise you cannot fly that aircraft. So, even if they pay monthly, there must be a structure to make sure that their insurance is on-going. So, I believe the monthly payment is just about cash-flow and liquidity management not the cover. The cover has to be 24 hours every day for a year.
Compared to more developed markets, the insurance industry in Nigeria is yet to attain full potential. What do you think is responsible for this?
The reason our insurance industry is not making the needed impact compared to those in other countries, is as a result of improper application of law and order. It is about seriousness of the government to get the different sectors of the economy to work. When the government was serious about telecoms, it worked. The government had to privatise the sector and gave it rules such as licencing rules, compliance rules, setting up of Nigerian Communications Commission (NCC) and enforcement of those rules. Today, we can buy phones; you can port at any time. The same thing goes for insurance. Compulsory insurance is the start-up of insurance and what has been used elsewhere and in developed countries to drive insurance penetration. So, the lack of political will and structures to ensure and monitor compliance are some of the major problems preventing the insurance industry from making the right impact in Nigeria. On the back of compulsory insurance is where we are supposed to have innovation, new products and services. Today, I do not think Nigeria is getting up to 10 percent of the potential in compulsory insurance. It is not my responsibility, as an underwriting firm, to implement; it is the duty of government.
What is your take on the drive to promote local content in the insurance sector?
There are some risks that some companies should not take. I think that is one of the elements of risk-based supervision that NAICOM is talking about. Even at that, I believe that this industry is ripe on innovation in terms of creating capacity, especially on oil and gas because with what we are doing today, we claim to be participating in oil and gas but the bulk of it still goes abroad because for the average premium for every oil and gas risk you take, the reinsurance premium is about 50 per cent. If I make $1 million revenue in oil and gas, half of it is used to pay reinsurance and I am still carrying the risk and my retention is such that I still pay most of the claims. So, it is not really working the way NAICOM intended but we all need to join hands with NAICOM and come up with innovation on how to create capacity. It is time for us to innovate, so that the real capacity can begin to be created locally.
Prior to now, you see companies carrying humongous outstanding premium in their books. You see 50 to 60 per cent being carried as outstanding premium, it doesn’t make sense. There is a reason the government decides to make some policies compulsory. It is not just because they want people to buy the insurance. Compulsory insuranceis one of the reasons the government has instituted compulsory insurance in the preservation of national assets as well as personal assets because they are meant to be protected. Also, for protection of liability, people can cause damage to one another; there should be a mechanism to restore people back to where they were before injuries occur. But most importantly, compulsory insurance was instituted to encourage long term savings.
And any economy that is not encouraging long term savings will never survive. It will find it difficult to mobilise long term fund and to have first class infrastructure. Everybody needs good road, hospitals, good educational system, and all these are not going to happen by word of mouth. We have to take some deliberate steps to create liquidity which can be leveraged on to create more funding for infrastructure development and compulsory insurance is one of those elements. So if as practitioners, we are now granting those insurance at one per cent or two per cent of the regulated price, then you will see that there is a problem in the industry. That is an area I believe the regulator is looking at and they should do it on time. They should instill discipline in the market. But compulsory insurance should be sold at the price instituted by government and it should be strictly monitored. If we do that, we will generate quite a lot of revenue in investment fund for the industry and the economy generally. See what has happened to pension fund. If the government did not specify the percentage for pension fund and pension fund companies have to go and be negotiating what percentage to charge, they are not going to have the kind of asset under management that they have now. Let’s do the same thing for insurance. So, we are looking at our regulator and the industry to come together to champion and reverse that negative trend.
Recently, the policy of ‘no premium, no cover’ was introduced, is it working?
It is working and it is in the interest of the industry that we do ‘no premium, no cover’.
The insurance industry is transiting into a ‘Risk Based Supervision’ sector, how prepared is standard Alliance for this?
The truth is that the risk-based supervision has started long ago. I think what the regulator is trying to do is to reinforce some certain aspects. Right now, if you want to take any business from Shell or LNG, it will be based on the size of your balance sheet and you cannot take more than a certain percentage. The best practice is five per cent maximum of your shareholders fund. But where NAICOM is going is that there could be other higher risks which are highly risky, hence, you need to do proper risk assessment more than ever before in an organised manner before accepting the risk. The higher the totality of risk you are assuming, the more capital you also need to deploy because of solvency issue. All these must be considered at any point in time in taking on new risks. So, as an institution we are prepared, we have complied with NAICOM guideline on the board structure and the composition of different committees particularly the enterprise risk committee that needs to look at every aspect of the risk inherent in our business because we are risk carriers. So, we must pay attention to every aspect of risk that may affect our operation. As a company, we are very ready to comply with that procedure going forward. NAICOM recently mandated insurers to exhaust local capacity before ceding any risk abroad. Are insurers complying with this directive? To a large extent all dollar-denominated businesses apart from multinationals are subject to NAICOM approval in principle, especially aviation and oil and gas risks. Insurers must go to NAICOM to get it approved. But what NAICOM is trying to do is to ensure that the bulk of the risks insurable in Nigeria are kept in Nigeria. However, some companies may choose not to take some certain risks that they are not comfortable with. If you have X cover for example and you are trying to place it locally and only four or five companies say they want to take it, whatever that is left, you will have no option than to go and present your case to NAICOM and secure approval to place it abroad. You can’t force other companies to take the risks, even as much as NAICOM is trying to encourage local content.
Your company has merged its life and its non-life sections, what informed this decision?
First, the two businesses are complementary. So, in the context of the operating environment in Nigeria, given the complexity of our operating environment, all the approval that I talked about, the cost of running business, getting approval here and there, it is only expedient that the two businesses should be run as one. That is the model that is running very well in Nigeria today. We have no business doing otherwise, if we want to succeed. If you look at the top five companies in Nigeria, the majority of them are composite. So, we decided that coming together will create economy of scale, it will save cost, it will enable us to cross-sell our products, have a unified staff that market both life and non-life products, providing more opportunity for our staff to succeed out there because they can now market all the products across the line. It will enable us to have only one board of directors, saving cost of executive management and related time for meetings and coordination, getting approval for accounts because it is now one account. So, it is meant to unlock more values for our shareholders. And that is the reason why we have gone ahead to do the merger.
What does Standard Alliance Insurance Plc stand for?
Standard Alliance Insurance is a composite underwriting firm. We just merged our life and non-life businesses. We have gotten all regulatory approvals. We have our licence reissued by the National Insurance Commission, (NAICOM). We have obtained Securities and Exchange Commission approval. We have obtained the approval of the Nigerian Stock Exchange. We underwrite both life and non-life insurance. Our vision is to be the preferred insurance company in Africa in terms of products innovation, customer service, profitability to our shareholders and corporate social responsibility. We pride ourselves as an innovative insurance company because we have been a leader in terms of introducing new ideas and new products into the insurance market. We just launched the Salary Protection Insurance Scheme to further buttress this. We are doing quite a lot of work on new products and will soon come out with new initiatives on agriculture insurance and health insurance, amongst others.
What services can you offer to airlines different from other insurance companies?
What we can offer to airlines are flexibility, access to the London market, which is the standard for placement of insurance risk and we will not play with their requirements in terms of where to place the risks and get the necessary approvals prior to placing such risks. Apart from that, we are developing passenger insurance to complement the mandatory cover whereby every passenger flying from one airport to another can also have extra insurance benefit to complement what they have in case there are any accidents. So, it is more of speed, quality of engagement with them and placing their risks in the Lloyd’s of London market, which is the standard for placing such risks.