1. POTENTIALS AND CHALLENGES OF DEVELOPING OIL AND GAS REINSURANCE MARKET IN NIGERIA Adewale Adewusi Presented by: Adewale Adewusi Asst. Director, Retrocession, Research, Statistics & Development

2. OVERVIEW  Introduction  Oil & Gas insurances: Potential for growth  Beefing up local capacity to ensure success of Local content Act  Forces impeding the development of Reinsurance Market  Advantages of a viable local reinsurance market  Conclusions 2AFRICAN REINSURANCE CORPORATION

3. INTRODUCTION  It is a pleasure to be given the honour to speak on a very topical issue.  Nigeria is the highest oil producer in Africa producing 2,211,000 gallons of oil per day.  At the turn of the 21 st century, Oil majors still arranged the bulk of their insurances abroad.  With the advent of the Nigerian Oil & Gas Local Content Development Act (2010) and guidelines issued later in the year by NAICOM, the insurance industry is set for a boom in Oil & Gas insurance income.  A viable local reinsurance sector is important to the success of the local content law and by extension the survival of a home grown oil & gas insurance sector. 3AFRICAN REINSURANCE CORPORATION

4. OIL INSURANCES IN NIGERIA: POTENTIAL FOR GROWTH  The first Oil Mineral Act (1914) vested the administration and control of oil affairs in the colonial government.  Oil was discovered in commercial quantity in 1956 in Oloibiri in Bayelsa State. Nigeria is the 12 th highest oil producer in the world and the 4 th largest exporter.  In 2010, 30 insurance companies wrote US$171.67 million from the sector out of which US$113.97 million was ceded to reinsurers. Africa Re gave capacity to over 25% of the cessions.  Further, about half of the Energy underwriters had net premium/SHF ratio below 3%, which shows growth potential. The industry average was 4.3% in the year under consideration.  Standard and Poors’ recommends an optimal net retention of 1% - 3% of SHF, while Aon Benfield recommends 3% - 6%. 4AFRICAN REINSURANCE CORPORATION

5. BEEFING UP LOCAL CAPACITY TO ENSURE SUCCESS OF LOCAL CONTENT ACT  The Nigerian Oil & Gas Local content Development Act (2010) allows insurance companies to participate up to 70% in local energy insurances. However due to capacity constraint, this is not yet feasible.  NAICOM’s guidelines defines local capacity as the aggregate capacity of all Nigerian registered insurers and reinsurers which should be fully exhausted prior to any application for approval to reinsure any Nigerian oil and gas risks overseas.  In 2010 according to NIA records, 4 underwriters wrote net incomes from the energy class corresponding to between 10% and 21.9% of SHF. These percentages are too high. NAICOM has stipulated henceforth, that insurers would not be allowed to write for their net accounts > 5% of their SHF.  In addition to the proposed US$20m capacity of NOEIP, the local reinsurance capacity to support the Nigeria market would be in the neighbourhood of US$200m. 5AFRICAN REINSURANCE CORPORATION

6. FORCES IMPEDING THE DEVELOPMENT OF LOCAL REINSURANCE MARKET  The local insurance industry ‘s capacity is limited. Among players in the Oil & Gas sector, the cumulative SHF is US$ 1.36 billion (2010). At 5% it can only keep for its net retention, US$68 million.  Before the Local content Act, local insurers wrote about a third of total insurance energy exposure (Excluding NNPC’s - US$101 billion). In 2011, the sector generated about US$320 million and should grow 10% p.a.  It is therefore an imperative that a viable secondary market that deploys sufficient capacity must exist to support the primary insurance industry grow in energy insurance sector.  However, there are only 2 local energy reinsurers in Nigeria; Africa Re and Continental Re.  Can 2 or 3 local players be said to be enough?  If a Nigerian member of the AOEP reinsures part of its risks with the AOEP, would NAICOM okay it as local capacity? When WAICA Re grows big enough to be an energy player, how would their capacity be treated?  If the proposed NOEIP capacity is local, why not the more tested AOEP? 6AFRICAN REINSURANCE CORPORATION

7. FORCES IMPEDING THE DEVELOPMENT OF LOCAL REINSURANCE MARKET  Cedants that undergo financial interactive rating with the likes of S&P or AM Best may have a capital charge against them for reinsuring with an unrated reinsurer/Pool. If this reality has slowed down the likes of AOEP, then NOEIP should brace itself as well.  Markets worldwide are moving away from minimum capital regimes towards Risk based capital regimes. Rating agencies no longer use a one size fits all approach to measure capital adequacy. Hopefully, the much expected Insurance decree will align in this direction. What does this mean to the primary and secondary carrier of risk?  Appetite for risk would be curtailed by the riskiness of acceptances or capacity needed.  A number of not so sound insurers may have to stop writing Special risks.  The above could stifle growth in the number of players in the primary market. New venture capital may be difficult to find considering the state of the global economy and financial markets. 7AFRICAN REINSURANCE CORPORATION

8. FORCES IMPEDING THE DEVELOPMENT OF LOCAL REINSURANCE MARKET  Inadequate industry analytics/technical skills: If the international markets must follow the lead of the local market, it must show strong analytics/Technical skills. XOL covers are still arranged abroad and are skewed against the local market.  Deductibles are set so high that unless a catastrophe occurs, reinsurers will not be called to pay.  Line slips allow for anti-selections since they can still reject certain risks offered.  Strong skills would give leverage to the local market to restructure covers fairly and allow outright treaties as against line slips.  Appetite for risk would be curtailed by the riskiness of acceptances and thereby capacity needed.  A number of not so sound insurers may have to stop writing Special risks.  The above could stifle growth in the primary market. New venture capital may be difficult to find considering the state of the global economy and financial markets. 8AFRICAN REINSURANCE CORPORATION

9. ADVANTAGES OF A VIABLE LOCAL REINSURANCE MARKET  Definitely there are many advantages derivable from a healthy local reinsurance market. A few of them are as follows.  The industry should become strong enough to lead risks ceded out.  The primary insurer would benefit from local reinsurers technical expertise.  Expertise can be transferred abroad.  Reinsurance arrangements would be more balanced and better priced in accordance with local circumstances.  Profits will be invested in the local market. 9AFRICAN REINSURANCE CORPORATION

10.  The Nigerian Insurance industry is now of age, with the last bastion of untouchables being removed. Oil & Gas insurances-the last frontier-has finally been opened up to the local market.  NAICOM, the regulator has responded rightly with guidelines to ensure the success of the Local Content Act.  The industry awaits the promised risk based capital regime which should allow for product differentiation. Further, all top energy insurers /reinsurers/Pools would be expected in the next few years to be rated by internationally recognized rating agencies.  Finally, while the primary energy risk carriers must be well capitalised in line with regulations and rating requirements, the number of secondary suppliers of local capital should be increased to include other Pools/reinsurers such as the AOEP, FAIR Pool, WAICA and Nigeria Re when they qualify for such acceptance. AFRICAN REINSURANCE CORPORATION10 CONCLUSION

11. THANK YOU AFRICAN REINSURANCE CORPORATION