How naira free-fall, others increase local airlines’ overseas insurance premium

The low solvency level of some underwriting firms and consistent depreciation of naira were, yesterday, identified as the reasons of the higher premium local airlines pay for insuring aircraft in Nigeria and overseas.

The insurance regulator and operators, who spoke at the opening of the Chinet 22 Aviation and Cargo Conference in Lagos, said aviation risks were of special categories than the Nigerian market could solely cover.

For several years, the local airlines have consistently bemoaned the higher premium of insuring an aircraft, which costs between three or four times the standard rate in Europe and America.

Speaking on the theme: “The role of insurance regulation in growing aviation and cargo businesses in Nigeria”, Director of Policy and Regulations at NAICOM, Leo Akah, noted that high premium remained one of the challenges facing the sector and partly for reasons not unconnected with the industry’s peculiarities.

According to Akah though aviation risks are low, they are high in severity to require a strict legal framework and regulatory principles that operate in the insurance sector.

He observed that the laws mandate players to have additional capital requirements to insure aviation, have the insurance domesticated locally and by Nigerian registered brokers, with the exception where there is low capacity of underwriters. In addition, underwriters cannot commit more than five per cent of shareholders’ funds into aviation coverage, “as part of measures to protect the shareholders from high-risk exposure.”

Managing Director of Cornerstone Insurance Plc, Ganiyu Musa, added that the total balance sheet of the insurance sector was over $1 billion, which is much to cover the aviation sector.

However, “Part of the issues facing the sector is in the area of regulations. We cannot invest more than five per cent of our fund, which is $50 million for aviation insurance. The severity of risk in aviation is high. Yet, the amount of risks covered in the oil and gas industry is four-fold higher than aviation and we are doing fine. So, we can insure the aviation sector,” Musa said.

He said further that the regulation also demanded that the foreign insurance company of choice has to be from A-rating markets, which costs the airlines’ higher premium.

“The business plan of the airline is required for risk assessment and it has implications for pricing. But when operators don’t supply details of their operations or give an inclination of not knowing what they are doing, all these will reflect in the cost of underwriting and it is very little anyone can do in that instance,” Musa said.

Director of Operations, FBS Reinsurance, Shola Ajibade, explained that the Naira free-fall has affected both the insurance market capitalisation and the ability of the country to insure aircraft with foreign partners. Ajibade observed that the prescribed minimum capital to venture into aviation is N10 billion.

“Given that aviation is denominated in dollars, at the exchange rate of N420/$, that is $23 or 25 million. And if at N700/$, then that is $15 million to be able to do aviation underwriting! Given aviation liability that is as high as $750 million, that leaves the Nigerian insurer with very little percentage and we have to go overseas where the capitalisation is far higher,” he said.

Managing Director of Custodian and Allied Insurance Limited, Edeki Isujeh, reckoned that local insurance premiums are not higher than that of their foreign counterparts, but for peculiarities of the local operating environment.

Isujeh said it was high time NAICON liaised with the Central Bank of Nigeria to ensure that airline operators have access to foreign exchange at the official rate, to bring down the cost of insuring aircraft.

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