Why Nigerian Airlines Lean On Foreign Insurance Underwriters

Aviation industry globally has transported about 2.4 billion people since inception, according to the International Air Transport Association (IATA). Over 43 million tonnes of cargo, 32 million jobs, $545 billion in revenue and $217 billion in debt are currently credited to the aviation industry worldwide.

However, despite the huge business potentials in the industry, aviation business remains very risky and prone to great losses. To therefore realise the business potentials in the industry, operators must mitigate the huge risk involved in the business. Hence, the growing need for aviation insurance.

The Nigerian insurance penetration measured by percentage of gross premium to the gross domestic product (GDP) is very low at about 0.71%. The gross premium per capita of $8.30 (₦1,328) is very low when compared with other countries. For instance, South Africa has a gross premium per capita of $867.65, while Chile, Brazil and China have $348.37, $239.02, and $105.20 respectively. The gross premium per capita is highest for the United Kingdom, the Netherlands and France at $6,854, $6,130 and $4,308 in that order.

With a penetration rate of below one per cent, Nigeria with a population of about 160 million portends a massive untapped investment opportunities for the insurance industry.

Insurance Requirements For Airlines In Nigeria
Public Liability Insurance: This insurance policy, often referred to as the third party liability, covers aircraft owners for damage that their aircraft does to third party property, such as houses, cars, crops, airport facilities and other aircraft struck in a collision. It does not provide coverage for damage to the insured aircraft itself or coverage for passengers injured on the insured aircraft. Public liability insurance is mandatory in most countries and is usually purchased in specified total amount paid in advance. For example, $1 million or $5 million policy can be bought. This is however not mandatory in Nigeria.

Passenger Liability Insurance: Passenger liability insurance protects passengers riding in the accident aircraft who are injured or killed. In many countries, this coverage is mandatory only for commercial or large aircraft. Coverage is often sold on a "per-seat" basis, with a specified limit for each passenger seat.  Like in most countries, all commercial aircrafts are mandated to have this policy in place to fly in the Nigerian air space.

Combined Single Limit (CSL): CSL insurance coverage combines public liability and passenger liability coverage into a single coverage with a single overall limit per accident. This type of coverage provides more flexibility in paying claims for liability, especially if passengers are injured, but little damage is done to third party property on the ground.

Ground Risk Hull Insurance not in Motion: This provides coverage for the insured aircraft against damage when it is on the ground and not in motion. This protects the aircraft in the events of fire, theft, vandalisation, flood, mudslides, animal damage, wind or hailstorms, hangar collapse or for uninsured vehicles or aircrafts striking the insured aircraft.

Ground Risk Hull Insurance in Motion (Taxiing): This insurance coverage is similar to ground risk hull insurance not in motion, but provides coverage while the aircraft is taxiing, but not taking off or landing. Normally, coverage ceases at the start of the take-off roll and is in force only once the aircraft has completed its subsequent landing. Due to disputes between aircraft owners and insurance companies about whether the accidented aircraft was in fact taxiing or attempting to take-off, many insurance companies have discontinued this coverage.

In-Flight Insurance: In-flight insurance coverage protects an insured aircraft against damage during all phases of flight and ground operation, including while parked. Naturally, it is more expensive than not-in-motion coverage since most aircrafts are damaged while in motion.

Key Players In The Nigerian Aviation Insurance
Over the years, foreign insurance and reinsurance firms such as LLOYD’S and the American International Group (AIG) have continued to be the major players in the insurance of aircrafts in Nigeria.  It is one of the major areas of capital flight in the country. This is because the level of involvement of local underwriters in the business is still very low.

There are fears that the domestic air transport in Nigeria may become moribund. And this is happening at the time international air travel in the country is enjoying a boost. Unfortunately, while 21 foreign airlines operate in the country, only three Nigerian airlines are involved in international operations and have about one per cent of the market. Industry experts say the domestic traffic has crumbled below 35% and that if it does not pick up in the near future, the few existing airlines may dissipate their operational funds and go into liquidation as revenue has significantly plummeted.

Top Global Insurance Underwriters In Nigerian Aviation

The Nigerian insurance market is small; tightly concentrated and characterised by slow growth with almost 70% of premiums split between Marine, General Accident and Motor Insurance policies. Relative to the rest of the financial services industry (commercial banking, securities and asset management business), the Nigerian insurance market remains slow and has experienced very little inflation-adjusted growth over the last 10 to 15 years. In sharp contrast to the recent exponential growth in commercial banking assets, gross earnings and profitability, equity and fixed income value/volumes traded, and total assets management across the financial system, the insurance premium growth has been lethargic.

Industry Structure
The Nigerian insurance industry is characterised by numerous players; most of them are of similar size. The average Nigerian insurance underwriter reported gross premiums in the region of ₦3.4 billion in 2011 financial year, with only a handful (about five companies) reporting numbers significantly larger than ₦5.2 billion. Of equal bearing, much of these premiums are mainly sourced from covering risks in the same class of insurance (life, motor, fire, marine, aviation, general accident and workmen’s compensation/employers liability). The industry is thus highly competitive, particularly considering the slow pace of growth in the overall market size.

The competitive structure of the Nigerian insurance industry is further complicated by the presence of a large number of insurance brokers. They are major intermediaries in the flow of business between corporate customers and insurance underwriters. Over 70% of industry premiums are controlled by this large group of brokers. Companies are comfortable with the competitive pricing and claims management support that these brokers typically provide. The brokers have thus leveraged on this position of strength to dominate the industry. Broker dominance ensures that premium payments by corporate customers (to the underwriters, through the brokers) are hardly ever received on time, resulting in a crippling industry premiums receivable ratio.

The Quest For Foreign Insurance Underwriters
Until the new capitalisation benchmarks set by the National Insurance Commission (NAICOM), the insurance industry regulator, in September 2005, the minimum capital base requirements for operators were stratified as: ₦150 million for life assurance; ₦200 million for non-life assurance; and ₦350 million for reinsurance companies. These requirements which most operators barely met underline the lack of capacity in the industry. The sector loses substantial business to foreign underwriters, especially in the oil and gas, and the aviation industries.

In a recent recapitalisation effort, concluded in November 2007, a total of 49 insurance companies and two reinsurers successfully raised enough funds to meet the minimum capital requirement to conduct insurance/reinsurance business in the country. The minimum paid-up capital requirement for a general insurer (property and casualty insurer) is currently ₦3 billion (about $19 million) while that of a reinsurer is ₦10 billion ($63 million).

From a policy implementation standpoint, the ability of local insurance underwriters to take more aviation risks is in doubt for reasons already described as investors fatigue and relative return on investment bordering on capacity. It is therefore apparent that foreign insurance and reinsurance firms will continue to be the major players in the insurance of aircraft in Nigeria until local underwriters rise up to the occasion.

The Huge Capital Flight
About 80% of Nigerian airlines insure their aircraft overseas, while the remaining 20% that insured theirs locally still have a major part of their risks hedged abroad. A development that has resulted to immense loss to the country due to capital flight, as the airlines pay billions of naira as annual premiums on the insured aircrafts to foreign insurance firms. The annual premium paid by Nigerian airlines and aircraft owners on their airplanes ranges between $100,000 and $1 million, depending on a number of factors which includes the size of the aircraft, the manufacturer, the brand and the use of the aircraft.

An average commercial airline cost about $10 million (₦1.6 billion) and an average compensation per passenger is about $100,000 (₦16 million). Multiplying these figures by 200 passengers (for an aircraft carrying 200 passengers apart from the crew members) and the damages that may arise if there is an accident, is a lot of risk. Aviation insurance requires large capital; even if all the insurance companies in Nigeria pool resources together, they may not have enough to bear the risk of the local aviation industry.