‘Despite fall in naira, Nigerian risks remain attractive to reinsurers’
Nigerian insurer’s risk remains attractive to local and foreign reinsurers despite challenges in foreign exchange. Adetola Adegbayi, executive director, Business Development, Leadway Assurance Company Limited in this interview with Modestus Anaesoronye bares her mind on impact of falling currency on the business, oil and gas risks and likely impact on claims. Excerpts
With the widening gap in foreign exchange against the naira, how are reinsurers overseas reacting to placements from Nigeria
There are two types of overseas reinsurers – the treaty reinsurer and the facultative reinsurer. The facultative reinsurers are not affected as they expect premium payment for risks in equivalent currency of insurance. Treaty reinsurers, on the other hand, consider the cedants’ overall book of risk in local currency and use this in determining treaty premiums. Of course, the same or more or less dollar value may be seen for particular portfolios depending on the diversity of assets insured. For example, owners of industrial assets purchased in foreign currency may have to revalue their assets for replacement purposes and in order to avoid potential “under insurance”/average in the event of loss. As such, sums insured in Naira may grow, with effect on absolute premiums paid; but the dollar equivalent may not have changed in terms of risk to the reinsurer. Alternatively though, if the retention of the insurer remains the same in Naira value and they have not adjusted their retention levels in line with real/true value, then the reinsurer assumes a higher risk and may decide to charge higher premiums.
Do you foresee a situation where foreign reinsurers may begin to reject businesses from Nigeria
Reinsurers reject business based on the quality of risks presented on the facultative side and the quality of the cedants’ underwriting on the treaty side. This has nothing to do with movements in foreign exchange. Of course, if a cedant (insurer) cannot meet payment obligations, the reinsurer will be within its rights to cancel the reinsurance policy, leaving the cedant (insurer) with the credit risk on the assets and liability insured.
The impact is more pressure on the insurers’ balance sheet and shareholders’ capital if reinsurers decide to come of cover for delayed/none payment of premiums.
With continued fall in the price of oil, how are oil and gas businesses being affected
Oil and Gas assets still have to be insured. The pressure on revenue means that oil and gas business owners are looking to save on insurance premiums and do achieve the savings once they are able to represent their risk quality to insurers/reinsurers or structure their risks in ways that allows them to enjoy lower premiums.
Market forces also come into play; as insurers compete for the smaller premium size in the market place, to force premiums down, save for books that have high loss ratios.
How is it impacting on claims
Claims are the reason why we are in business as insurers. However, if an insurer does not match its premium assets properly to its core insurance liabilities, then it is quite possible for the insurer to end up with challenges to its solvency. If an insurer decides to accept to insure a dollar/foreign currency linked asset today in Naira and a loss occurs, the insured is going to insist on the asset being paid in Naira equivalent of the dollar/foreign currency link. Alas! The adjusted premium asset to the insurer at the time of loss may be so minute, as to have granted the cover for free, or even at a loss, when adjusted for possible brokerage. So, potentially we may see higher loss ratios.
Could you give us an insight on whether or not projects are being cancelled in response to the falling oil and gas prices
Business runs with the times and I am not aware of projects being cancelled in response to the fall in oil and gas prices from an insurer’s point of view. It may be that projects get delayed or adjusted to suit current financial/economic realities.
Modestus Anaesoronye