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Nairobi Business Monthly
Home»Briefing»OIL INSURANCE
Briefing

OIL INSURANCE

EditorBy Editor18th July 2014Updated:23rd September 2019No Comments4 Mins Read
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The Nairobi Law Monthly September Edition

Local insurers miss out on oil boom

Major oil insurance businesses are likely to be snapped up by foreign-based underwriters, local industry players say, raising fears that the resource may not benefit the economy optimally.

 

Oil is a multi-billion dollar investment whose insurance might prove a nightmare for a young economy with no prior experience. Prospecting in emerging economies is often done by international oil and gas exploration companies, which take control of the whole distribution chain.

Tullow Oil Plc from Britain is leading the pack. Others that are already on the ground include the Royal Dutch Shell, London based Cove Energy Inc, Canadian Vanoil Energy Ltd, America’s Anadarko Corporation and Norwegian’s Statoil, among others.

Insurance stakeholders have raised the red flag on the common insurance practice adopted by these international oil companies (IOCs) which tend lock out the local insurers and deprive host economies of valuable resources.

Speaking at the 2014 Africa Insurance and Reinsurance Conference last month in Nairobi, Mr George Kabban, the CEO of United Insurance Brokers, Dubai International Finance Centre (DIFC) Ltd, said international oil companies prefer offshore mutual industry insurers.

The IOC seeks to recuperate its prepaid premium to the offshore mutual insurer by capturing as much reinsurance premium out of the local insurers as possible. And as a minimum, the IOC will seek to capture a share equivalent to its percentage share in a joint venture. “This practice denies or limits the national insurance markets from actually participating to their full potential and leads to a drain or outflow of hard currency premium out of the national financial system.”

Mr. Kabban says that often, the intent of the IOCs is to take maximum reinsurance premium out of the country and leave only ‘fronting fees’, which is a tiny fraction of the total premium charged to ‘cost oil’. That way, IOCs maximise their own, and their captives’ benefits as they minimise revenue to the national/local insurance industry and national economy in general.

IOCs strategically select from the weak but licensed local insurer(s) to issue a local policy in compliance with the local laws. However, the selection is predicated on the instruction that maximum reinsurance premium is to be returned to the IOC’s captive or its so-called global programme. The local insurers are then put into competition to quote the lowest “issuance fees” or “fronting fees”, which is often a tiny fraction of the gross premium.

“Through such a strategy an IOC’s gross premium expense in the host country, in reality, becomes revenue to the IOC’s Captive reinsurer and further benefit is generated by increased oil allocation.” Mr Kabban, an expert in well control issuance, says.

Net insurance premium and risk exposure are not retained locally. It also inhibits real growth opportunities for the local insurance industry with a knock-on effect on the rest of the financial sector by denying the market the ability to retain more net premiums in the local market, which may then be invested in the stock market or other investments that can generate greater liquidity.

The international oil companies ensure they have control over local insurance and reinsurance arrangements, often claiming local insurers are not financially strong enough to underwrite such risk.

IOCs manipulate the prices of to undercut the commercial conventional reinsurance market to achieve a greater goal, or the reverse – to increase cost oil.

Mr Kabban suggests, among other measures, collaboration between the local national insurer and its reinsurance brokers. There should be competitive sourcing of insurance and reinsurance services to ensure fair risk pricing and benchmarking. “The local insurance market should also be enabled to retain viable risk and commensurate premium thus building greater risk retention capacity over time and be also enabled to create more quality employment opportunities,” he says.

Mr Kabban proposed the creation of the National Energy Insurer as the county’s own captive insurer, owned by insurance companies through subscription would build a combined capital base to take on high-value/high-risk exposures.

“The National Energy Insurer should initially be supported and designated as sole authorized insurer of new energy risks. With a strong capital base and growing ability to retain risk and premium, such an insurer can eventually become a regional or even an international energy insurer,” he says.

This would also support national financial services economy and increase quality employment opportunities locally.

The Nairobi Law Monthly September Edition
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