IBN Chief Urges Caution In Local Content Implementation
By Ifeanyi Ugwuadu
 9th NOV 2006

Insurance Brokers of Nigeria (IBN)'s Chief Executive, Mr. Prosper Okpue, has asked insurers to be cautious over hasty implementation of the Federal Government local content policy in the oil and gas sector. He canvassed for a gradual approach and a thorough understanding of the risks in the industry and applying small retention each year.

“My counsel is to start small, perhaps 5 per cent local retention in year one, based on limits/sums insured,” adding “where possible take more risk but only if the implications are carefully analysed.

The former Agip risk manager premised his counsel on the loss experience and high loss potential in the oil and gas industry which has forced many energy insurers in the developed economies to pull out. He would rather prefer a strategy that allows insurers to grow their local content participation over a 5-year period at 5 per cent per annum. This would take them to 25 per cent in 5 years, he stated.

Okpue said the strategy would also enable insurers to properly evaluate the risks they write so as to prevent many insurers going under as a result of taking larger risks.

“If the market can be allowed to develop over a few years and to remain open and competitive, gradually, a genuine marketplace with proper local content will be developed,” he stated, adding that the same applies for other classes of insurance “where significant exposures are at risk.”

He believes that “rushing headlong into 45 per cent local content, even before it is defined, is a recipe for disaster” in the insurance industry and the larger economy.

The former President of the Nigerian Council of Registered Insurance Brokers (NCRIB) warned that “if local content is forced, the knock-on effect will run far deeper than just the insurance market; the next round of marginal field “farm-outs” in 2007 will be the first to feel the effects.” If the industry is serious about rebuilding confidence in insurance, then the players must carefully look at risks being offered and if possible decline risks that it may not be able to pay claims if there are losses.

He faulted the desire of most underwriters to take energy risks without understanding the nature of the risks they wish to assume. Similarly, he was worried that the necessary skill and technical knowledge as well as sound financial capacity to do energy business are inadequate.

Arguing that acceptance of any risk should be based on the underwriter’s ‘working knowledge of the subject matter offered for insurance” including its capacity and the reinsurance capacity available in the market, he said the industry has not evolved appropriate strategy for local content. “If we must be sincere to ourselves, our local insurance industry has not developed any mechanism to evolve appropriate local initiatives that will create value for their shareholders other than the excitement that the 45 per cent local content target for 2007 will bring dollar windfall to their balance sheet without consideration to the real potential catastrophic claims of energy exploration and exploitation operations.

He spoke in on a paper, Local Content in Nigeria: Matters Arising in Nigerian Energy Insurance Market, Challenges and Recommendations.

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