Imperative Of Aviation Insurance In Nigeria

The just-concluded Aviacargo summit where stakeholders in the aviation and insurance industries brainstormed on gamuts of issues is an opener as the summit kept stakeholders spellbound as to where aviation is headed, writes WOLE SHADARE

Discourse

One issue that dominated discourse at the Aviacargo summit tagged ‘CHINET 2022’ put together by travel expert and consultant, Ikechi Uko, was the role of insurance in aviation; the need for comprehensive insurance packages for Nigerian airlines, and the intricacies of insurance in the life of the aviation industry.

Speakers drawn from insurance regulatory body, the National Insurance Commission (NAICOM), top officials from Leadway Assurance, Boff and Company Insurance Brokers Limited, FBS Reinsurance, Axa- Mansard Insurance Plc. and Cornerstone Insurance Plc, among others, were unanimous in their views on the important role of insurance in growing aviation and cargo business in Nigeria despite the infinitesimal portfolio of aviation compared to the oil and gas industry, which is more than 10 times what the insurance firms cover.

What the law says

The law in Nigeria domiciled with the Nigeria Insurance Commission (NAICOM) requires that every aviation operator be insured against third-party liabilities, for example, passengers dying and people’s properties being damaged. They are compulsory by law and the NCAA Act provides the same thing.

The NAICOM Act provides the same thing that they must compulsorily be insured. If the law requires aviation operators or airlines specifically to have insurance cover, how come some airlines are reluctant to have comprehensive insurance cover for their assets?

To put it in proper perspective, why are they under-insuring their assets? Under-insuring happens when the operator increases his insurance policy to reflect an aircraft’s actual value, which may lead to it being prematurely written off. That is, your plane is taken away for salvage, leaving the owner without enough funds to replace it.

Nigeria, Africa in perspective

There is no gainsaying that aviation is the bedrock of the national economy. In 2019, the contribution of the aviation industry to the nation’s gross domestic product (GDP) was put at ₦198.62 billion, according to the National Bureau for Statistics (NBS). In fact, aviation was adjudged the fastest growing sector for 2019 despite the harsh operating environment.

The African aviation industry has witnessed a growth in mainly privately owned and funded investment in African airline operations. Presently, there are over 300 airlines from 45 markets actively operating in the continent with over 1,700 owned aircraft and about 100 owned helicopters.

The aviation insurance market worldwide is highly specialised and local capacities are limited in the African continent, where there is a strong demand for general aviation risks (with significantly lower exposures in terms of property damage and loss of lives) in addition to the airline business.

Premium rates in the aviation industry have been falling each year by at least 20 percent and this has impacted adversely the premium incomes of the African aviation pool in the last six years.

Thus, for the same or higher levels of exposure, the premium charged is lower.

The lower premiums, coupled with the occasional crashes of African airplanes are causing serious turbulence in the pool’s result. For instance, the underwriting loss of 2014 was occasioned by the July 24 Algerian Airline crash in Mali.

Similarly, the 2016 Egyptian Airways crash in the Mediterranean on May 19th will most likely throw the books of the pool again in the red.

 

Experts’ views

This assertion was buttressed by the Director of Policy and Regulations at NAICOM, Leo Akah, those premium rates are usually raised any time there is a plane crash, stressing that though aviation risks are low, they are high in severity and require a strict legal framework and regulatory principles that operate in the insurance sector.

 

Asked about the capacity of Nigerian insurance firms to insure the country’s carriers, Akah said: “I am one person that does not like blowing the trumpet of our insurance firms openly but I have to say this.

The percentage of aviation insurance compared to the oil and gas sector is so small. It is not a case of so much coming from aviation. We have local content law and we need to abide by local content law. “If you allow any aircraft to fly in Nigeria, none of our indigenous airlines can even fly and compete with their counterparts abroad.

Aviation insurance is a special risk. We call it a special risk. Even the rate of five percent we are talking about is not fixed here in Nigeria. It is from the UK market. “If you take your aircraft that you want to insure, they can’t tell you this is what it will cost. They still need quotes from the UK market or what I call the global benchmark because of the nature of the business. If there is an accident here today, or globally, it will affect the premium next year.”

Managing Director of Cornerstone Insurance Plc, Mr. Ganiyu Musa, disclosed that the total balance sheet of the insurance industry was more than $1 billion, which is more than enough to cover the aviation industry in Nigeria.

Part of the issue, according to him, is that the insurance firms cannot invest more than five percent of their funds, which translates to $50 million for the aviation sector going to regulation.

He added that the severity of risk in aviation was high, yet, the amount of risks covered in oil and gas is about ten times higher than in aviation, adding, “we have all it takes to insure the aviation sector.”

Need to build capacity

Not a few believe that insurance companies are always there assessing their own risk, so risk assessment is based on past experiences, safety standards, and what have you. So, for any African operator to have a palatable insurance expense, Africans need to build their capability of safety records by way of safety assessment, safety avoidance, accident predictions, and aviation facilities and safety equipment, which are expected to be of world standard.

Once the aircraft leaves the ground it needs to land back safely with all the souls it is carrying. So, it is for a purpose that safety is being given a big emphasis. Therefore, insurance evaluation depends on safety capabilities and safety records, the better it is, the lower airlines pay. So all that we need to do is safety oversight and training.

The odds are against the local operators given the nature of the aviation insurance market, the volatile environment, and the inability of firms to underwrite aviation insurance.

Collaboration

Globally, no single insurer has the resources to retain the risk, the size of a major airline, or even a substantial proportion of such a risk. In other words, insurance companies often collaborate by percentages given the huge sum involved. In the case of a fatal accident, a passenger or victim is entitled to about $100,000 compensation.

An aviation insurance lawyer who pleaded anonymity said, “The industry market is competitive and you negotiate the premium. That is why we cannot compare the Nigerian aviation insurance market with that of the United States (U.S.). In the U.S., there are about one million aircraft to insure, Nigeria has about 30 airplanes, so, how will the premiums in both regions be competitive?”

Aviation is regarded as a strategic industry, not only for its potential for economic growth but also for its crucial role in national development and regional integration. Indigenous airlines are faced with enormous challenges like high insurance premiums, multiple taxation, and disadvantageous policies.

 

Last line

Nigeria’s insurance premium on aircraft is recognized as the highest in West Africa and every aircraft parked at the ramp of any airport is guarded by security operatives at the expense of the airlines and this is added to the cost of operation and cost of leasing, especially wet-leased aircraft.

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