Regulators urged to strengthen local capacity for premium retention

by Modestus Anaesoronye

January 29, 2014 | 12:10 am
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Insurance brokers have emphasised the need to develop local capacity in the oil and gas industry to enhance premium retention by local players, which will definitely reduce premium flight to international reinsurance captives.

To the brokers, the industry regulators need to make strategic policies that give local operators the opportunity to acquire skills and build the necessary capital to be able to underwrite big ticket risks.

Feyisayo Soyewo, chairman, African Insurance Brokers Association(AIBA) noted that this will require local insurance and reinsurance brokers to form a pool to be able to compete with other foreign players.

Over the week, another oil and gas risk expert urged insurance industry regulators in emerging nations that hold oil resources to work with local insurance markets to create national insurance carriers and prevent the flight of valuable premium income to international markets via captive reinsurance and global programmes, a leading brokers said.

The broker based in the United Arab Emirates, told delegates at the 4th annual Middle East & Africa Insurance Summit held in Dubai that oil rich emerging nations need to act to prevent international oil companies from using captives to exploit immature economies.

The broker, who pleaded anonymity, said that many international oil giants keen to tap the oil resources of emerging or troubled nations such as Angola and Iraq use their captives and membership of international mutuals such as OIL in Bermuda to fully protect their assets.

They are of course forced by national regulations in most territories to use local insurers for cover. But in reality they often only use the local companies as fronting insurers to satisfy such requirements and the bulk of the premiums flow out of the market via captives and global programmes.

This common practice hinders the development of local insurance markets and enables the international oil companies to set their own prices via captives-usually at an unrealistic rate.

To make matters worse the oil giants then pressure ‘vulnerable’ and inexperienced governments to grant them so-called ‘cost oil’ credits to the value of the premiums supposedly placed with the local insurers.

Typically, the unwitting governments are persuaded to grant credits for the full premium value of say $20m while in actual fact as little as $250,000 will typically be held by the local market in the form of fronting premiums.

This system wipes out the real cost of the transaction for the oil giants and represents a ‘win-win’ situation for the oil conglomerates, claimed the broker.

The solution to this unethical practice, he said, is for national regulators to effectively pool the local insurance market’s capacity and expertise in a national carrier formed specifically for the oil sector.

The combined capacity of the local market will enable it to retain much more of the risk and ensure that the commercial market properly prices the risks.

Claims should be adjudicated by an independent third party to ensure that claim values are not decided by the oil major’s captive, which could easily undervalue the claims for strategic reasons, said the broker.

By: Modestus  Anaesoronye

by Modestus Anaesoronye

January 29, 2014 | 12:10 am
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