Tackling aircraft’s high insurance premium


Airlines, airport authorities, ground handling firms and other ancillary services providers are on war path over the high insurance premium for aircraft. However, experts say the paradigm can change, if there is  enhanced capacity, right pricing and pooling of risks, among indigenous insurance firms, to enable them handle serious aviation undertakings.

THERE is growing discontent among aviation players  over the rising cost of insurance premiums charged by local underwriters.

The  cover is for aircraft, ground handling equipment and installations at airports.

In most countries, including Nigeria, all commercial aircraft are mandated to have the combined single limit category. The category combines public and passenger liabilities, with an overall limit per accident.

Going by the various submissions of stakeholders, the prohibitive cost of insurance premiums on aircraft used locally, is predicated on the inability of indigenous firms to undertake risks without resorting to firms abroad.

This is why foreign insurance and reinsurance firms, such as LLOYD’S and the American International Group (AIG), have found the Nigerian airline industry a veritable market for business.

Others reaping from the lack of domestic insurance firm’s capacity include America International Group in United States (US), AXA Group in France, Allianz Worldwide in Germany, Meti Life in the US, General Group in Italy, Zurich Financial Services in Switzerland; Prudential Financial in US, AVLVA in the United Kingdom,  Munich Re in Germany, ManuLife Financial in Canada and AEGON in Netherlands.

According to the requirements of the Nigerian Civil Aviation Authority (NCAA), airlines must have a valid cover for their aircraft before they operate scheduled or charter  flights.

Investigations reveal that the high cost of aircraft insurance in Nigeria can be traced to  its classification as a high risk country, no thanks to the insecurity in some states,  the state of navigation and airport facilities and its history of air accidents.

But experts, including Airline Operators of Nigeria (AON) Chairman Captain Nogie Meggison said the assessment should be discarded because Nigeria holds a Category One ICAO safety rating.

To correct this, he said operators have engaged underwriters to do a rethink.

Worried by this trend, the National Insurance Commission of Nigeria (NAICOM), a few years ago, called for merger among insurance firms to enable them pool  funds and expertise to undertake aviation risks. The regulatory body said such merger could correct the anomaly.

Standard Alliance Insurance Plc Group Managing Director Bode Akinboye said that many factors were responsible for the high cost of premiums on aircraft.

He said many insurance firms were scared of aviation risks because of the large funds required to pay claims.

Akinboye said unless an insurance firm gets a large number of risks to undertake, the premium would remain high.

He said: “It is not true because capacity is relative. Insurance is an international business.  It is a matter of capacity and the network of reinsurance companies behind you as a company.

“To boost your capacity as an insurance company, you must have a solid back up of retro-concessionaires. These are companies that reinsure the re-insurance companies behind you.

“So, it is a long chain. Every business you take from Nigeria can find its way to the US, UK, Russia or even find its way back into Nigeria.

“If there is no capacity to handle airlines, the capacity can be put in place and there are laws that enable the insurance companies through our regulators to put the necessary capacity in place.

“Insurance is a game of large number and unless you get the large number. It is impossible to get the large pool of fund to handle those heavy claims.”

Besides large pool and capacity, Akinboye said other factors responsible for high insurance premium included the issue of right pricing of insurance products.

He said: ”Another factor is pricing. The  public wants  quality services from the insurance companies, but they do not want to pay the right price. You cannot get what you don’t pay for. Nigeria is one of the few markets where you can get the cheapest form of insurance.”

Akinboye said the model of aircraft ownership also contributed to the problem.

He said: “Most aircraft in Nigeria are on lease, so the lessors have global insurance cover with their international insurance companies.

“But to comply with the Nigerian laws, airlines still pass through a local insurance company. Any insurance company that takes up a business knows that we are in business of risks management.

“You have to look at your balance sheet and know how much of those risks you can retain and bring other insurance companies to join hands with you. If they cannot carry it, you take it to the international market.

“The truth is that there is no business that is too big for the insurance world to take up as long as you give it to insurance company that knows its onions. They will know how to place that business in the global market. This is  because global network  is where the strength of insurance is.

“Every business you take, you have to find a formula where you take the portion you can absorb and give the rest out to others both locally and abroad. With that, there is no business that you cannot place with insurance companies.

“The cost of insuring aircraft is so high in Nigeria because of claim experience.There have been a series of aircraft accidents in Nigeria in the past and the environment is perceived as  not safe. These are the factors that drive insurance premium.We look at different factors before we know how much we want to charge.

“The rates are not determined by us, they are determined by foreign reinsurers who take the bulk of the risks. For most aircraft, we retain maybe 20 to 30 percent risks; the remainder is insured abroad.’’

He continued: “That is how the market is because aviation is a specialised risk. It is not just for anybody. Inside the aircraft, we have complex equipment and these are not as straight forward as insuring a motor vehicle.

“There are special risks that need to be handled by experts. As long as we are still developing the know-how in Nigeria, we still have a lot to learn from our counterparts abroad. We just have to take the one we can absorb and give the rest to the international market.

“Every sector is looking for survival and aviation has its own challenges. So, in an attempt to save cost and manage liquidity, they want to buy insurance in the right size, so that they can use and pay, but the requirements for aviation is very strong that you must have insurance throughout the year, non-stop otherwise you cannot fly that aircraft.

“So, even if they pay monthly, there must be a structure to make sure that their insurance is on-going. So, I believe the monthly payment is just about cash-flow and liquidity management not the cover. The cover has to be 24 hours  daily in a year.

“What we can offer to airlines is  flexibility, access to the London market, which is the standard for placement of insurance risk and we will not play with their requirements in terms of where to place the risks and get the necessary approvals prior to placing such risks.

“Apart from that, we are developing passenger insurance to complement the mandatory cover, whereby every passenger flying from one airport to another can also have extra insurance benefit to complement what they have in case there are any accidents.

“So, it is more of speed, quality of engagement with them and placing their risks in the Lloyd’s of London market, which is the standard for placing such risks.”

Akinboye said one of the reasons insurance industry was not making the needed impact compared to other countries’ could be traced to improper application of  the law. He called on the government to overhaul the sector.

Akinboye said: “The lack of political will and structures to ensure compliance are some of the major problems preventing the industry from making the right impact in Nigeria. On the back of compulsory insurance is where we are supposed to have innovation, new products and services. I do not think Nigeria is getting five to 10 per cent  of the potential in compulsory insurance.

“It is not my responsibility as an underwriting firm to implement; it is the duty of the government.”

Also, Air Peace Chairman Allen Onyema said the high cost of insurance was affecting operators.

But, he admitted that the setting up of a pan – African aircraft leasing company could bring about reduc Insurance premium .

He said : “ Insurance premium is very high in Nigeria. It is very high to insure one aircraft. All the odds are stacked against us. All over the world, insurance premium is next to nothing. But, in Nigeria, the insurance firms have no capacity to insure an aircraft.

“It makes my heart bleed that  aircraft  registered in Nigeria  have to pay twice or more than the amount foreign registered aircraft pay on insurance premium. The reason given for this by insurers is that Nigeria is considered a high risk nation. But, we are not a high risk country, considering the fact that we have Category One staus. If our aviation standards are not high, we could could not have been awarded Category One. We are doing well in terms of safety globally, yet insurers label us as a high risk country.”

Also, Managing Director, Medview Airlines, Muneer Bankole said the  insurance market is unable to effectively underwrite risks in aviation because of the high exposure of an average $500 million required to cover hull, war and third party liability.

He said: “The issue of insurance is dollar denominated. Insurance companies have no capacity to carry the burden of such risks.

“The categories include: public liability, passenger liability, combined single limit, ground risk hull  and inflight insurance.’’

In the public liability category, the policy covers owners for damage by their aircraft to third party property, such as houses, cars, crops, and airport facilities.