In response to the naira's persistent depreciation, Nigerian insurance companies are increasingly transferring their oil and gas business abroad through offshore reinsurance policies. This strategy is aimed at mitigating the risks associated with currency fluctuations and protecting their premium income.
Recent data reveals a dramatic increase in offshore reinsurance activity. In the first quarter of 2024, premium income ceded offshore surged by 94.5% year-on-year, reaching N95.11 billion, up from N48.9 billion in the same period the previous year. This trend has intensified despite local content regulations that mandate 70% of insurance risks related to oil and gas be retained within Nigeria.
The industry's figures show that while the oil and gas premium income amounted to N132.01 billion in Q1 2024, insurers retained only N36.9 billion, a mere 28.1% of the total. This shift towards offshore reinsurance is a direct response to the forex crisis, which has significantly eroded the capital base of local insurers.
For instance, in the full year 2023, oil and gas insurance premiums totaled N167.8 billion, with N113.1 billion ceded offshore, leaving just N54.7 billion retained. This contrasts sharply with 2022, when N80.6 billion of a N125.7 billion premium was ceded, and N45.1 billion was retained.
Industry experts argue that the continuous depreciation of the naira is exacerbating the situation. Ben Ujoatuonu, Managing Director of Universal Insurance Plc, explained that the forex crisis has devalued insurers' capital in dollar terms, forcing them to cede more business to reinsurers. This situation creates a cycle where local insurers are increasingly constrained in their ability to retain business and invest in growth.
Similarly, Rashidat Adebisi, Chief Client Officer of Axa Mansard Insurance, noted that the rising costs of repairs and other services due to forex fluctuations are further straining the insurance sector.
Olasupo Sogelola, CEO of International Energy Insurance, highlighted how the dollarization of the oil and gas sector affects local retention. As the naira depreciates, the value of retained business in dollar terms declines, leading to more business being ceded to international reinsurers.
As the forex crisis persists, it is expected that this trend of increasing offshore reinsurance will continue, posing significant challenges for Nigeria's insurance industry and its ability to retain and grow within the local market.
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