Nigeria’s High Risk Status Raises Airlines’ Insurance Premium Above Peers

Notwithstanding Nigeria’s attainment of Federal Aviation Administration (FAA) Category One Status, its airlines pay higher insurance premiums, more than their counterparts, because the country is still categorised as a high risk nation to do business by foreign insurance companies.

With the attainment of Category One Status, aircraft leasing and insurance premiums ought to have dropped as the country is categorised as a premier league nation in terms of civil aviation safety.

Nigeria attained FAA Category One Status eight years ago.

Investigation by Independent shows that the country’s carriers expend eight percent of total value of their aircraft as insurance premiums while their foreign counterparts in Europe, America, South Africa and even Ghana pay a meagre one percent or less as insurance premiums annually on the value of their aircraft.

Independent also learnt that Nigerian scheduled carriers expend at least N12 billion on aircraft and passengers’ insurance premiums annually, N6 billion as insurance premium for the aircraft while another N6 billion is expended as cover for passengers annually.

Independent gathered that average age of aircraft in the country’s sky is between 16 and 24 years old while a used 1999 Boeing 737-300 aircraft, which 90 percent of the nation’s airlines use for flight operations, is valued at $4.5 million (about N1, 642,500,000 at the exchange rate of N365 to a dollar).

For each aircraft valued at N1.6 billion, the airlines pay N131,400,000 (N131.4 million) as aircraft insurance premium annually and another N131.4 million as passengers’ insurance cover while their counterparts in Europe and America pay just N16,425,000 as insurance cover for their aircraft, which represents one percent of the total value of an 18-years-old Boeing 737-300 aircraft.

Following the high cost of insurance premiums, most carriers in Nigeria prefer to do monthly insurance cover for their aircraft and passengers.

The amount of money paid as insurance premiums by the present eight scheduled airline operators is apart from what business aviation, charter operators and private jet owners pay as insurance premiums on their jets annually.

The eight scheduled operators are Aero Contractors with just two aircraft; Air Peace, 13; Arik Air, 10; First Nation, one; Azman Air, four; Dana Air, five; Med- View Airline, four, and Overland Airways with seven airplanes.

As at January 2017, the number of business aviation aircraft stood at 68: 34 for private jets and another 34 for charter operations.

Independent investigation revealed that at least 80 percent of insurance premiums are done abroad with international insurance companies while 20 percent is domiciled in the country with local insurance companies as brokerage firms.

Some of the major foreign insurance firms Nigerian airlines insure their aircraft with are Allianz Aviation Insurance, Aerospace Insurance and Lloyds of London.

Nigeria As A High Risk Country

Sam Adurogboye, General Manager, Public Affairs of the Nigerian Civil Aviation Authority (NCAA), observed that insurance premiums came down drastically for the nation’s carriers immediately the country attained Category One Status, but later moved up after the Dana Air aircraft accident of June 3, 2012, where no fewer than 159 souls onboard and on ground lost their lives.

Adurugboye, however, linked absence of corporate governance, lack of accountability, default on the part of the airlines, business recession and the usual delay in the passage of national budgets as some of the reasons why airlines in the country are compelled to pay more by insurance companies.

“As soon as we got the Category One Status, the insurance premium came down because that was when we joined the premier league and we seem to be complaint to international safety programmes in aviation. NCAA as it is today became like a guarantor to operators. If an operator wants to get an aircraft, we will guarantee you by the new civil aviation regulation, but if you are in default, we will deregister the aircraft and the owner takes the plane out”, he said.

“So, all of these boosted the confidence and allowed the premiums to come down drastically. Don’t forget again that the level of corporate governance in the airlines equally works in favour of their insurers or otherwise. If you see what is happening in our airlines, people are running them like a one man show and corporate governance is questioned.

“Then, the insurance companies monitor the business; the business recession, the business becomes very risky. All these led credence to high premiums. So, as some are coming, some are going down; free entry and free exit.

“So, all these contribute to the premium going higher; the political system; all the delay in passage of the budget have effect on all of these. The more delay in passing budget, the more the business community suffers”, Adurugboye noted.

Engr. Sheri Kyari, Chief Executive Officer (CEO), Finum Aviation Services Ltd, attributed nearness to aircraft manufacturing, strength of economies and the value of Western countries’ currencies to the major reasons why insurance premiums are low abroad than some other countries on the African continent.

Kyari also mentioned the nation’s poor economy, security and safety of equipment, poor landing facilities at airports and stations and area activities as some of the reasons why insurance premiums are high in Nigeria when compared to the Western countries.

He explained that the totality of the nation’s budget was not up to 50 percent of total earnings of an average airline in the United States.

“Some of the foreign underwriters will make our insurance premiums to go high because they don’t just believe we are safe enough as an aviation industry. So, in order to protect themselves, they want to cover as much as possible most especially what we faced between 2005 and 2006 and later 2012 and 2013 when we had series of air accidents.”

Low Financial Capacity Of Local Airlines

Adrugboye said that the nation’s insurance firms don’t have the financial capacity to wholly insure the airlines in the country because of the huge financial resources involved.

Rather than act as insurance firms for the airlines, he noted that indigenous insurance firms act as brokerage to airlines.

“For example, I once asked a big player in the insurance sector why they don’t deal in aviation, he said it is a high risk business because if you put all of the insurance companies together in Nigeria, they can’t even fund one airline in the event of an accident.

“So, you will see our insurance companies providing the legal content by way of serving as a brokerage while the main insurance companies will be outside to insure the airline,” he said.

Kyari added that most of the insurance premiums are done outside because Nigeria still lacked strong financial institutions that could under-write aviation insurance, stressing that this necessitated the high premiums imposed on our carriers.

He, however, called on the government to intervene so that at least 50 percent of insurance premiums could be carried out locally.

“The government should be able to come in and make sure that by now 50 percent of required premiums are carried out locally. Underwriting should be done locally so that they can retain money in the country, but I don’t know if the local insurance they do is even up to 20 percent.

“We are just helping foreign insurance firms to do what they are doing. Also, I don’t know if the airlines too are happy about it because they are keeping quiet. If they are happy about this, it means there is something they know that ordinary Nigerians are not seeing because they are not complaining,” he said.

Need For Merger Among Operators

In a bid to negotiate properly with insurance firms and other business organisations, Adurogboye canvassed for merger among the carriers.

He said that NCAA as a regulator of the industry had over the years urged the operators to team up, pull resources together and form three or four strong entities, but decried that they preferred to run a one man business, which, he pointed out, was working against their operations.

Unsafe Operating Environment
Bode Akinboye, Group Managing Director, Standard Alliance Insurance Plc, in a recent interview with journalists said that the cost of insuring aircraft was high in Nigeria because of claim experience, series of aircraft accidents and the unsafe operating environment.

He pointed out that the rates were not determined by local insurance firms, but rather by foreign reinsurers who take the bulk of the risks and categorised as a specialised risk.

“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,” he said.