Country focus:Nigeria – Glass half empty

Nigeria’s volatile social and political backdrop provides a challenging environment for businesses and prominent risks over long-term investment projects. At the root of the political risks are the electoral cycles in Nigeria. “Certainly one of the key concerns investors and the insurance industry would have is how the 2015 national elections will affect those security dynamics and the stability outlook in Nigeria,” said Roddy Barclay, Nigeria Analyst at Control Risks, an independent global risk consultancy. The current President Goodluck Jonathan, member of the ruling People’s Democratic Party and a southern Nigerian, intends to stand again for the 2015 elections. “We believe this decision will prove highly contentious in the Nigerian context given the country’s growing social, political and economic gulf between the north and south. With a southern president in office for 13 of the last 16 years, there are heavy pressures for a northern president to come back into office,” explains Mr Barclay.hideThe ruling party’s structural system has been ‘artificially’ designed to enable power to rotate between the north and south every two terms ensuring there is adequate distribution of political power between the different ethno-regional groupings within the country. “The outlook is uncertain and, although not the most likely scenario, should elite tensions rise to the point of threatening stability, latent ethno-religious divisions could create a deep-rooted crisis that would have a major impact on business,” he added. Meanwhile some of the more subtle political risks encountered in Nigeria, ones that companies across various sectors need to have understanding of, is the risk of political interference in key stages of business development. Licensing, privatisation and procurement processes in Nigeria are extremely vulnerable to political interference and corruption. For example a licensing round may be subject to influence from invested interest and politically connected individuals influencing processes for their own benefits. “Insurable political risks relating to expropriation and outright industry nationalisation are less of an issue,” said Barclay. “But more subtle interference in key business processes and uncertainty surrounding future legal and regulatory reform—particularly in the oil and gas sector—remain a key concern.” This is especially true given how challenging contract renegotiations and licensing processes can be in Nigeria. On the operational risk side, commercial businesses face corruption, bureaucratic blockages, power shortages, general infrastructure deficiencies, and regulatory uncertainty within the oil and gas sector surrounding the Petroleum Industry Bill (PIB), which has been at a stalemate for over four years now. “Once passed, the PIB will act as a single legal instrument to guide all upstream and downstream activity in Nigeria’s oil and gas sector. However, its stalled passage has held up billions of dollars in investment as companies wait for clarification to the regulatory environment,” explained Mr Barclay. “There are also local content issues among the operational risks—in the oil and gas sector it is legislated that companies need to ensure they have the measures and systems in place to ensure they are building local content. This entails building local workforce content and subcontracting to local service companies and so the issue lies in ensuring there is adequate technical capability and corporate standards aren’t compromised as a result,” added Mr Barclay, acknowledging that the process has also contributed to capacity improvements in the local market. The petroleum industry is Nigeria’s largest industry and main generator of GDP in the country and has also contributed to the growth of Nigeria’s insurance market—the biggest in west Africa—through the economic development and demand for energy infrastructure projects, according to AM Best. In the Nigerian market certain parts of the country are viewed as hostile security environments, which represent a real challenge for commercial operators. In the south of the country—within the oil producing Niger Delta region—a coordinated militant regional campaign raged for more than a decade. While this hostile campaign has ceased following a 2009 government amnesty programme, there remains a legacy of complex local engagement issues for oil and gas companies operating in that environment, which remain largely unaddressed. “If these local engagements are mishandled or disputes are allowed to escalate there are some direct security threats to oil and gas operations that can result in sabotage, kidnap or militant attack,” added Barclay. In fact a recent statement from the Organisation of the Petroleum Exporting Countries (OPEC) stated production output from Nigeria has slowed: “Nigeria, subject to frequent sabotage of oil installations and pipelines and also seeing its US export market shrink dramatically, saw output slip by 10,000 b/d to 1.97m b/d in April.” The long-term concerns are how the political and social situation in the Niger Delta will evolve in the coming years and whether there is any resurgence in militant activity in the region. “It may be that sophisticated militant activity will likely pick up again in the longer term—particularly if there is a shift in the national political leadership,” warned Mr Barclay. Equally, in the north of country there is a security risk posed by Islamist militant activity by the Boko Haram group. “Much of this has been focused on domestic targets including security forces, religious and government targets and some commercial operators such as banks, but lately the campaign has expanded to include symbols of the international presence in Nigeria and kidnapping of foreign nationals in particular has become a growing risk,” said Mr Barclay. On the broader national scale, crime is also one of the primary security risks facing businesses operating in Nigeria, which has one of the highest crime rates in the world. There are very prominent armed and violent crime threats and kidnapping risks to commercial operators across some parts of the country. Meanwhile the complexities of community engagement is another concern for businesses in Nigeria: “The issues that the arrival of a big commercial project can create among the local social fabric is an important aspect to consider, understand and mitigate when operating in Nigeria because it is such a complex local environment,” said Mr Barclay. Lastly in the maritime sector there are a number of prominent risks to consider for commercial business operators. There is the offshore security risk of piracy as criminally motivated gangs attack vessels to steal cargo, kidnap crew members for ransom, or indeed to siphon fuel from vessels. The west African maritime space is becoming a difficult environment to operate in for commercial businesses. According to the ICC IMB Piracy and Armed Robbery Against Ships—2012 Annual Report, ‘Nigeria has already become a new centre for maritime piracy as the number of attacks increase steadily despite the government’s impressive naval assets’. The number of pirate attacks off the coasts of Nigeria in 2012 increased to 27 from the 10 in 2011, according to the International Maritime Bureau, while the Nigerian Maritime Administration and Safety Agency reported even higher figures of 119 incidents in 2011, the report said. So far there have been 19 incidents reported this year, stated the ICC International Maritime Bureau (IMB). “From an insurance angle, the challenge lies in knowing exactly what is being insured,” explained Nick Roscoe, Managing Director at Marsh’s Global Marine Practice. Currently armed security off the west African coast can only be provided by the national armed forces of each country’s own territorial waters. Insurers are finding that security companies on the east coast of Africa are using teams they have chosen, trained and are working to their procedures, whereas on the west coast a team assigned to them is often conflicted by the fact that they often report to more than one ‘master’. “The difficulty for underwriters in the UK, for example, is not knowing the details of the mandated procedures of these security forces. If they are looking at a similar security operation in the east coast of Africa the information they need is available. They know the details of the security company’s vetting and operating procedures, the dynamics of the security team, and how they would escalate the use of force—they understand the risk,” said Mr Roscoe. “Without this information the risk becomes extremely difficult to rate. Furthermore, there are also the challenges of conflict of interest within these government operated security teams and uncertainty regarding regulatory procedures should incidents occur.” On the onshore side, again there is the problem of corruption and interference in the ports sector. Finance Minister Ngozi Okonjo-Iweala saw this as a serious impediment to rapid growth in Nigeria’s economy and sought to conduct reforms to try and improve performance and reduce the amount of corruption and bureaucratic bottlenecks in the port system. While this was initially successful, reports suggest corruption has not been fully uprooted. Another risk is the issue of capacity. Nigeria’s main ports, particularly Lagos, are straining at the bit in terms of capacity. Delays and subsequent supply chain risk in distributing products across the country, largely due to poor infrastructure, the poor standard of the roads and criminality, can seriously interfere with business. Capacity is not an issue isolated to the maritime sector, but one the Nigerian insurance industry as a whole is hindered by. While it may be the largest insurance market in western Africa, with total premium of US$1.6bn in 2011, the Nigerian industry does not have the capacity to hold the potential insurance business the country can generate, particularly in the oil and gas sector. “The oil and energy segment is a large part of Nigeria’s GDP and continues to grow so there is a lot of insurance potential for that area. However, the area that limits growth is the mandatory requirements for the domestication of a large portion of oil and gas risks in Nigeria before transferring these risks internationally,” explained Deniese Imoukhuede, Senior Financial Analyst, AM Best. Nigeria’s Local Content Act 2010 effectively states that 70% of all business coming out of the oil and gas sector must be insured in Nigeria—for example, engineering, building of infrastructure and insurance needs, stated an AM Best report. However, the direct insurers tend to have relatively low retention levels, due to their modest size and capitalisation compared with international standards. “The general Nigerian insurers have limited capacity and are unable to retain that 70%, so what tends to happen is around 1.5–3% of the risk is retained locally, while the majority of the risk is ceded out to international reinsurers because they are unable to keep that amount on their books,” said Ms Imoukhuede. She added: “There are some insurers that may retain a higher amount of this risk, however, the reinsurers operating in Nigeria have stated they are not comfortable with the level of technical expertise among direct insurers in dealing with oil and gas risks. So while the growth potential is high, the areas that downplay it are capacity and technical expertise to support the underwriting of that business.” It’s not only the oil and gas sector that poses a conundrum to the direct insurers in terms of capacity, expertise and technical know-how—the majority of political and security risks are also ceded internationally, according to Ms Imoukhuede. “The Nigerian insurers generally do not offer cover for terrorism risks and stick to vanilla products, there are possibly only two or three players in this arena who then largely cede the risk into the international market. There is a lack of expertise in this area, but they are aware of the demand for this product and there have been talks of insurers dipping their feet into this market and creating a ‘special risks’ pool.” Recently, the Chartered Insurance Institute of Nigeria has called for the government to provide an intervention fund to insurers to help them underwrite terrorism and kidnapping risks, among others. Meanwhile, the chairman of the Nigerian Insurers’ Association, Olusola Ladipo Ajayi, also stated in the media that Nigerian insurers have ventured into creating and marketing special risks covers, which includes kidnap and ransom, piracy and terrorism insurance, as well as athletes, artists and entertainers’ insurances and the insurance of dangerous scientific experiments. But there needs to be further development among the direct insurance companies in Nigeria in terms of growing their knowledge in the special risks lines of businesses and, as Ms Imoukhuede points out, the issue with operating in Nigeria and Africa in general, is that data is limited and often not of good quality. Mr Barclay agrees: “Insurance companies are faced with the challenge of attaining informed and insightful information on their risk exposure in an extremely complex and—in places—hostile environment. “The fast-evolving nature of some of the political and security risks faced in Nigeria require constant monitoring and adaptation—both by the commercial companies operating in Nigeria and the insurance companies providing them with coverage.”

Country focus:Nigeria – Glass half empty

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