How Nigerian Airlines Spend N300bn Annually for Double Insurance on Aircraft
Chinedu Eze
In a bid to meet the National Insurance Commission (NAICOM) regulation, Nigerian airlines insure their aircraft locally and also insure the same aircraft with international insurance companies like Lloyd to meet the criteria of aircraft manufacturers and lessors, amounting to double insurance, THISDAY can report.
The payment on double premium has been projected by industry experts to cost Nigerian carriers over N300 billion annually.
In addition, Nigerian airlines pay high insurance premium compared to other countries in the world because it is designated as high country risk.
Nigeria is described as harsh environment to operate aircraft, so while many countries pay one per cent value of an aircraft in insurance, Nigeria is made to pay eight per cent of the value of the same aircraft.
International aircraft insurance companies defend the high premium Nigerian carriers pay for insurance because of the designation of high country risk and they also do not recognise the premium airlines pay to meet local regulatory requirement of NAICOM.
The Chief Operating Officer of United Nigeria Airlines, Osita Okonkwo, said because of the insurance policy in Nigeria, some lessors don’t lease aircraft to Nigerian airlines and even those that lease their aircraft to Nigerian operators, insist on wet lease, which is a situation whereby the lessor would be in the management of the aircraft, including maintenance and crew and insurance (Aircraft, Crew, Maintenance and Insurance (ACMI); unlike dry lease where an aircraft is leased to an airline and the airline would solely manage the equipment in terms of maintenance and crew.
Okonkwo also said that Nigerian insurance companies lack the capacity to insure aircraft because of the cost of the asset, so Nigerian carriers resort to group insurance, which aircraft manufacturers and lessors do not allow. They insist you must insure with major insurance companies like Lloyd.
“The problem we have is what they describe as country risk. It has nothing to do with the operators. We have had cases where lessors will say your books are good and you are doing well, but your country has this risk rating and we are not allowed to lend to this country because of its rating. So, we have to be mindful of that. And really what I will appeal to you journalists is to find out how this matter can be resolved.
“The other one on insurance is that there is no capacity internally in Nigeria to do big insurance here, like aircraft insurance. Many big aircraft may go for a minimum of $600 million combined single unit and there is a law in Nigeria that says you must originate the insurance in Nigeria. But most lessors, whether it is leased, it is wet or dry lease, would want the aircraft to be insured by Lloyds in London or in Dubai or New York, anything short of that they will not allow it. They also insist that the insurance has to be specific, reinsurance has to be specific (that is insuring an aircraft alone without making it group insurance). So we have to insure in Nigeria to abide by the Nigerian law and also insure outside to meet the requirement of the lessor or the manufacturer. So many lessors are not operating in Nigeria because of insurance and this is another point.
“And we really want you to do some more work on this and educate our NAICOM on this because it is killing business. Even though you want to do indigenization, you can’t do indigenization with another person’s asset. Even if you buy an aircraft today, it is a requirement that you have to insure it with known insurers even if you pay with your own money. You can buy it from Embraer or from Boeing, but insurance must cover them even though they have sold the aircraft to you. So, you can’t escape the international requirement for that part of the business. And limiting it locally will not help lessors” Okonkwo said.
He further said: “So what people do is to embark on local insurance just to satisfy all righteousness. You still have to go outside and take another one to satisfy the lessor and the manufacturer. That is double cost. There is nobody that will give you an aircraft today sell or lease that will accept local insurance, especially if it is above $200 million. The other ones we have like Embraer E145 and other small aircraft, there is no problem; the capacity is there. But once you start going to bigger aircraft, forget it; the premium is very high. The 50-seater and less than 100-seater aircraft you can manage locally but once you start having bigger aircraft you have to go out.”
Reports indicate that in 2017 airlines operating in Nigeria pay an average of $1 million annually to insure a B737-300 aircraft while airlines in Ghana or US pay between $200,000 and $300,000 to insure the same aircraft type.
But defending the policy, the Managing Director of Universal Insurance Plc, Ben Ujoatuonu, told THISDAY that airlines should insure their risks here in Nigeria in line with the local content rule, noting that it would help the development of the local market and reduce foreign exchange flight to international market.
“Again one has to look at he issue of capacity to accommodate the entire risk. The capacity of the local market obviously cannot accommodate the aviation risks, which we know is enormous. So the indigenous insurers must seek for reinsurance outside the country and that is from foreign market but they must start here that is the airline operators must first of all feed the local market. Good enough Nigerian insurers are now shoring up their capital. The essence is to be in position to accommodate higher risk like the aviation risk. It is true airline operators complain about high cost of aviation insurance in Nigeria but they should consider the peculiarity of aviation risk in Nigeria. It is true that every business operator is looking for how to cut cost and get the best service. It is really a challenge but airline operators should take note of the fact that although anybody can go anywhere and get insurance cover the issue of patriotism is a strong factor,” he said.
