Airlines Call for Suspension of Local Content in $2bn Aircraft Insurance Cover, NIA Disagree

Chinedu Eze and Ebere Nwoji

Nigerian airlines have called for the suspension of local content in aircraft insurance, which premium is projected to reach $2 billion annually, insisting that they are forced to undertake double insurance for their aircraft because lessors want their aircraft to be insured overseas.

But the Nigeria Insurance Association (NIA) is insisting that Nigerian insurers can handle as much as $2 billion aviation insurance annually, since insurance is about collective risks.

According to the Chief Operating Officer of United Nigeria Airlines, Osita Okonkwo, airlines are made to insure aircraft with local insurers, which most of the lessors do not recognise, a development that compels airlines to insure their aircraft with international insurers in compliance with leasing conditions of lessors.

“There is no capacity internally to do big aircraft insurance in Nigeria. So many lessors are not operating in Nigeria because of insurance. It is killing business because even though you want to do indigenisation, you cannot do that with another person’s assets. Even if you buy an aircraft today, it is a requirement that you have to insure it even if you pay with your money to Boeing, Embraer or whatever. The insurance must cover Boeing even though they have sold it to you, they must be party insured in that transaction. So you can’t escape the international requirements of the business and limiting it locally will not help lessors,” Okonkwo said.

Throwing more light on this, the Managing Director and CEO of Aero Contractors, Captain Ado Sanusi, told THISDAY that airlines were made to undertake 110 per cent to 140 per cent insurance cover on one aircraft because airlines pay minimum of local content cover of 30 per cent and also fully insure the aircraft 100 per cent with Lloyds, for example, which means paying for 130 per cent on insurance for one aircraft.

Ideally, airlines are expected to share the insurance of their aircraft, 30 per cent local and 70 per cent international, but some lessors and aircraft manufacturer would insist on 90 per cent international or even 100 per cent and in order to abide by the regulation of the National Insurance Commission (NICON), airlines also undertake the 30 per cent insurance cover locally for the same aircraft, Sanusi said.

However, Sanusi said that airline can undertake 100 per cent local coverage of an aircraft if the aircraft is owned by the airline and knows the value of the aircraft because size of aircraft, year of manufacture determine the value and the insurance premium; whereby local insurers cannot cover the value they will need international partners.

“The choice of where to insure your aircraft depends on who owns the aircraft. We at Aero Contractors do local insurance because we know the local market can absorb it. We see the value of Boeing 737 Classics. If it is outside the country it won’t be the same. It boils down to how the lessor can get his money out of the country. The owner of the aircraft determines where the aircraft is insured. Local market is good. If we do not insure locally how can we advance? We must start from one point. So, I totally support local component.

“Local component can be 30 per cent and you insure 70 per cent outside but some aircraft owners don’t agree; so, they insist you insure outside 100 per cent and you will have local content 30 per cent, which is 130 per cent insurance cover; some also agree on 110  per cent and 140 per cent. We should urge the Federal Government to talk to lessors to allow aircraft to be insured locally. We must develop our local insurance market. Insurance companies can even own aircraft and lease them to airlines. Some insurance companies do that overseas,” Sanusi further said.

But the Director, Nigeria Insurance Association (NIA), the umbrella body of Insurance underwriters in Nigeria, Mrs. Yetunde Ilori, said Nigerian insurers could handle $2 billion aviation insurance, adding that insurance is a pull of risks and that no single insurance firm sits on a pull of risk alone. She noted that local content law was already in place in the country and must be open to everyone, including airlines operators in Nigeria.

Ilori who was former Managing Director AXA Mansard insurance, said insurers engage in risk sharing through consortia and so can undertake any insurance cover because they have capacity.

“The answer to your question whether Nigerian Insurers can handle up to $2bn aviation insurance is yes because insurance is a pull of risks and no single insurance firm sits on a pull of risk alone. Secondly, the local content law is in place in the country and must be obeyed by everyone including airline operators in the country and because of this local content law and issue of capacity, insurers engage in risk sharing through consortium arrangement. This is a situation where in handling huge business sector like aviation, a lead underwriter spreads the business to other underwriters based on their capacities and their reinsurance backing,” Ilori said.

According to Ilori, “These must be based on regulation on the quantum of business each underwriter is allowed to accommodate. Thirdly, all the underwriters in the business shared have insurance backing mainly from abroad. These reinsurance backing enables them to retain big businesses and be in position to pay claims when the unexpected happens. The insurers themselves are backed by those called retrocessionaires who stand as reinsurer of reinsurers so the reinsurers reinsure the same business reinsured in their offices to the retrocessionaires.

“These efforts gear towards ensuring seamless claims payment when claim occurs.They boost insurers’ capacities towards claims payment. Most of the reinsurance backing and retrocessionares support are sought for from insurers abroad. So insurance business is a global business and Nigeria plays in the global market arena and can handle any aviation business any one may want to take abroad here locally.”

But this does not resolve the problem where lessors and even aircraft manufacturers decide where their aircraft must be insured. THISDAY also learnt that sometimes manufacturers approve where the aircraft they sold to an airline could be maintained. So, in the case of insurance, a leased aircraft belongs to the lessor and decides where the equipment should be insured.