As Airline Operators Tackle Double Aircraft Insurance Premium 

Airline operators are no longer at ease with double insurance premium payment for leased aircraft. Ebere Nwoji in this report highlights their consistent call and push  for an end to the problem

Recent call by the aviation industry stakeholders on the National Insurance Commission (NAICOM) for a review of its regulatory policy on leased aircraft insurance has raised questions on the appropriateness or not of full application of the local content law of the federal  government on insurance to aviation sector since Nigeria does not manufacture any aircraft.

At the recent  Chinet AviaCargo 2024 conference in Lagos,  airline operators said due to the high cost implication of the full application of local content by NAICOM on their businesses, the commission  should consider giving concession and waiver on leased aircraft  used in Nigeria; since the lessors insist on full insurance of such aircraft with international insurers before releasing their aircraft to the airlines.

The operators requested for waiver of  local insurance for these particular aircraft types, while they insure the rest of their fleet with local insurers.

Their reason is that since Nigeria does not manufacture aircraft and the owners of the aircraft who lease to Nigerian carriers insist on full insurance of their equipment by international insurance companies, NAICOM multiply  the cost of  aircraft insurance by applying fully the local content law to the users of such aircraft; thus compelling them to wade through double insurance of the equipment, which has negative impact on their over head cost.

According to the operators, currently, airlines pay double premium for some leased aircraft types because some lessors insist that certain international insurance companies must cover the risk for their leased aircraft in Nigeria, while NAICOM also insists that airlines must insure their aircraft locally in tandem with local content policy of the Federal Government.

They lamented that in  order to meet these two demands, airlines pay double premium, insuring such aircraft locally and at the same time insuring same aircraft with the international insurance companies recommended by the lessors. The airline operators pleaded for a waiver by NAICOM so that airlines can pay single premium for the coverage of aircraft risks.

Industry Analysts’ views

Looking at their argument, industry analysts said their request at its facial look is reasonable since Nigeria does not manufacture any aircraft locally and insurance by its nature is taken to protect one’s property against dame risk or loss; they, therefore, argued that since the aircraft does not originate from Nigeria, local insurers should concern themselves with only the air passenger insurance to protect the air passengers while leaving the aircraft insurance open for the operators to decide whether to insure again in Nigeria or not since they have secured compulsory insurance of the aircraft by the insurance companies of the home country.

They further argued that NAICOM should look critically into the operators’ request given the fact that by the nature of insurance in case of any damage on the aircraft, the owner or the lessor cannot collect claims from both the foreign insurers and local insurers in Nigeria for the same risk.

The Chief Executive Officer, Overland Airways, Captain Edward Boyo, called for the review of the NAICOM policy, remarking that such laws that made it compulsory for all aircraft types to be insured locally have become inimical to the aviation industry and therefore should be reviewed.

“Some of these rules, regulations and laws work against the industry they were made for. This is because the sentiments at the time they were made, the environment, economic environment, was different. If we look at comparative advantage of nations, we, Nigeria, do not have strength in capacity to produce aircraft.

“We do not have strength and the financial capacity to own aircraft. I think the aircraft that are wholly insured in Nigeria, without duress, are the aircraft that are financed by the local banking institutions. Now, the industry, the market, is restricted as of today by this insurance difficulty, the imposition of the fact that we have to insure our aircraft locally,” Boyo explained.

Commissioner for insurance Reacts

But in his reaction to this,  the Commissioner for Insurance and CEO, National Insurance Commission, Segun Ayo Omesehin,  said the whole essence was to  create local content to protect the economic interest of Nigeria.

Omosehin also noted that innovations in the aviation system such as the evolving landscape of the aviation sector, marked by advancements like electric and hybrid aircraft, predictive maintenance, and automation of air traffic control systems, come with new risks that require robust insurance mechanisms to mitigate.

The insurance commissioner further explained that certain laws were made by a country to protect certain aspects of its economy, noting that the whole concept was to create local content to protect the economic interest of Nigeria.

“It is aimed at protecting the economic interest of that nation. And before I come to aviation, I will go to a slightly bigger one which is the local content policy that was announced for the Nigerian oil and gas sector. Prior to the enactment of that law, most of the oil majors in this country that were operating in Nigeria never believed there was anything good about Nigerians. As a matter of fact, crudes were imported from abroad to Africa, up to the point when we then had to wake up” he explained.

He said insurance plays critical role in aviation industry, noting that the  future of the aviation industry was  full of potential, but with that potential comes the need for comprehensive risk management strategies. 

“Insurance serves as a vital safety net, ensuring that the financial burdens of potential losses are transferred to insurance companies, thereby fostering growth and development in the sector.”

He explained that aviation, being an international business,was  inherently complex and fraught with risks such as accidents, equipment failures, and other operational challenges.

According to him, these risks are managed through global risk transfer mechanisms like reinsurance, which spread risks across continents, ensuring resilience in the face of unforeseen events.

Omosehin  also highlighted the importance of local expertise in risk profiling, stressing that while aviation insurance operates on a global scale, the knowledge and skills of local professionals were  crucial in accurately assessing and managing risks in the Nigerian context.

He said, “The Nigerian insurance sector is uniquely positioned to understand the patterns, behaviours, and risk profiles of various sectors, including aviation. This understanding is critical in providing the right coverage and support to businesses operating in Nigeria.”

Acknowledging the challenges posed by disruptive environmental patterns and the need for the insurance industry to adapt to these changes, he called for a collective effort to grow the Nigerian economy sustainably, emphasising that insurance was not just about financial protection but also about enhancing resource allocation and stimulating investment in high-risk sectors.

He said NAICOM as the regulator of the insurance industry in Nigeria, was committed to ensuring the stability of the financial system, improving the soundness of insurance operators, and safeguarding the interests of policyholders.

THISDAY notes that this is not the first or second time airline operators complained  about their predicament on aviation insurance.Before now, they have been complaining about high premium rate charged by local insurers compared to the rate foreign insurers charge.

But aviation insurance experts  said airline operators in Nigeria should stop benchmarking their premium rates with those of Nigerian neighbours like South Africa, London and other western countries, arguing that safety culture in Nigera was very poor when compared with those of other countries.

Airline operators view

A member of the Airline operators of Nigeria (AON) who spoke in this regard said that some of their members sneak abroad to buy their insurance policy despite the local content law because insurance rate in Nigeria was very high and operators were looking for ways of cutting cost.

The operator, who however said his statement did not mean his airline insures abroad, said Nigerian insurers, should look for ways of reducing their rates to encourage those who sneak abroad for their insurance needs to patronise them.

But former Chairman, Nigeria Insurers Association (NIA), Eddie Efekoha, said there was no basis of comparison between Nigerian aviation insurance providers and their foreign counterparts because the level of risk exposures of both differ.

“All these aviation operators over there, do they pay premium on monthly or daily basis and when you get to the airport, look at our airports, with all the touts and what have you so everything is wrong with it so the rates cannot but be high. When we get our things right, the premium can reduce. Of course, size is an issue. You are generating a premium for instance that cannot buy one plane but like the likes of BA, their premium can buy three planes. So size is an issue,” he explained.

Continuing, the NIA boss stated, ”You find out that we have multiplicity of problems when it comes to aviation insurance in Nigeria and you must take all of these into account in your rating. What is rating? First of all, it starts with underwriting; look at the good features and look at the bad features and all these help you to determine your average rate, The good ones will help you to determine your discount rate, the bad ones will help you to blow the rates in order to come with the rates that apply to that particular risk.”

It was learnt that ideally, airlines were 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.

It was also gathered 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.

It was further gathered that the choice of where to insure an aircraft depends on who owns the aircraft. 

Aviation insurance experts

Aviation experts informed that the component could 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. 

Airline operators said this has created the need  for the Federal Government to talk to lessors to allow aircraft to be insured locally to  develop local insurance market.  They further suggested that insurance companies could even own aircraft and lease them to airlines just like their counterparts  overseas.

Major insurance stakeholder told THISDAY that the lasting solution to the problem has remained Nigerian insurers trying to reach a compromise with their foreign counterparts on charging a single insurance premium on such aviation insurance risk where they currently pay double premium.