Chief Babajide Olatunde-Agbeja is the Chairman of Boff & Company Insurance Brokers Limited based in Ibadan, Western Nigeria. He analyses issues on aviation insurance and finance in Nigeria as the country’s aviation industry is now struggling for recovery from the impact of the COVID-19 pandemic, in this exclusive interview with Aviation & Allied Business Journal.
Q: The aviation industry has been hit hardest by the COVID-19 pandemic since year 2020; how would you describe the impact on the aviation insurance sector in Nigeria?
A: As countries closed their borders and economies were locked down with little or no movement of people and goods, airlines were grounded, and many small ones collapsed and filed for bankruptcy as they couldn’t keep up with their commitments financially.
When insurance policies were due for renewal, many airlines in Nigeria placed their fleet on ground risk only (GRO) basis as their aircraft were not flying. This led to a huge reduction in premium paid during the pandemic.
With the country opening up gradually, a few aircrafts in the fleets were reverted to full flight risk (FFR) but premiums were paid on a quarterly basis and in some extreme cases, monthly because of cash flow. This led to a reduction in premium income for the insurance industry.
There have been complaints of inadequate capacity especially on the Lagos-Abuja route as only a few aircraft are on FFR as airlines strive to balance the use and cost of aircraft in operation to the available passenger load on their scheduled routes. They are yet to get it right as air fares have skyrocketed due to inadequate aircraft capacity.
Q: Governments and financial institutions have been urged to give financial support for aviation recovery; how would you assess the response so far in this regard?
A: Aviation worldwide is an expensive industry, and many Governments support their local airlines from time to time as it is the fastest means of public transportation and a need for any economy. Nigeria cannot be an exception.
There were talks about the federal government of Nigeria’s plans to boost the health of our aviation industry with cheap loans prior to the pandemic.
With our current reality, this gesture is definitely a step in the right direction as our airlines are almost crippled from the effects of COVID-19.
Q: In what ways would Insurance support recovery within the aviation industry, and what should be the priority of the aviation insurance sector as the industry strives towards recovery over the next 2-4 years?
A: Insurance is a private sector initiative and businesses were set up to make a profit. In the developed world, insurance capacityis imported to areas that are profitable and withdrawn fromunprofitable sectors. In the last couple of years, capacity for aviation insurance has been shrinking annually and premiums have increased based on the law of demand and supply. While many airlines in Nigeria have been without major claims for years, their premiums have been increasing based on the global industry’s claims experience.
This doesn’t sound fair, but it is the reality. Once global claims experience improves, increased capacity will be redeployed to the sector worldwide, and premiums will fall. Unfortunately, claims in the aviation sector are normally large when they happen-they may be infrequent, but can be quite severe in quantum.
As Insurance practitioners, we can offer support to this important sector by allowing monthly premium payment to ease the airlines cash flow. Two decades ago, premiums were paid annually and as airlines started facing the high cost of aviation fuel, we supported them by allowing for quarterly premium payments. I guess it is now time to widely adopt monthly premium payments.
Q: Poor capacity of local Insurance in Nigeria and Africa had been a challenge before the onset of the Covid-19 pandemic; how do you think that the capacity can be remarkably increased in the region?
A: Capacity is gradually increasing in the region, but more is needed sooner than later. In recognition of this, the National Insurance Commission (NAICOM) in Nigeria directed that insurance and reinsurance companies increase their minimum paid-up capital by September 2021, but some shareholders of Insurance companies sued NAICOM to extend the period because of this pandemic that has been with us for about a year and a half now.
Once the paid-up capital of insurance and reinsurance companies are doubled (as will be the case in most instances) in most cases, the available capacity in Nigeria will increase significantly.
I am sure that many other countries in Africa will follow suit as experienced in the past. Many insurance companies were not buying aviation treaties in the past but in recent times, as an Insurance Broker, we have seen an upsurge in requests for treaty reinsurance irrespective of the high Minimum and Deposit premiums involved.
Only a decade ago, the combined aviation insurance capacity in Nigeria was below US$50 Million. Today, I can confirm that the combined capacity of all Insurance and reinsurance companies in Nigeria is well over US$150 million. That is a 200% increase in a decade.
What this means is that any aircraft and liability cover of US$150 million and below can be fully insured in Nigeria without seeking any capacity abroad.
Q: Insurance premiums have been high in Africa due to the perceived poor safety records of African airlines; how is the improving safety outlook in Africa affecting premiums?
A: It is true that African Airlines lack sophisticated Maintenance/Repair, Overhaul (MRO)centers,and they have in the past not maintained their aircraft following laid down procedures. This is improving annually as more MROs spring up across the continent and thegovernment inspection departments operate professionally and without fear or favour.
Once claims experience improves in Africa, premiums should reduce, although the state of the global aviation market and local capacity, as earlier explained, are factors that will influence the premiums, in varying degrees.
Q: What do you see as the major threat facing aviation insurance in Nigeria, and how best could they be resolved?
A: In my opinion, lack of technical capacity is a major minus for the Nigerian aviation insurance industry. Only a few companies can quote for just a portion of all aviation insurance policies without recourse to more experienced international under writers.While financial capacity is improving over time, technical know-how has been stagnant and for many insurance companies, non-existent.
For immediate improvement, companies must specialize to be technically competent and drive the success of their sector. In the London Insurance market, you have a professional working in the aviation department of broking, insurance and reinsurance firms.
Not only that, but they also still specialize within departments so you will have a set of differentprofessionals handling aviation hull and liabilities, airport liabilities, war risks, air traffic control, spare engines, loss of license, claims, all within the aviation department and throughout their working lives. In Nigeria, there is no specialization. This is a must,going forward.
Q: How satisfied are you with the products in the travel insurance market in Nigeria?
A: There are a few good travel insurance products, but most are bought to satisfy foreign embassies for visa processing. Most Nigerians don’t buy insurance as a need except if made compulsory by the government or their agencies.
Insurance has a very low penetration in Nigeria and all our industry associations need to come together to educate the public on the need for insurance in their lives and prove beyond any reasonable doubt that claims will be paid on time. When I joined the industry 40 years ago, insurance had a very low appreciation level claims wise. Things have changed over time. Presently, simple claims are paid within days and complicated claims within weeks.
Travel insurance cover many losses including injury or death, loss of documents, credit/debit cards, cash, personal effects, baggage, missing of connecting flights, cancellation of hotel bookings due to flight cancellations,and so on.
Fortunately for the public, the industry has evolved with the times and many providers offer the comfort of purchasing travel insurance from your mobile device.
Q: There are discussions on achieving codeshares and interline among Nigerian Airlines; do you think such partnerships are achievable in Nigeria, and what would successful airline partnerships in Nigeria mean for the insurance sector?
A: Codeshare partnerships were set up worldwide to improve the operations of airlines, offer more destinations to their passengers and fuse tickets of partner airlines for ease of transfer at different airports without the need to clear immigration then check in again for a connecting flight.
Seamless travel over multi-cities on the same trip has become the order of the day. Efficiency breeds successful operations, and this will flow down to the insurance industry as airlines will be better run and become more profitable to operate. Premiums will be easier to pay, and rates will be lower with better run, claims free operations.
Such partnerships will improve the operations of Nigerian airlines as economies of scale will be an advantage. Smaller airlines will also gain from such partnerships as the synergy will boost their operations while linking regional to national and international airports seamlessly.
Q: There is renewed emphasis on increasing air cargo in Nigeria especially under the recently launched African Continental Free Trade Area (AfCFTA); what role do you see for the insurance sector in this regard?
A: There are only very few cargo airlines in Africa and intra trade within the continent needs a major boost. AfCFTA should boost African economic integration and open up the continent as a United State of Africa where we can travel continent-wide without a need for visa, goods can move freely, and markets open for manufacturers continent-wide.
With a population of over one billion people in Africa, that is a huge market for goods and services. I wish that we can all see this potential and cooperate fully to achieve it.
The Aviation Insurance sector should have a combined capacity of close to US$500 Million and we will be able to work within Africa first before venturing into placement of risks in the developed world. Within the next decade, other continents will approach Africa for their needs on excess capacity that we would have developed.
Q: The Nigerian Civil Aviation Authority (NCAA) is currently undergoing reviews; what areas would you think require urgent attention?
A: NCAA is the powerhouse of the aviation sector of the Nigerian economy.
Regulation or supervision in any economy is key and NCAA must get it right to drive the new proposed vibrant aviation sector in Nigeria.
Operating an airline is an expensive venture. Why approve airlines to commence operations without a robust financial backing? Many airlines operate for less than five years before collapsing from the weight of their cost of operations. NCAA must scrutinize the proposals of prospective airlines and guide their operations on an annual basis to avoid this mass collapse within five years.
Many industrial aid aircraft are used in Nigeria without registering in Nigeria. They are allowed to fly around the country for sixty days undisturbed. This is a huge loss of revenue for the Nigerian economy. 5N registered aircraft are legally mandated to be insured within the country, so if these aircraft are not registered here, they don’t have to insure here. This should be looked into and amended in favor of the local economy.
Q: Would you think that the state of insecurity in Nigeria could impact or forestall fast recovery and growth in the aviation sector, and how would this impact on insurance costs?
A: The USA and many countries in Europe have issued travel advisory to their citizens against traveling to Nigeria due to growing insecurity and kidnapping activities around the country.
There was a time when traveling to Port Harcourt was a nightmare because of inadequate seating capacity on airlines flying to and from that city. The economy was vibrant, oil personnel were flying to and from Lagos but what do we have now? Insecurity has caused many companies to relocate their operations to other perceived safer cities.
In addition, many companies have left Nigeria for other African countries for various reasons including insecurity. All these are negatively affecting the Nigerian economy and recovery will be slower. While policies are available for kidnap and ransom including the wider cover of political violence, the overall premium from these classes of new business as a result of the insecurity in the land is much lower than if the clime is secure and businesses are vibrant and successful.
Q: What is the future of aviation insurance and brokerage in Nigeria over the next ten years?
A: Let me use this opportunity to explain the wrong notion that many people have in the aviation industry that using the services of insurance brokers cost you more than insuring directly with an insurance company. Insurance brokers are professionally qualified insurance personnel who act as consultants to any client.
Brokers debrief you on your operations and propose peculiar tailor-made insurance policies for your operations. Our remuneration is from the premiums paid, and brokers are trained to negotiate reasonable discounts on your policies, providing a very robust cover at a very reasonable premium for your operations.
Claims are processed on your behalf in a timely manner to a logical conclusion and risk management advice is provided for your smooth operations.
Once the proposed increase in share capital of insurance or reinsurance companies are in place, this year, capacity should increase, technical knowledge should be a continuum and with my proposal on AfCFTA, our insurance industry should do very well in the next ten years and beyond.