Insurance companies dealing on offshore risks, particularly the volatile oil, gas and aviation businesses, in the wake of the foreign exchange shortages in Nigeria have adopted far-reaching strategies including income-liability match for survival.
Income-liability match is a situation where insurers hedge their dollar denominated risk liabilities against dollar denominated income from offshore transactions.
The foreign exchange scarcity, which did not only throw Nigeria’s economy into crises and testing the country’s fiscal policy regime, posed challenge for insurance companies that needed to meet claims obligation in dollar denominated transactions.
However, insurers that efficiently managed the issues were able to meet up with their foreign denominated risks claims liabilities, achieving good underwriting result, profitability as noticed in the first quarter performance results being released by some of them.
Edwin Igbiti, managing director/CEO, AIICO Insurance plc, said his company strategically managed the foreign exchange scarcity to its advantage, ensuring that it was able to match its foreign exchange liabilities with its foreign exchange income.
“We were able to manage this situation nicely because we also earn dollar denominated incomes. What we do with this dollar denominated’ income is that we keep it, we don’t spend it, so that when we have dollar denominated claims we hedge it instead of going to buy from the black market,” Igbiti said.
Igbiti said AIICO did not have adverse effect of the foreign exchange scarcity on it business as many other businesses that depend on foreign inputs suffered, having applied the hedging strategy.
“Even though we have a dollar denominated loan that we are servicing, we go to the CBN to get dollar at the official exchange rate to pay for the loan interest because we imported the inflow through the official rate,” he said.
You know what insurance is, because you cannot say when a loan will crystallise so we readily prepared to meet our obligations even in the mist of the foreign exchange crises.
“So, for us as a business, we were able to hedge our dollar denominated expenses with our dollar denominated income. That is what we did,” he stated.
Humphrey Overa, a broker, said shortage of dollar was a big challenge to most companies who had dollar denominated claims to pay, but those who had reserves had little issues to contend with.
He stated that accessing dollar at the rate of over N400 to a dollar to pay claims on risks that were admitted at less than N300 was a big challenge, saying “my underwriter partner had a good strategy in place, so kept enough reserve and when we had a claim it was not a problem at all.”
Adetola Adegbayi, executive director, Leadway Assurance Company Limited, responding to BusinessDay questions on impact of widening gap in foreign exchange against the naira, and how reinsurers overseas were reacting to placements from Nigeria said:
“There are two types of overseas reinsurers – the treaty reinsurer and the facultative reinsurer. The facultative reinsurers are not affected as they expect premium payment for risks in equivalent currency of insurance. Treaty reinsurers, on the other hand, consider the cedants’ overall book of risk in local currency and use this in determining treaty premiums.
“Of course, the same or more or less dollar value may be seen for particular portfolios depending on the diversity of assets insured.”
According to Adegbayi, owners of industrial assets purchased in foreign currency may have to revalue their assets for replacement purposes and in order to avoid potential “under insurance”/average in the event of loss.
As such, sums insured in naira may grow, with effect on absolute premiums paid; but the dollar equivalent may not have changed in terms of risk to the reinsurer. Alternatively though, if the retention of the insurer remains the same in naira value and they have not adjusted their retention levels in line with real/true value, then the reinsurer assumes a higher risk and may decide to charge higher premiums.”
On claims management by insurance companies, she noted, “claims are the reason insurers are in business. “However, if an insurer does not match its premium assets properly to its core insurance liabilities, then it is quite possible for the insurer to end up with challenges to its solvency.”
“If an insurer decides to accept to insure a dollar/foreign currency linked asset today in naira and a loss occurs, the insured is going to insist on the asset being paid in naira equivalent of the dollar/foreign currency link.”
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