Insurance cover: How Nigeria’s ‘high risk’ status chokes local airlines


The 2000s witnessed a series of air mishaps that opened a can of worms in the risk coverage and the air transport sector at large. Scandalised by the turn of events, concerned regulatory agencies introduced a new set of guidelines to tighten the noose on errant operators. Most significant was the extensive shake-up in the risk management plan, and recapitalisation of the local carriers. WOLE OYEBADE writes that the industry has since turned the corner of a bygone era to emerge as one of the safest globally, but at a humongous cost now hurting survivor airlines.

Saturday, December 10, 2005, was the day that changed it all industry-wide. In barely seven minutes of a dramatic turnaround, about 108 souls perished at the Port Harcourt International Airport (PHIA), Omagwa, Port Harcourt. That ghastly incident not only devastated families, the air transport business lost its innocence.

Some 17 years later, the scars still run deep, the agony unsurmountable, and the lives lost in the accident (perhaps caused by weather vicissitude and attendant pilot error) irreplaceable.

Most traumatic were the years of bitter legal fireworks that followed, as well as the numerous panels of inquiry over liability claims that have still not been fully settled to date.

Globally, flying equipment are high-end and highly risky given their far-reaching impacts on the airline, travellers, the non-flying public, and other components of the value chain. Mandatory insurance cover is, therefore, aimed at insuring lives and all assets that could be damaged in the cause of these operations.

A shocking revelation that the Sosoliso airplane that crashed in Port Harcourt was inadequately insured did cause quite a stir in airline-passenger relations, and a defining moment for the sector.

Specifically, it immediately led to an overhaul of the standard operating framework of the aviation industry, as it became mandatory that insurance brokers must be A-rated internationally with sufficient capacity to underwrite aviation risks. The same provision made it compulsory that a certain fraction of the premium must be domiciled in Nigeria, always up to date, and verifiable.

The industry has since turned a new leaf with better safety records and prompt settlement of claims. However, the challenge is that the guideline has left a sour aftertaste in the mouth of struggling airlines.

Interestingly, without a commercial plane crash in the last seven years on the bounce (one of the best records in global aviation), the local sector still carries the oddly familiar moniker of a “high-risk zone” with comparatively higher insurance premiums than what is obtainable in other parts of the world.

While the insurance brokers did blame the general decline in economic fortunes, free-fall in value of the naira-to-dollar (the currency of aviation), and regulatory bottlenecks on insurance capitalisation locally, the airline operators lament that they are more at financial risk, battling the ghost of an uncharitable past.

Commercial aviation is complex and sometimes dramatic. One such manifestation was the fateful day that the ill-fated Sosoliso aircraft made the last flight, unannounced. The airline, barely five years in operation, had some of the cleanest airplanes and the best customer service in the country.

It was also a promising day in the Garden City when family and friends funneled into the PHIA to receive a large number of their children and wards that were coming home for the Christmas holidays.

The festive feeling was especially high among parents waiting to reunite with 61 students of Loyola Jesuit College, Abuja. Coming together at the Arrival terminal was therefore carnival-like. At noon, a subtle announcement of a two-hour delay of the operating aircraft and a new estimated time of arrival (14:00 hours) did little to douse their excitement. On the airside and beyond, it was a clear, bright, and sunny day.

At 13:41 hours the cruising Sosoliso McDonnell Douglas aircraft contacted the Port Harcourt Approach Control. At 13:42 hours, the approach controller passed the weather report to the aircraft. It was all-clear for a safe landing. 13:50 hours, the aircraft got initial descent clearance.

At 14:00 hours, according to the accident probe report published by the Accident Investigation Bureau Nigeria (AIB-N), the crew asked the approach control if it was raining over the station. The reply was negative. But the weather has started to change around the airport.

In the waiting terminal, a few parents noticed a cast of shadows masking the sunny afternoon. It changed so fast that the threat of a downpour was almost certain. At 14:04 hours the crew was set for a touchdown. The approach controller buckled on the earlier verdict, informing the aircraft of precipitation approaching the station, and passed the aircraft to Airport Tower for landing instructions.

At 14:05 hours Tower controller cleared the airplane to land on runway 21, but to exercise caution as the runway surface was slightly wet and the pilot acknowledged this.

News wafted through the waiting terminal that the operating aircraft had arrived. Some mothers leapt for joy and quickly sat down to wait for the disembarkation rituals.

Outside, at about 14:07, it was nearing pitch-black darkness. Massive lighting lit the skies and the thunderstorm jolted the attention of all in the waiting terminal. A momentary silence at the bang, then the chitchat continued. 14:08, another bang was heard from the airside. And silence again.

At 14:08, according to the investigator, the aircraft made an impact with the grass strip between Runway 21 and the taxiway (a clear miss of the unlit runway), skidding into a concrete drainage culvert about 60m away that wrecked the aircraft on impact.

“The second bang was the loudest,” an eyewitness, Ozor Uweke, reminisced. “Everybody knew that something terrible had happened. The entire airport was silent for over a minute. The billowing smoke far from the runway area got us all on our feet. The ensuing pandemonium was unthinkable.”

By the time stock was taken from the disaster site, the death of 103 souls had been registered and seven were rescued to the hospital with second and third-degree burns. Only two of them eventually survived. Kachi Okwuchi and Bunmi Amusan, now Mrs Bunmi Adams.

Barely two months before the Sosoliso crash, exactly Saturday, October 22, 2005, a Bellview Airline Boeing 737-200 aircraft had crashed in Lisa Village, in Ogun State killing all 117 souls onboard.

Unlike the Bellview crash, the Sosoliso fatal incident immediately opened a bizarre chapter in the legal fiasco between the airline, grieving families, and the Loyola Jesuit College that lost “60 angels” in the crash.

As an industry that is governed by rules dictated by the International Civil Aviation Organisation (ICAO), of which Nigeria is a signatory, the standard compensation for a crash victim is $100, 000. The Sosoliso management opted to pay $10, 000 per victim.

Findings by the Nigeria Civil Aviation Authority (NCAA) showed that aircraft belonging to the airline were not properly insured, a development, which passed the burden of liability settlement to the airline alone.

Cash-strapped to cough out a whopping $10.7 million, the airline requested to resume flight operations to earn revenue and pay compensation in installments. The sheer insensitivity of the option irked grieving families to high heavens and expectedly threw up a groundswell of lawsuits that dragged on for years.

While the Sosoliso feud festered, on October 29, 2006, an ADC airliner with 114 passengers crashed after takeoff in Abuja killing 103 passengers. The Presidency could not take it anymore. And so, then President Olusegun Obasanjo, immediately set up a Presidential Task Force on the Aviation Industry to probe the root causes of the serial air crashes, and make recommendations for reforms. The fall-out, among others, was the immediate recapitalisation order of all operating airlines with the deadline set for April 2007.

Multiple court hearings, out-of-court settlements, and a National Assembly (Senate) mediatory hearings between families and management did little to resolve the Sosoliso crash case before the expiration of the April 30, 2006 deadline. Sosoliso and six others technically collapsed.

About five years later, the NCAA concluded plans to sell off Sosoliso’s assets to compensate the families of the crash victims. The then Director-General of the NCAA, Dr. Harold Demuren, in 2010, disclosed that Sosoliso had realised more than $2.1 million from the sale of its aircraft and other assets to settle compensation claims to the families of the victims.

“Money cannot replace life, but I want to tell you that Sosoliso airline has sold all its aircraft and realised $2.1 million (out of $10.7 million estimated compensation),” Demuren said.

APART from the fact that the recapitalisation order was to ensure that the country has stronger and stable operating airlines, the emergency reform also etched a detailed legal framework for aviation insurance to align with global trends.

Since the Warsaw Convention of 1929, aviation insurance has been made mandatory for global operators, to provide coverage for hull losses, as well as liability for passenger injuries, and environmental and third-party damage caused by aircraft accidents.

The Nigerian Civil Aviation Act, 2006, 74 (1) provides that “any carrier operating air transport services to, from or within Nigeria, or aerodrome operator, aviation fuel supplier, or any provider of ground handling services, meteorological services, air traffic control services, aircraft maintenance services, or provider of such other class of allied service as the Authority may, from time to time, determine in writing shall maintain adequate insurance covering its liability under this Act, and also its liability towards compensation for damages that may be sustained by third parties for an amount to be specified in regulations made by the Authority.”

Unlike other sectors, aviation is high-end, with special risk and attendant high premiums.
For instance, the insurance premium on an average aircraft is put between one to two per cent of the entire value in Europe and North America. For aircraft flown in the “high-risk” African region, the insurance goes for between three and five per cent of the entire value.

For instance, the 1990s (fairly-used) Boeing 737-300 aircraft that is the bride of the Nigerian commercial airspace sells for about $4.5 million or N2.01 billion (at N447/$). At a conservative rate of three per cent premium, each aircraft is insured with an average of N60 million yearly.

Across a total of 98 commercial aircraft in the country, the average total insurance premium on aircraft alone is N5.88 billion yearly. To insure passengers require an additional N5 billion minimum.

Sections 65 (7) and 74 of the Insurance Act also provide that “all aviation insurance business shall be conducted in accordance with insurance laws and other relevant regulations, which include the establishment of underwriting terms and conditions for any aviation and its associated risks in Nigeria, shall be the responsibility of an insurer duly licensed to transact insurance business in Nigeria.”

Drafters of the legal framework did anticipate that the insurance cover could outweigh the capacity of the local underwriters or the five per cent risk exposure of shareholders’ funds allowed in Nigeria.

The Insurance Act, therefore, mandates that: “A person who intends to insure any property located in Nigeria, whether movable or immovable or any insurable interest or liability in relation thereto, shall place such an insurance with an insurer registered in accordance with this Act who may, subject to the provisions of this Act, reinsure such property or liability overseas where the Nigeria insurance industry lacks the capacity to retain the risk.”

Special Risk, Higher Premium
A chief operating officer of one of the airlines said the implication of the dual (local and foreign components) insurance framework is the passage of excess burden on the local airlines.

“To be clear, we are not complaining about insuring our businesses. Insurance is a global standard and covers all parties in case of accidents. However, we seem to be over-regulating the aviation sector and passing unnecessary burden to the airlines.

“It is clear that our local insurance companies do not have sufficient capacity to insure a brand new aircraft. Yet, about 20 per cent of what we pay as insurance still goes to local brokers, while the rest goes to A-rated foreign insurers that have the capacity. Why don’t we have a stronger insurance sector in Nigeria instead of servicing a ‘local content policy’ that is not working? If the local underwriters are strong enough, we (airlines) will be paying for insurance in naira, and not in scarce dollars.

“We pay between 300 to 400 per cent higher premium than our counterparts in other parts of the world. Yet, we have one of the best safety records in the world. Why is no one addressing these issues to relieve local airlines of excess financial burden?”

The Chief Executive Officer of Ibom Air, George Uriesi, also affirmed that the odds are stacked against local airlines, due to the “Nigerian conundrum.”
Uriesi said that Nigerian airlines use the same airplane as everyone in the world, but because the operator is from Nigeria, he pays higher acquisition cost; higher cost insurance that is three times more than in Europe, North America, and Asia; uses weak naira to pay in dollars and so on.

“On top of it all, you are operating in a systemically limiting environment that makes it harder for you to be as productive as your colleagues in Europe, Asia, and North America,” Uriesi said.

The Director of Policy and Regulations at the National Insurance Commission (NAICOM), Leo Akah, acknowledged that high premium remains one of the challenges facing the aviation sector, partly for reasons not unconnected with the industry’s peculiarities.

“We have seen situations where operators have difficulties paying their premiums, and even having to pay in bits and that is a serious issue,” he said.
Akah, however, noted that even though aviation risks are low, they are high in severity to require a strict legal framework and regulatory principles that operate in the insurance sector.

He emphasised that the laws mandate players to have additional capital requirements to have at least third-party insurance, as well as have the insurance domesticated locally and by Nigerian registered brokers. In addition, underwriters cannot commit more than five per cent of shareholders’ funds into aviation coverage, “as part of measures to protect shareholders from high-risk exposure.”

On the rationale for an A-rated foreign insurer, he said: “We know that insurance companies out there are outside of our regulations. Hence, the law has mandated that airlines must deal with the best of the best (A-rated) with credit credibility that will not give us issues when there is a liability to be paid. In the case of Sosoliso, what was insured was the aircraft. Unfortunately, the insurer was low-rated and could not even pay for liabilities.

“So, we are insisting that the insurers must be A-rated. Of course, that will affect the premium. Those over there are also looking at airlines coming from Nigeria because they see the risk as a bad one and they will charge accordingly. We must understand that aviation risk is a special risk. Rates and conditions are global and not determined locally. And if there is a crash today, it will affect the premium by next year.

“Whether the local insurers are adding value or not, I will say that the last plane crash that we had, the underwriters (local) didn’t want to pay and they were right. The airline was not even paying the premium, and our law is ‘no premium, no cover.’ But we compelled the underwriters to pay because the people involved are Nigerians. The Lloyd of London came here and we had a series of meetings before an agreement could be reached on payment. It was more of a national call,” Akah said.

On claims that the nation’s insurance industry is lowly-capitalised to insure a brand new aircraft, the Managing Director of Cornerstone Insurance Plc, Ganiyu Musa begged to differ.

According to Musa, the total balance sheet of the insurance sector is over $1 billion, and enough to cover the aviation sector. However: “Part of the issues facing us is in the area of regulations. We cannot invest more than five per cent of our fund, which is $50 million for aviation insurance. The severity of risk in aviation is high. Yet, the amount of risks covered in the oil and gas industry is four-fold higher than in aviation and we are doing fine. So, we can insure the aviation sector,” Musa said. He said further that the regulation also demands that a foreign insurance company of choice has to be from A-rating markets, which costs airlines a higher premium.

“The business plan of the airline is required for risk assessment and it has implications for pricing. But when operators don’t supply details of their operations, or give an inclination of not knowing what they are doing, all these will reflect in the cost of underwriting and it is very little anyone can do in that instance.

“The aviation insurance premium in Nigeria, as a percentage of the total insurance premium is less than 10 per cent. Oil and energy premium is at least four times of the aviation business. Yet, it is from the aviation sector that we have to deal with this (complainants) all the time. This is a cost component that is less than five per cent of the total market cost of the airlines.

“There was a particular experience of a local airline operator that had 60 per cent in the country and 40 per cent insured abroad. The foreign company repudiated the claim, but the local insurance company paid 60 per cent. The foreign company had good reason to do so because once you breach the slightest of the contract terms, there is no consideration. But the local insurer understands the situation of the Nigerian operator and hence admitted the liability. That is a clear-cut indication of some of the values that we bring to the airlines,” Musa said.

Apparently in agreement with Musa, the Cornerstone Insurance Plc boss, is the Director of Operations, FBS Reinsurance, Shola Ajibade, who explained that the naira’s free-fall has affected both the insurance market capitalisation, and the country’s ability to insure aircraft with foreign partners. Ajibade observed that the prescribed minimum capital to venture into aviation is N10 billion.

“Given that aviation is denominated in dollars, at an exchange rate of N420/$, that is $23 or 25 million. And if at N700/$, then that is $15 million to be able to do aviation underwriting. With aviation’s liability being as high as $750 million, that leaves the Nigerian insurer with very little percentage and we have to go overseas where the capitalisation is far higher,” he said.

On the flip side of the high insurance premium and the attendant spike in the cost of operations, the local aviation sector has continued to enjoy good stability and is arguably one of the safest in the world (recording zero major crashes in commercial aviation in the last eight years).

The Director-General of the Nigerian Civil Aviation Authority (NCAA), Captain Musa Nuhu, regretted that over 2, 000 lives lost were in one-crashes-too-many in the past, including the 108 that died in the Sosoliso plane crash, and the 153 in the Dana Air plane crash of June 2012.

“But over the last few years, with recommendations from the AIB-N and standard practices, there has been significant improvement in safety records. Safety remains the primary function of all aviation organisations and it involves everyone,” Nuhu said.

Stakeholders all agreed that the financial health of the operating airlines is very critical to sustaining the safety record and peace in the air. Heavy toll from critical insurance premiums is currently not helping the airlines in the safe era. But more rapport among all parties – operators, regulators, insurers, and the Central Bank, among others, can improve the modalities of risk assessment, and management, ease pressure on the airlines, without compromising safety, or risk coverage, and possibly bury the ghost of the bygone era.

Quote 1:
We pay between 300 to 400 per cent higher premiums than our counterparts in other parts of the world. Yet, we have one of the best safety records in the world. Why is no one addressing these issues, to relieve local airlines of excess financial burden?

Quote 2:
In the case of Sosoliso, what was insured was the aircraft. Unfortunately, the insurer was low-rated and could not even pay for liabilities. So, we are insisting that the insurers must be A-rated. Of course, that will affect the premium. Those over there are also looking at airlines coming from Nigeria because they see the risk as a bad one and they will charge accordingly.(The Guardian)

*PHOTO: Remains of accidented Dana aircraft