FX rate, third-party costs keep aircraft insurance high despite 91% audit score

Nigeria’s record-breaking 91.45 percent performance in the recent International Civil Aviation Organisation (ICAO) safety audit was expected to act as a catalyst for reducing the exorbitant insurance premiums paid by local airlines. However, industry stakeholders warn that this milestone, which is the highest in the nation’s history, may fail to provide financial relief. A volatile foreign exchange rate and an expensive third-party insurance culture continue to erode potential gains.

Airlines generate revenue in naira but must settle insurance premiums, aircraft spares, and maintenance checks in US dollars. With the high exchange rate, any marginal reduction in premium rates resulting from the improved safety rating is neutralized by the rising cost of acquiring foreign exchange.

Local market capacity limits premium relief

This financial strain is worsened by the limited capacity of the local insurance market. While regulatory requirements mandate that airlines use Nigerian insurers, the high-value, high-risk nature of aviation assets forces these firms to partner with foreign entities. Typically, Nigerian insurers retain only 30 percent of the risk, reinsuring the remaining 70 percent with A-rated offshore giants like Lloyd’s of London, a practice that keeps premiums high.

“I think we have been here before when we had Category One and this was like a diamond,” Zenith Travels director of research Olumide Ohunayo told BusinessDay. “We were among the five countries that had it in the whole of Africa. After the bragging rights, we did not see it transform into direct foreign investment or reduce insurance premiums paid by the airlines.”

Ohunayo said the ICAO rating may not significantly reduce high premiums charged by insurance firms because of macroeconomic issues beyond the aviation industry.

Read also: FG launches insurance regulation for leased aircraft to boost aviation sector

Broader security and legal reforms required

“We still have security risks as a country, and an exchange rate which is high and has not shown any stability,” Ohunayo said. “These factors are not within the airport purview. All these are part of what lessors and other companies use in insuring aircraft operating within Nigerian airspace.”

Ohunayo explained that Nigerian insurance companies remain weak despite recent consolidation and capitalization. Because airlines are capital-intensive, local firms must partner with foreign insurance entities rather than dealing directly, which drives up premium costs. He noted that while Nigeria has succeeded in attracting lessors, the state must fix structural issues outside the aviation sector. The judiciary must remain firm and accelerate cases where airlines breach contracts, Cape Town Convention rules must be enforced, and documents signed by the minister must be rigidly followed.

Substantial regional price disparities persist

BusinessDay findings show that while Nigerian airlines pay 8 percent to 10 percent of the value of an aircraft for coverage, carriers operating in Ghana, South Africa, and other African countries pay 2 percent to 3 percent. Meanwhile, airlines in Europe and the US pay just 0.5 percent to 1 percent to insure identical aircraft.

For instance, airlines operating in Nigeria pay an average of $500,000 annually to insure a Boeing 737-300 aircraft, whereas those in Ghana or the US pay between $200,000 and $300,000 for the same model. United Nigeria Airlines chairman Obiora Okonkwo recently revealed that he pays $2 million to insure just six Boeing 737-800 aircraft. In comparison, he noted that the same amount would cover a fleet of 25 aircraft in Europe.

Security audits hold key to financial relief

Centurion Aviation Security and Safety Consult CEO John Ojikutu told BusinessDay that the 91 percent score from ICAO focused strictly on a safety audit rather than a security audit.

“It was not ICAO alone that conducted the audit; they were accompanied by the US Transportation Security Administration (TSA),” Ojikutu said. “We need the ICAO and TSA security audit reports to know where we stand on national security and where the airlines stand on insurance.”

Ojikutu insisted that the domestic security situation explains why airfares from Nigeria to Europe and the US are substantially higher than those from regional hubs like Ghana, adding that aviation security remains a critical determinant for underwriting risk.

Exaggerated risk perceptions inflate costs

Aircraft Owners and Pilots Association of Nigeria president Alex Nwuba noted that the 91 percent safety audit score is a strong technical achievement that improves the global safety profile of the country. In principle, this should support lower insurance premiums because underwriters typically price risk based on regulatory oversight quality, operational safety records, and national compliance levels.

However, Nwuba stated that the impact remains limited because local carriers face structural cost pressures like dollar-denominated premiums, naira volatility, and a long-standing, often unsubstantiated perception of elevated operational risk in Nigeria. Insurers frequently use this narrative to justify premium hikes regardless of actual safety performance.

Nwuba explained that while the audit result strengthens national credibility, it will not automatically translate into lower premiums without broader reforms in how risk is assessed and priced locally. Currency instability and inflated domestic charges continue to dominate the cost structure of the industry, meaning that even a perfect safety score cannot guarantee financial relief until systemic market pricing cultures are reformed.