Nigerian airlines’ insurance costs spike above African peers
Nigerian airlines have seen their insurance costs surge above what their peers in Ghana, South Africa and other African countries pay to insure their aircraft.
Operators told BusinessDay that the perception of Nigeria as a high-risk environment and the high insurance premiums demanded by local insurance firms had pushed up the cost of insuring their aircraft.
BusinessDay’s investigations show that while Nigerian airlines pay between 8 percent and 10 percent of the value of an aircraft to insure it, airlines operating in Ghana, South Africa and other African countries pay 2-3 percent.
Airlines operating in Europe and the United States pay between 0.5 percent and one percent to insure the same aircraft.
For instance, airlines operating in Nigeria pay an average of $1 million annually to insure a B737-300 aircraft while airlines in Ghana or US pay between $200,000 and $300,000 to insure the same aircraft type.
The scarcity of foreign exchange in Nigeria has continued to worsen the situation for airlines as they have to pay for insurance in foreign currencies.
The National Insurance Commission had spearheaded the enactment of a law that no airline can insure any aircraft registered in Nigeria except it goes through a local insurance firm in Nigeria. This law has made it difficult for airlines to source for affordable alternatives outside the country.
In addition to this, the inability of all Nigerian insurance companies to put together to insure a single brand new aircraft in the country made them to reinsure with foreign insurance companies, thereby increasing airlines’ insurance costs.
Most African airlines, including Nigeria, insure their aircraft through local insurance firms, which then reinsure with Allianz, a German firm or the Lloyd’s of London, an insurance and reinsurance market located in London.
Allen Onyema, chairman of Air Peace, Nigeria’s largest carrier, said what it cost Nigerian airlines to insure just one aircraft is what it cost airlines outside Nigeria to insure over three aircraft.
Onyema, who cited the perception of Nigeria as a high-risk environment, as a reason for high insurance premiums, said: “All insurance firms put together do not have the capacity to insure a new aircraft in Nigeria; yet airlines are forced to insure their aircraft in Nigeria.”
Obiukwu Mbanuzuo, chief commercial officer at Green Africa, told BusinessDay that insurance premiums vary from airline to airline.
He said: “I know an airline in Nigeria that pays $1 million annually for insurance of a B737-300 aircraft while for a UK or US airline, it would probably not cost more than $100,000-$200,000.
“The perception of risk in Nigeria started when the number of crashes was high but has remained the same even with low rates of aircraft crashes and incidents because our infrastructure is still substandard. Runways still lack proper landing aids or runway lights, navigation aids break down frequently and sometimes radio communications are unreliable.”
According to Ibrahim Mshelia, owner of West Link Airlines Nigeria and Mish Aviation Flying School, Nigerian insurance companies have continued to raise insurance premiums higher than the global standards.
“So many people think that insurance premiums are high in Nigeria because of the country’s risks but this is not true,” Mshelia said.
He said the criteria insurance companies use to assess risk factors include ratings by the International Civil Aviation Organization (ICAO), experience of airlines’ personnel, personnel training, facilities where aircraft maintenance are carried out and the frequency in the number of claims made by the airlines.
According to Mshelia, Nigeria meets all these criteria as airlines carry out maintenance as and when due, train personnel as required by the Nigeria Civil Aviation Authority, and the country has Category 1 rating, and the country’s risk factor remains low.
He, however, faulted the law that says no airline can insure any aircraft registered in Nigeria except they go through local insurance firms in Nigeria.
He said: “They decided to become very expensive. All the insurance companies in Nigeria cannot insure a single brand new aircraft in Nigeria. So, they reinsure with foreign insurance companies. They become middlemen and get so greedy and they raise insurance to 1o percent or more of the value of the aircraft.
“Abroad, some countries charge 0.5 to one percent. I was operating a non-Nigerian registered airplane that cost $6.5 million. Despite the fact that I insured it with a third-party liability to enable me to fly into Europe, I was paying about $67,000 as insurance premium a year. If I was to pay an insurance company in Nigeria, I will pay $650,000 a year. They will charge me between five and 10 percent. From this, they will pay the insurance broker less than $65,000 and they will keep the remaining money.”
But Ajibola Dalley, an aviation lawyer and senior advocate of Nigeria, said even though Nigeria meets all ICAO requirements, there are still some perceived risks in the country that drive up the insurance premiums.
He said: “Insurance companies will look at the environment. I think when you look at the factors that determine payment of premiums, over the past years, you have to look at the maintenance culture, companies and individuals involved in running of airlines, the support system and environment of aviation in Nigeria.
“Prior to the year 2006, when the Civil Aviation Act came into force, we didn’t have a good record on air accidents. Before 2006, planes were falling off the sky. We had the Sosoliso, Belview and Chachangi crashes, among others, and then Dana Air crash.”
According to him, these factors still determine the premiums that are charged and an insurance company will also look at the regulation.
Dalley said: “We have had a decent safety record since 2006. When you look at repayment on premiums and the responsibility of airlines, can you really blame an insurance company? Are the regulators doing a proper job on safety and security oversight? The risk of paying out is higher; so in order to insure you, they will increase their premiums, so that they know that they will recoup a considerable part of what is potentially a loss.
“How many airlines survive in Nigeria? How many aircraft do they have? We have runways that have problems, no light at the airports and the security issues keep getting worse. These factors raise premiums for airlines.”