Introduction

The top five African oil producers are Nigeria and Angola, followed by Algeria, Egypt and Libya. Others are Congo Republic, Sudan and South Sudan, Equatorial Guinea, Gabon, Chad and Ghana. These markets jointly produced 7,210,000 barrels per day in 2016 with Nigeria, Angola and Algeria producing 70% of the top 10 markets output.

Local energy insurance expertise is limited on the continent and capacity is a problem among domestic African reinsurers because of the huge oil exposures, especially upstream. Capital flight represents over 90% of premium income in Africa.

In this paper we shall beam our searchlight on the operations of the African Oil & Energy Insurance Pool (AOEP), set-up in 1989 to increase local capacity in the continent.

Background

At the 13th General Assembly of the African Insurance Organisation held in Bujumbura, Burundi on 20th June 1986, it was resolved that an African Oil & Energy Pool be established to address the Capacity constraint facing the African energy sector.

The Pool commenced operations in 1989 with the following objectives:

1. To create capacity within African Oil, gas, petrochemical and energy related insurance risks emanating from Africa with a view to reducing foreign exchange outflow.

2. To provide adequate insurance cover to match the rapid technological advancement of individual African countries and to further ensure that oil companies operating in Africa are charged competitive premium rates in order to enhance profitability and stabilize the African Oil insurance market.

3. To create the manpower capacity and acquire technical expertise in the insurance of oil and gas related risks, through a systematic manpower development.

4. To disseminate technical information to members of the pool on issues affecting oil and energy insurance risk.

5. To give technical support and advice to insurance companies operating in Africa on matters relating to risk management and insurance of oil and energy related risks

Challenges facing the African Oil and Energy Pool

1. Excess capacity in the global energy market

Excess capital remains dedicated to the sector irrespective of loss levels in different sub-sectors of the industry, resulting in premium rate cutting, year-on-year. For instance, on an ASIF basis, AOEP premium rates dropped by over 20% between 2016 and 2017, while the number of risks insured fell only by 3%.

2. Recent large losses to the Pool

In 2016 and 2017, the AOEP suffered 3 huge losses. The total estimated gross loss to the Pool of the damage to the offshore Tullow rig in Ghana (18th February 2016), ADNOC refinery loss in Abu Dhabi (11th January 2017) and SIR refinery loss is USD40.81 million.

The Pool is able to recover from these losses because of a build-up of prior years’ profits as well as the estimated recoveries from the 2016 and 2017 reinsurance programmes (USD21.21 million), which hitherto had been loss free. While the claims, net of recoveries from our reinsurance programme is USD19.6 million, the cumulative financial loss in 2016 and 2017 was just USD3.80 million because of increased premium income in 2017 and reduced reinsurance expense. The participating members account stands at USD45.72 million.

A positive to the above narrative is that the ability to pay these losses truly showcases the importance and need for local capacity in the African energy sector.

3. Threats to the top line going forward

a) Restriction on refinery exposure: An aftermath of the 2 refinery losses is that the Pool has restricted its participation in any refinery exposure to a maximum of USD6.5 million unless opportunity exists to reinsure excess amounts facultatively. This would definitely impact on gross premium income going forward.

b) Emergence of Nigeria’s Energy & Allied Pool (EAIPN) in 2015: With a capacity of USD100 million, the EAIPN has been an impediment to writing energy business from Nigeria’s rich energy market since 2015.

c) Potential country energy Pools: The following African markets are preparing to operate energy pools as soon as the operating environment is viable: Mozambique, Uganda and Tanzania.

Conclusions

The African Oil & Energy Pool has evolved over the years into a viable capacity provider to the African energy market. Recent settlement of huge losses also attest to this fact. Even though there are a number of challenges to the growth of the Pool, however, Aggressive and informed marketing as well as prudent underwriting going forward would ensure that the pool remains in business providing much needed local capacity in the years ahead.