A HUGE percentage of energy risk is still being ceded abroad despite the local content law. Why is this so?Capacity is of two fold, which are technical capacity and financial capacity. Technical capacity has to do with competencies, expertise and is beyond what you see about externalization of risks. There is a local content law which states that you must exhaust local capacity before you can externalize any risk. So if you bring your capacity to the table and I bring mine, it will first go into accepting risks before they can be externalized. However, the foreign players bring expertise to the table.
Most of the rates that we currently have are being run from the London market. So if you provide the expertise, it is only natural that you will be in control of a lot around the processes. Yes they provide expertise, there is also the awareness that there is a local content law that allows for local retention before it is being externalized. But the reason risks are still being externalized is because of capacity, capability as well as capital.
It is on the strength of these three Cs that you can muster the energy to take on oil and gas risks. These are big ticket transactions. For instance, an energy rig or a floating barge could have an excess of $4 billion assets in one single vessel.
You will agree with me that we do not have capacity to underwrite such business locally. We may not necessarily want to say we do not have the sort of expertise to underwrite such businesses, but we recognize that we need to transfer such risks by way of sharing and mutual arrangement. That is why we will take what local content says, which is in the ambit of the law.
How can local underwriters develop capacity to take up more of these energy risks?
What we need to do as insurance companies is to come together. There is an energy pool in the market which has been sustaining local capacity. So because there is an order in which risks gets externalized, local underwriters get involved first. They have a first right of refusal which means, local insurers will be shown the business first. They can then say no, depending on their capacity and appetite before it gets externalized. If we build on capacities, capabilities and capital, we can then take more risks before they get externalized.
Local underwriters have the habit of taking up insignificant proportion of these big ticket risks; can such action aid their business growth?
These things run on some principles as well. How effectively are we pricing our risks to even start with, because it all begins with pricing. If we price adequately, which is what we should do, we will definitely get a hold of it because you can speak for the premiums but when it comes to exposure, there are so many elements around it. The business runs on the principle of how much capacity is available in total.
For us as reinsurers we need to look at what is adequate. The truth is that when you come to the table of acceptance, you have to look at your own capital requirement, solvency, as well as shareholders funds. After you consider these things, in terms of risk premium, commerciality, and what is economically viable for me as a company, am I then willing to risk my capital on XYZ business.
That is a sort of conversation that we should be having as opposed to what is the price. Price for you may not be the price for me. The experience is part of it. If we do not price adequately, that is a problem.