Oil and Gas Insurance Pool leads the way to upstream oil & gas underwriting in Africa
The Ghana Oil and Gas Insurance Pool has been leading in underwriting upstream oil and gas insurance risks over the last couple of years.
The Pool was set up in 2010 to exclusively underwrite assets and liabilities in exploration through to production and decommissioning phases, and has over the last few years changed the mindset on how the insurance industry in Africa can approach underwriting in this sector.
In an interview with Kwabena Larbi, Head of Pool, he mentioned: “When I took over managing the Pool in late 2017, I needed to look at underwriting from a different perspective; and my background in mechanical engineering enabled me to look at this as an engineering problem: How did the Pool approach underwriting in the past; what type of reinsurance was in place and how was the underwriting structured to derive maximum value; how is aggregation on fields approached and how was it managed; and lastly, how do we determine pricing adequacy.
In summary, how do you get control over risks which even though they are domiciled in Ghana the Pool did not control them and the international market treated them as a ‘follow market’.
“The Ghanaian insurance market currently retains about 7% of risks for assets valued over US$1billion, compared to a few years ago when the market held less than 2%. The current underwriting capacity of the local market has grown from less than US$30million to US$200million in three 3 years, with the reinsurance security behind the Pool having an ‘A’ rating from Standard and Poor’s. The panel of reinsurance security that I met when I joined the Pool was not inspiring, and that did not give confidence to the oil companies when Ghana wanted to retain more of the risk in-country,” Mr. Larbi further stated.
What has accounted for the growth in underwriting?
A combination of improved technical capability of understanding the complex nature of upstream energy and its exposures, coupled with increased underwriting capital and capacity largely account for this growth. The capacity comes from Lloyd’s of London and the London Market which directly back the local market.
According to Mr. Larbi, in the past reinsurers operating out of London knew Ghana by virtue of the books of account from big oil companies like Tullow, Kosmos and ENI, without necessarily knowing much about the local insurance market. We needed to correct this narrative and we began engaging them directly to let them see the opportunities available.
Another factor that attributed to this growth was establishing benchmark rates for upstream insurable risks. We realised that the premiums at which the local market was underwriting these complex risks were not sustainable, because the local market does not have the same global spread of energy premium as the London reinsurers.
To counteract that and ensure this class of business is sustainable over the long-term, we began to re-evaluate every risk submitted on the basis of the local market underwriting the risk solely as a singleton. Therefore, discounts and credits applicable on global portfolios should not be applicable to the Ghana risks.
The Pool has also invested a lot in training to develop the technical underwriting capabilities of local underwriters. There is no doubt that oil and gas is complex and will remain complex; however, with the right training you can understand and appreciate the risk in order to make prudent underwriting decisions.
Countries on the continent have taken notice and now approach the Ghana Pool to model their systems around it. They come to find out how they can replicate this in their countries. We are the Black Star of Africa, and with the right resource backing we continue to lead the way on insurance underwriting.
It is also important to recognise that policies made by regulatory bodies – and in this case the National Insurance Commission and Petroleum Commission – have been instrumental in providing the regulatory support which the Pool requires.
What are the challenges?
It’s easy to say the local market retention is low and ask why the retention is not higher. It is imperative to note that the Ghana Pool underwrites oil and gas risks from the three producing fields in Ghana: namely the Jubilee, T.E.N and Sankofa fields. Each field presents its own set of accumulation of risks; such as subsea asset connecting to the production facility and the consequential loss arising out of it in the event of an accident.
There are unique risks such as well blow-out and pollution, which can add dramatically to the cost of rectifying damage to the fields. This risk, if not managed properly, poses severe vertical and horizontal risk exposures to the local market.
Mr. Larbi said that you have to do a careful evaluation of exposure to a worst-case event, and then decide where to place your capital. If your intention is to accept every risk, you run the chance of paying a lot of claims – and at the end of the day you don’t show value to shareholder’s funds.
Leading the way in Africa
Over the last few years, several African countries such as Senegal, Mozambique and Uganda among others have all made oil or gas discoveries, and their respective insurance industries are looking at how they can approach and also structure their model to derive maximum benefit. They look to Ghana, which has implemented the Pool model and managed it successfully.
According to Mr. Larbi, the Ghana Pool gets a lot of enquiries regarding training and underwriting support; and we have given training across several African countries to achieve tremendous success in supporting growth of the relevant local insurance markets.
The Pool remains the only entity in Africa that is able to give its independent terms and price on a risk-by-risk basis. Even the top oil-producing countries in Africa with thriving insurance industries do not have the expertise to give lead terms. The expertise is simply not there, and Ghana is an exception rather than the norm.
How has the Pool fared in claims payments?
Since 2010 to date, the local market has paid claims of about US$10million net. This is quite a significant achievement for the energy insurance market, which is relatively young.
The Pool continues to plough underwriting profits back into the business, and this has paid dividends through its recognition as a model that other African countries can replicate. The Pool is in the top 5% of subscribing insurers and reinsurers who pay their share of a claim immediately.
There is potential for continuous growth of the Pool with the exploration activities and development of new oil fields. Prudent underwriting is required for long-term sustainability of the Pool.