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National Insurance Commission issues oil and gas guidelines - International Law Office

International Law Office

Energy & Natural Resources - Nigeria

National Insurance Commission issues oil and gas guidelines

February 28 2011

Since the Nigerian Oil and Gas Industry Content Development Act 2010 was passed, several measures have been put in place to implement its provisions. The act contains far-reaching provisions that are designed to ensure the use of Nigerian labour, goods and services in the national oil and gas industry (for further details please see "Implications of new Oil and Gas Industry Content Development Act").

In December 2010 the National Insurance Commission, the insurance industry regulator, issued its Guidelines for Oil and Gas Insurance Business in collaboration with the Nigerian Content Development and Monitoring Board, with the dual objective of establishing a uniform set of rules, regulations and standards for insurance contracts within the oil and gas sector and facilitating compliance with the act.

The guidelines require all oil and gas-associated insurance business to be conducted in accordance with the relevant sections of the Insurance Act (Chapter I17, Laws of the Federation of Nigeria 2004), the National Insurance Commission Act (Chapter N53 Laws of the Federation of Nigeria 2004) and the new act.

The guidelines replicate the provisions of the act to require all regulatory authorities, operators, contractors, subcontractors, alliance partners and other entities involved in any project, operation, activity or transaction in the oil and gas sector to seek prior written approval from the National Insurance Commission before any insurance risk in the oil and gas sector is placed offshore. In granting such approval, the commission will consider whether Nigerian 'local capacity' – defined as "the aggregate capacity of all Nigerian-registered insurers and reinsurers which shall be fully exhausted prior to any application for approval to reinsure any Nigerian oil and gas risks overseas" – has been exhausted.

This is not entirely a new concept. It is not unusual, for instance, for project financiers and other foreign lenders to Nigerian businesses to require borrowers to place insurance and reinsurance risks offshore. However, even before the guidelines were issued, the Insurance Act had prohibited insurance and reinsurance businesses from carrying out transactions in respect of any Nigerian life, asset, interest or other property business classified as domestic insurance unless such transactions were entered into with an insurance company registered with the commission under the Insurance Act.

'Domestic' insurance or reinsurance business is defined in the Insurance Act to include fire insurance and reinsurance business, motor insurance and reinsurance business, liability insurance and reinsurance business, life insurance and reinsurance business, accident insurance and reinsurance business and such other insurance and reinsurance business as the commission may from time to time prescribe.

The commission has statutory discretion to approve the placing of insurance or reinsurance risks outside Nigeria where it is satisfied that, because of the exceptional nature of the risk in or emanating from Nigeria or any other exceptional circumstance, the risk is of an exceptional nature and cannot be placed locally, or where the local market does not provide a particular type of policy or lacks the capacity to provide all of the cover required in respect of the risk, in which case the excess (the amount that the commission feels cannot be placed locally) may be insured or reinsured outside Nigeria.

It seems likely that in applying the guidelines, the commission will be guided by similar principles in relation to oil and gas industry-specific contracts, bearing in mind the specialised nature of certain risks that are specific to the Nigerian petroleum industry. For example, the commission's consent is required in order to access the foreign exchange (forex) market to purchase forex to fund the remittance of premiums to offshore insurers.

Failure to obtain the commission's consent before insuring such risks offshore attracts penalties of either a fine equivalent to five times the premium involved or the imprisonment for three years of the chief executive, directors, managers and company secretary of the relevant offender.

Nigerian-registered insurers are eligible to participate in any Nigerian oil and gas insurance business subject to any restriction in their operational licences. Every insurer willing to participate directly in such business must provide:

  • a current tax clearance certificate;
  • evidence of value added tax registration;
  • evidence of procurement of workmen's compensation insurance;
  • evidence of pension registration;
  • a group life insurance certificate;
  • a certified true copy of the insurer's operational licence permit issued by the Department of Petroleum Resources; and
  • the latest audited accounts approved by the commission.

Insurance companies and brokers participating in oil and gas insurance business are permitted to set up a process of manpower development and must render annual progress returns to the commission in order to bid for oil and gas insurance business. The guidelines allow insurance companies to form consortia for the purposes of bidding for oil and gas insurance business. In addition, insurance brokers holding current licences issued by the National Insurance Commission are eligible to provide brokerage services to petroleum industry insurance businesses, subject to having an office in at least one of the oil-producing states of Nigeria. Notably, in situations where the provisions of the act regarding insurance matters may result in conflict between stakeholders, the guidelines allow the commission to clarify such matters within the ambit of the Insurance Act, if necessary, in collaboration with the board.

The issuance of the guidelines by the commission is another step towards the goal of achieving clarification and guidance on the petroleum industry-specific issues raised by the act. It is anticipated that other industries with corresponding operations in the Nigerian oil and gas industry and which are also regulated by the act will follow suit. The long-awaited regulations and guidelines to be generated by the board, which are expected to provide substance and much-needed clarity on the more nebulous provisions of the act, remain of key importance.

For further information on this topic please contact Folake Elias Adebowale, Funmi Olojo or Nnewuoghor Okhai-Akhigbe at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831), fax (+234 1 263 4541) or email (funmi.olojo@uubo.org, folake.adebowale@uubo.org or oghor.okhai-akhigbe@uubo.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.

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