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THE ROLE OF INSURANCE IN THE PETROLEUM INDUSTRIES IN NIGERIA

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Abstract

This project deals with the role of insurance in the petroleum industries in Nigeria. The economic recession which begin in 1981 is highly correlated to the decline in the average selling price of out due to recession in the world economic situation and oil glut in the international oil market. In order to avert the current recession in the economy. There is an urgent need to diversify the economy the economy. Particularly to more meaningful expansion of the petrochemical, agricultural and steel industries. The role of oil therefore appear limitless as there can be no meaningful of the economy without the sue energy. Therefore, the development of the other sectors is more or less dependent on the oil industry. The aim of this research work therefore is to examine the activities of the producing companies operating in Nigeria, review the various policies of insurance covering the various exposures in order to determine the role played by insurance in the industry. To examine if the exi

• INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Before independence and shortly after, Nigerian depended solely on agricultural commodities for her foreign exchange earnings. The oil boom in the 70’s led to Nigeria economy with the resultant neglect of the agricultural sector. The boom attracted many oil producing companies to Nigerian for exploration and production of crude oil exploration on both onshore and offshore operation basis. Among the early oil producing companies to explore crude oil in Nigeria are the British petroleum company no (Shell). Agip, mobile total national and most recently development in the petroleum industry in Nigeria is the establishment of the petrochemical companies by the federal government.

Petroleum is used in most major areas of human endeavour. This includes household, manufacturing, transportation and communication. The petroleum industry has become an important ingredient in the modernization process and industrial growth of all nations. In addition, the production of petroleum product is sources of revenue generating foreign exchange reserve and it is also a high contribution to the national output little wonder therefore that our age has aptly been described “petrol-chemicals and the Nigeria economy”. The NNPC defined petrochemical as “generating the product based on chemicals derived form oil and natural gas. Then we have to contend with various types of risk that the petroleum industry as a whole are exposed to, both onshore and offshore operations. So we are considering the ways the risk could be prevented, controlled or minimized in order not to paralyze the country’s economy. What comes first to one’s mind as an insurance student in an institution of higher learning is an insurance coverage for all the various exposures.

Being in mind, that the majority of the oil producing companies operating in Nigeria engage in offshore production and that their offshore facilities run into millions of naira, one need to examine and re-examine the various types of coverage available and make necessary recommendations for improvement in order to enable the petroleum companies concentrate on the exploration and production of crude oil and improve the country’s economy as a whole. As an insurance student, one cannot do this in isolation, there must be a proper study of the operations of the oil producing companies in Nigeria must be carried out. This is needed so as to understand their various risk exposures and design an appropriate cover to meet necessary recommendations for an improvement on the existing ones.

1.2  STATEMENT OF THE PROBLEMS

Currency equalization clause was introduced for the fact that it has been difficult to maintain adequate cover throughout the policy terms despite the currency fluctuation of the naira. NICON introduced into all the policies insuring various assets of joint return operators (NNPC) and other oil producing companies that have foreign currency components, a clause known as the currency equalization clause. In 1987 in the exchange rate area by the application of this clause, the insured amount adjusted on a quarterly basis and any differences in exchange rate between the (N) naira and the ($) one dollar falls between N118, except where there is average fluctuation during the greater rate. The effectiveness of this clause was short lined because of the drastic fall of naira (N) at the end of 1987.

Settlement of claims was another problem of the researchers. They see this unhealthy relationship between the naira (N) and ($) dollar as a problem which may affect claims settlement and even lead to inadequate cover held by the oil producing companies, especially on the offshore facilities which has a very high foreign currency companies.

Another area of problems is the non availability of adequate and required skilled manpower in the petrochemical industries in Nigeria, this cause more problem to the industry in terms of risk management.

Last but not the least will be the effects of political instability in Nigeria now, which is one of the most superior revenue sources in Nigeria and their instable nature, they could not invest their fund in petrochemical industry in Nigeria. But with their investment, they may create more risk prevention technological advancement in Nigeria.

1.3  OBJECTIVES  OF THE STUDY

The need for this research study arose on the research desire.

1. To enlighten the policy holders on the need for thorough study of their policy forms and other insurance documents.
2. To examine the role of insurance in the petrochemical industries in Nigeria.
3. To find out if the existing protections provided by the insurance industries in Nigeria fully meet the needs of the petroleum industries in Nigeria.
4. To determine whether their oil producing and petrochemical companies have taken full advantages of the facilities provided by the insurance industry.
5. To make necessary recommendation to the petroleum industries and their subsidiaries in Nigeria.

1.4     RESEARCH QUESTIONS

1. How we enlighten the policy holders on the need for thorough study of their policy forms and other insurance documents?
2. What are the role of insurance in the petrochemical industries in Nigeria?
3. Who can we find out if the existing protections provided by the insurance industries in Nigeria fully meet the needs of the petroleum industries in Nigeria?
4. What extent can we determine whether their oil producing and petrochemical companies have taken full advantages of the facilities provided by the insurance industry?

 

1.5  RESEARCH HYPOTHESIS

H

0

:  Insurance industry play a significance role in Nigeria.

H

1

:  Insurance industry do not play a significance role in Nigeria.

H

0

:  Insurance protection meets the need of the petroleum industries in Nigeria.H

2

:  Insurance protection does not meet the need of the petroleum industries in Nigeria.

 

1.4  SIGNIFICANCE OF THE STUDY

The significance of this research work is that the insurances will find this work useful as it highlight the implications such as switch on their insurance portfolio and the reduction in their aggregate premium income.

The graduate and the undergraduates are not left out as people that will benefit from this study because it will broaden their knowledge in the relationship between insurance and petrochemical industries and the need for them to work together.

Furthermore, having implemented the measure mentioned in the study, it will limit the problem of unemployment that is facing the general public in Nigeria.

Finally, to the researchers, the study has broadened their knowledge in the various facilities of the oil producing companies and their recent developments in Nigeria.

 

 

 

1.5  SCOPE OF THE STUDY

The scope of this work covers the offshore and onshore risk management in the petrochemical industries in Nigeria and other insurance coverage associated with it. This covers data from insurance and petrochemical journals, newspapers, magazines, bulletins and other observations of the researchers. Also covered are the interviews of prominent insurance professionals in Nigeria and petrochemical industries. The research work will include definitions of some insurance terminologies.

 

1.6  LIMITATION OF THE WORK

Due to finance, time and distance including other constraints, we were not able to cover the whole works that we are supposed to do in this research study. We were only limited to the data available to the study and other observations of the study so far is problem solving in the petrochemical industries in Nigeria. And if any other researchers will work on this type of work can do it without the above limitations, a better result may be produced.

1.6  DEFINITION OF TERMS

1. Life assured: This can be defined as a person who insured his own particular life for his benefit or for his wife and children or for dependants i.e the particular life that is covered.
2. Insurers/Assurers: This referrers to the insurance of assurance company that collects the premium after due considerations and produces the policy and are liable for settlement of claims to the policy.
3. Premium: After due consideration of the policy conditions and terms, the amount to be paid by the insured to the insurer is called premium.                                           
4. Brokerage: This is the amount paid to the broker by their principal in form of commission for job done.
5. Res-Ipsa-Loquitor: This is an insurance term meaning that the truth speaks for itself.
6. Pro-rata: This refers to the method by which the insurers calculated payment according to fixed rate. To suit a period of insurance, example if the premium for one year is N4000, and the insured want to insure from mid year to the next year or from mid year to the end of the year, the premium will be calculated to that data at the commencement of the policy.

Pro-rata also means exactly proportionate and this is meaning here. By the condition inserted in the policy documents an insured is penalized exactly proportionately to the degree of under insurance that exists.

For example, a house is insured against fine risk for the sum of insured of N600 and is subject to average condition. The value of the house s N1000, total loss of N300 occurred, you are required to determine the insurers liability.

Solution to this problem

There is under-insurance and so average applies using the formular

Sum/insured   x     loss

Value      

Sum insured    =     N600

The value of the house is N1000

Loss               =     N300

=     600  x     300

1000

=     N180

Therefore the insurer will pay N180 of the insured.

1. Broker: This is an intermediary in the insurance market who works for the principal and received breakage as compensation. He can be sued for professional negligence.
2. Fronting: This refers to the insurance company or person representing an insurance company in a business activity, e.g. insurance company abroad use some healthy home based insurers to represent themselves in their business.