Cynthia Ezekwe
Faced with a growing anxiety among Nigerians over the spiralling cost of electricity, insurance management consultant Ekerete Ola Gam-Ikon has urged electricity distribution companies (DisCos) to explore innovative risk management solutions via insurance modelling as a means to lower electricity prices for customers.
This appeal comes in light of the long-standing burden of high electricity rates borne by customers, largely attributable to the high cost of risk management and a dearth of effective risk mitigation strategies within the power distributions companies, a situation that has long plagued the Nigerian electricity sector.
During a recent media chat with business a.m. Gam-Ikon underscored the critical role that an in-depth understanding of the very nature and essence of insurance plays in the context of Nigeria’s ongoing economic reinvention. Highlighting the importance of insurance as a foundational tool for protecting and promoting economic growth, he pointed out that grasping the significance of insurance at this time is of utmost importance for ensuring the success and sustainability of any positive outcomes of Nigeria’s economic transformation.
Gam-Ikon provided an illuminating definition of insurance, describing it as a mechanism by which individuals or organisations enter into an agreement with a licensed insurer, enabling them to transfer or share the risks they face in exchange for a regular premium or contribution.
He further underscored the necessity for DisCos to consider insurance modelling in their cost-benefit analysis, explaining that incorporating insurance into their business model can help alleviate the need to pass on the entire cost of risks to customers through increased rates or prices.
In Nigeria, the electricity sector has been persistently plagued by a host of issues, including an unreliable power supply and inadequate infrastructure. These longstanding challenges have led to a recent directive by the Nigerian Electricity Regulatory Commission (NERC), mandating an increase in electricity tariffs across the board, particularly affecting Band A consumers who experienced a staggering hike in electricity prices from N68 to N225 per kilowatt-hour.
This exorbitant increase in electricity prices has only served to intensify the already significant financial burden faced by many Nigerian consumers, who are now finding it increasingly difficult to keep up with the cost of living. The skyrocketing electricity rates have once again highlighted the urgent need to tackle the deep-rooted issues that continue to hinder the efficient functioning of the country’s power sector, as well as to explore viable solutions that will enable consumers to access reliable, affordable, and sustainable electricity services.
In light of these challenges, Gam-Ikon maintained that insurance modelling presents a promising solution for the Nigerian electricity sector. He noted that by adopting a comprehensive insurance model, DisCos can effectively mitigate the risks associated with electricity distribution, such as weather-related damage to infrastructure or unanticipated power disruptions, thereby ensuring their financial security. This approach, he explained, could also prevent consumers from being overburdened by excessive electricity rates, as the costs of risk management would be shared between the DisCos and the insurance providers, resulting in a more equitable distribution of the financial burden.
The insurance management consultant further highlighted that the mounting pressure from both the Nigerian government and the public to ensure that electricity services are both reliable and affordable has become a driving force behind the need for DisCos to explore insurance modelling as a viable risk management solution.
With the government advocating for increased accountability and transparency in the electricity sector, and the public demanding better access to reliable and affordable electricity services, DisCos are facing a significant challenge in balancing their financial stability with the need to improve their performance and meet the expectations of their customers.
Gam-Ikon posed a critical question regarding the revenue projections of DisCos, asking whether they base their calculations on the actual amount of electricity they receive from the transmission system or on the amount they ultimately distribute to their customers.
“To manage their technical losses, they’ll need some actuarial valuation and determine their rates using the maximum possible gain or loss given the defined population of users. The losses experienced by users based on the Band system introduced could possibly be mitigated by ensuring that one band pays for the losses of another Band and vice versa,’’ Gam-Ikon noted.
While acknowledging the potential benefits of insurance modelling for the Nigerian electricity sector, Gam-Ikon also stressed the need for insurers to carefully evaluate the insurable interest in the DisCos, which refers to the financial stake or potential loss that the DisCos could face in the event of a disruption to their operations.
Additionally, insurers would need to clearly define who is responsible for paying the insurance premiums and establish a transparent process for handling claims in the event of an incident, such as a power outage or infrastructure damage, in order to ensure a smooth and efficient process for both the DisCos and their customers.
Gam-Ikon underscored the evolving nature of risks in today’s increasingly uncertain environment, pointing to the growing opportunities for the insurance industry in Nigeria to step up and offer innovative solutions that address national challenges from an insurance perspective. He also pointed out the need for insurance professionals to actively engage in these conversations and to position the insurance industry as a key player in the present and future solutions for Nigeria, using their expertise to develop tailored insurance products and services that mitigate emerging risks and contribute to the country’s resilience and growth.
