Fuel Surcharge As Alternative To Third-Party Motor Vehicle Insurance In Nigeria

Insurance is a risk-transferring mechanism. The basic objective of the scheme is to facilitate financial protection of the beneficiaries by puttng them in the position they were in, but for the occurrence of the risks insured against.

In a contract of insurance, on the payment of a monetary sum - the premium – by the insured, the insurer undertakes to indemnify the insured against risks or loss arising from some insured events. As custodian of the premium, the insurer absolves the insured from liability upon the occurrence of the events insured against. The contract is evidenced by the insurer issuing an insurance policy to the insured.

In auto vehicle insurance, the common risks insured against are losses arising from death or bodily injury, medical expenses, the??, and property damage. The insurance plays a major role in managing road hazards by indemnifying the insured against liability for loss and damages arising from auto crashes, thereby reducing the burden and consequences of road trauma, and compensa??ng vic??ms of unsafe driving.

Auto insurance is statutorily required for driving a motor vehicle on Nigerian public roads. Driving an uninsured vehicle is a criminal offence, and upon convic??on, the defendant is liable to a fine or imprisonment. Imprisonment for failing to insure a vehicle rarely occurs in Nigeria, and the number of motorists fined for driving while uninsured is insignificant.

There are two types of statutory insurance under the Nigerian Insurance Industry Reform Act, 2025 (NIIRA): comprehensive and third-party. A third op??on provided under the Motor Vehicles (Third Party Insurance) Act, 1950, whereby motor vehicle users deposit money with the Accountant-General in lieu of insurance, is omi??ed in the NIIRA. Third-party insurance is the minimum coverage for all vehicles onNigerian roads. It is purchased on an annual basis, commonly through private commercial companies.
Comprehensive insurance covers a variety of risks such as death or bodily injury, medical expenses, the??, and property damage. It covers losses of the insured, third- par??es, and their respec??ve vehicles. On the other hand, third-party insurance covers third-party liability only, and does not indemnify the policyholder.
Insurance premiums generally reflect the perceived risk profile of the vehicle owner and the coverage type desired. But in Nigeria, third-party insurance premiums are set by the government through the Na??onal Insurance Commission (NAICOM), in consulta??on with the insurance industry. The rates are based on vehicle user-types. Expectedly, premiums for commercial vehicles are higher than the rates for private vehicles. Payment of premium is a condi??on precedent for a valid insurance, but the strict prepayment requirement is waived for third-party insurance.

Government intervention in third-party premium-settng results in policyholders paying an iden??cal amount for same policy type regardless of individual risk profile. This has several effects. It fails to mirror the true costs of unsafe driving, and taxes safe driving while subsidising risky driving choices. It leads to lower premiums and as a result, affects the cash-pool reserve available to compensate potential crash victims. It also makes the rates cost-reflec??ve, and not risk-reflec??ve, which equally affects the sensi??vity of premiums to pricing incen??ves such as, no claims discount.

Comprehensive insurance premium rates, on the other hand, are set by the insurance companies taking into considera??on individual vehicle-user risk profile. The rates are influenced by several variables, including personal factors like the driver’s age and gender, driving history, claims history, traffic viola??ons, and current driving behaviour. These factors are weighed to determine the insurer’s poten??al risk exposure, leading for instance, to older, more experienced, and teetotaler drivers graded as lower risks, more insurable, and en??tled to preferen??al premium rates.

Comprehensive insurance premiums may also be influenced by non-personal factors such as expected travel mileage, with drivers less likely to drive long distances enjoying more favourable rates than those whose profiles indicate that they might go on long trips, the la??er, being a red flag for increased exposure to the vagaries of the road. Likelihood of travel speed may also be a factor in premium- se??ng. Data for monitoring driving economics or habits can be gathered with on- board diagnos??cs or in-car technologies that track movements and behaviour fi??ed to the vehicle.

Geographical loca??on, whether the vehicle is to be used or parked in a predominantly the?? or crash-prone areas, could be affect the determina??on of premium rates. For example, the North Central and the South-West zones of Nigeria are iden??fied road-crash hubs and should pose higher claim exposure to insurers. This factor could be priced into chargeable premiums.

Finally, insurance companies could consider vehicles’ inherent factors such as classifica??on, make, value and age in premium rates determina??on. Vehicles with enhanced safety and security features are considered less likely to cause damage therefore, possess lower on-road costs, and are rela??vely more insurable.

Nigeria has a motor insurance compliance problem. As at the end of 2023, out of a total of 12 million vehicles on Nigerian roads, approximately 3.11 million of them were insured. This represents only about 25% insurance rate. These motor vehicles are supplemented by numerous motorcycles and tricycles. Meanwhile, there are no reliable sta??s??cs of insured motorcycles and tricycles in Nigeria, but industry data es??mates that they are between 8 million and 12 million. Of these numbers, about 75% to 78% of them operate without genuine insurance. The failure to insure costs the insurance industry a loss of about N240 billion on premium incomes over 16 years from 2000 to 2016.

The problem of low insurance compliance is not unrelated to the current opt-in system whereby vehicle owners voluntarily approach a provider to purchase a policy. As against the opt-in model, Nigeria could consider a government-run social insurance scheme to provide vehicle owners with a base-level third-party liability coverage. The scheme would be funded by imposing a fuel surcharge or levy on every litre of petrol sold.

The proposed programme would be similar to the South African Road Accident Fund (RAF), and cover medical and funeral expenses, lost earnings and support, damages for emo??onal trauma, and pain and suffering for bodily injury. Notably, it is not expected to cover property damage but provide an op??on for the vehicle owners to purchase supplementary first-party coverage for property damage and other risks from private sector insurers. The benefits recommended under the scheme are broader than the compensa??on provided by NIIRA third-party insurance, which la??er programme indemnifies against risks of death or bodily injury, medical expenses, the??, and property damage only.

The new scheme would result in rela??vely high-rate compliance and make non- compliance virtually impossible because fuel surcharge as premiums would reflect actual road usage, ipso facto, vehicle-owner exposure. It would especially correct the non-insurance by motorcycles and tricycles since they would be automa??cally pulled into the scheme and covered by the surcharge at the point of fuel purchase.

Since premiums are deducted at source, the presence of a vehicle on the road would, on its own, be indica??ve proof of insurance. Therefore, the programme would be less expensive to run. It would also reduce the costs of running the government as it eliminates the current prac??ce of compliance-enforcement by the police and other law enforcement agencies. The cost savings could then be passed on to crash casual??es in the form of increased compensa??ons.
Rather than segrega??ng premium contribu??on pools into comprehensive and third- party contribu??ons, it would all go into the same pot, making more funds available for se??lement of losses and guaranteeing vic??ms adequate recourse. Finally, the proposal would provide a pre-determined compensa??on funding source, thereby enabling recovery from a single iden??fiable en??ty.

Nigerian homes and industries are heavily dependent on petroleum fuel for their respec??ve domes??c and industrial uses. A legi??mate argument could be made that funding the programme through fuel surcharge would inequitably impose a levy on non-vehicle owners. To ameliorate or mi??gate this possible adverse consequence, the system could be designed in such a way that only fuel purchased by motor vehicle owners would be charged. It is not suggested that the dichotomy mechanism would be easy to implement, but it is worth trying.

Some vehicle owners could a??empt to bypass the system by dispensing fuel into jerrycans and transferring same into vehicles. This should not be of much concern because the amount of surcharge per litre could be so minute that it might not be felt by or considered worth the effort of vehicle owners. Addi??onally, experience has shown that effects of fuel price increases in the past have been felt for a flee??ng period only, a??er which consumers revert to their old purchasing habits or rou??nes. Therefore, there is the likelihood that jerrycan bypass would not last for long.

In place of funding the insurance programme through a fuel levy, the government could adopt an alterna??ve funding mechanism such as imposing add-on fees to vehicle registra??on and licensing processes. This is less advisable because it might create an addi??onal problem whereby vehicle owners avoid registra??on or licensing en??rely.

Whatever the case, the current high rate of uninsurance in Nigeria is clearly unacceptable, and is crying for an urgent solu??on.

From: Alimi O. Adamu, Esq.1

Via Idowu Adewale, Communications Officer,
Media Rights Agenda

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