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

Insurance is a risk-transferring mechanism. The basic objecƟve of the scheme is to facilitate financial protecƟon of the beneficiaries by puƫng them in the posiƟon 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, theŌ, 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 compensaƟng vicƟms 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 convicƟon, 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 opƟon 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 omiƩed in the NIIRA. Third-party insurance is the minimum coverage for all vehicles on

Nigerian 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, theŌ, and property damage. It covers losses of the insured, thirdparƟes, and their respecƟve 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 NaƟonal Insurance Commission (NAICOM), in consultaƟon 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 condiƟon precedent for a valid insurance, but the strict prepayment requirement is waived for third-party insurance.

Government intervenƟon in third-party premium-seƫng results in policyholders paying an idenƟcal 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 potenƟal crash vicƟms. It also makes the rates cost-reflecƟve, and not risk-reflecƟve, which equally affects the sensiƟvity of premiums to pricing incenƟves such as, no claims discount.

Comprehensive insurance premium rates, on the other hand, are set by the insurance companies taking into consideraƟon 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 violaƟons, and current driving behaviour. These factors are weighed to determine the insurer’s potenƟal risk exposure, leading for instance, to older, more experienced, and teetotaler drivers graded as lower risks, more insurable, and enƟtled to preferenƟal 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 laƩer, being a red flag for increased exposure to the vagaries of the road. Likelihood of travel speed may also be a factor in premiumseƫng. Data for monitoring driving economics or habits can be gathered with onboard diagnosƟcs or in-car technologies that track movements and behaviour fiƩed to the vehicle.

Geographical locaƟon, whether the vehicle is to be used or parked in a predominantly theŌ or crash-prone areas, could be affect the determinaƟon of premium rates. For example, the North Central and the South-West zones of Nigeria are idenƟfied 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 classificaƟon, make, value and age in premium rates determinaƟon. Vehicles with enhanced safety and security features are considered less likely to cause damage therefore, possess lower on-road costs, and are relaƟvely 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 staƟsƟcs of insured motorcycles and tricycles in Nigeria, but industry data esƟmates 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 emoƟonal trauma, and pain and suffering for bodily injury. Notably, it is not expected to cover property damage but provide an opƟon 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 compensaƟon provided by NIIRA third-party insurance, which laƩer programme indemnifies against risks of death or bodily injury, medical expenses, theŌ, and property damage only.

The new scheme would result in relaƟvely high-rate compliance and make noncompliance 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 automaƟcally 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 indicaƟve 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 pracƟce of compliance-enforcement by the police and other law enforcement agencies. The cost savings could then be passed on to crash casualƟes in the form of increased compensaƟons.

Rather than segregaƟng premium contribuƟon pools into comprehensive and thirdparty contribuƟons, it would all go into the same pot, making more funds available for seƩlement of losses and guaranteeing vicƟms adequate recourse. Finally, the proposal would provide a pre-determined compensaƟon funding source, thereby enabling recovery from a single idenƟfiable enƟty.

Nigerian homes and industries are heavily dependent on petroleum fuel for their respective domesƟc and industrial uses. A legiƟmate argument could be made that funding the programme through fuel surcharge would inequitably impose a levy on non-vehicle owners. To ameliorate or miƟgate 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 aƩempt 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. AddiƟonally, experience has shown that effects of fuel price increases in the past have been felt for a fleeƟng period only, aŌer which consumers revert to their old purchasing habits or rouƟnes. 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 alternaƟve funding mechanism such as imposing add-on fees to vehicle registraƟon and licensing processes. This is less advisable because it might create an addiƟonal problem whereby vehicle owners avoid registraƟon or licensing entirely.

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