Payment Default Cascade Threatens Portfolio Stability

Nigeria’s electricity subsidy regime has evolved from a fiscal policy challenge into a crystallized insurance risk event. Generation companies are owed approximately ₦4 trillion as of mid-2025, comprising ₦2 trillion for 2024 electricity supplied and ₦1.9 trillion in legacy debts. The federal government’s subsidy obligation escalated from ₦536.40 billion in Q1 2025 (representing 59.16% of total NBET invoices) to a total exceeding ₦1.05 trillion for H1 2025.

Despite revenue improvements, the sector suffered ₦260 billion in under-recovery over the four months ending April 2025, with Aggregate Technical, Commercial, and Collection (ATC&C) losses standing at 39.6% in Q1 2025—nearly double the 20.5% regulatory target. This translated to an estimated ₦200.5 billion in forgone revenue.

For insurers and reinsurers underwriting political risk insurance (PRI), business interruption coverage, and project finance guarantees in Nigeria’s power sector, this represents a fundamental reassessment moment. The subsidy is not cushioning risk but concentrating it into sovereign payment default-precisely the peril most expensive to cover.

Underwriting Context: Constrained Capacity and Elevated Pricing

Traditional PRI underwriting for Nigerian power projects historically focused on confiscation, expropriation, nationalization, and currency inconvertibility. The more insidious risk-government payment default disguised as operational subsidy-was systematically underpriced. Power purchase agreements (PPAs) with Nigerian Bulk Electricity Trading (NBET) appeared to offer sovereign offtake, theoretically reducing credit risk and enabling lower premiums.

This underwriting assumption has been invalidated. NERC data shows DisCos’ remittance performance to NBET stands at 95.79% in Q1 2025, yet GenCos report receiving only 28% of their outstanding debts recovered in 2024. Market intelligence indicates West African power projects now face constrained insurance capacity, with Marsh McLennan’s 2025 Political Risk Report highlighting Nigeria among regions of “increasing concern” where “capacity remains constrained.”

General market conditions show PRI pricing experiencing flat to 20% increases at renewals, but Nigeria-specific power sector exposures command substantially elevated premiums given concentrated sovereign payment default risk. Several commercial insurers have quietly reduced their Nigerian power sector exposure limits, with some declining new business entirely pending clarity on the ₦4 trillion debt resolution framework announced by President Tinubu but not yet implemented.

Precedent Analysis: Regional Comparisons

Ghana’s 2022-2023 power sector debt crisis offers instructive parallels. When Ghana’s Electricity Company owed generation companies $1.6 billion, PRI claim frequencies increased, and several insurers invoked arbitral award default coverage. The resolution required IMF intervention and sovereign debt restructuring-precisely the scenario insurers price as tail risk.

South Africa’s transition toward cost-reflective tariffs, despite implementation challenges, catalyzed $8.5 billion in private renewable investment between 2011-2022. Critically, these projects secured PRI coverage at substantially lower premiums because revenue certainty did not depend on subsidy continuation. The Nigeria differential emerges clearly: subsidy-dependent revenue models amplify rather than mitigate political risk, as they introduce government fiscal capacity as the primary determinant of payment performance, overriding project fundamentals.

Implications for Risk Managers and Insurers

Reinsurance Treaty Exposure Review

Facultative and treaty reinsurers providing capacity for Nigerian power sector primary policies should conduct immediate portfolio reviews. Attachment points established when payment collection exceeded 90% are now severely misaligned with actual loss experience. With Q1 2025 collection efficiency at 74.4% and subsidy obligations representing 59.16% of total invoices, treaty renewals for 2026 will likely feature Nigeria power sector exclusions or substantially increased retentions and pricing.

Political Risk Insurance Structure Evolution

Standard PRI coverage for expropriation and currency inconvertibility provides limited protection against the dominant exposure: chronic payment default by government-backed offtakers. Breach of contract coverage specifically addressing subsidy discontinuation or sustained payment default has become essential. However, underwriters must recognize that even breach coverage has limits when the underlying payment failure stems from sovereign fiscal exhaustion rather than political willfulness.

Credit Enhancement Alternatives

Project sponsors increasingly require layered risk mitigation: multilateral partial risk guarantees from World Bank or African Development Bank, alongside commercial PRI, alongside standby letters of credit from rated financial institutions. This structure-originally proposed during Nigeria’s 2013 privatization-proved impossible to maintain. Its resurrection indicates market recognition that single-layer credit enhancement cannot adequately address the concentration of sovereign payment risk.

Embedded Generation Premium Differential

Underwriters are establishing bifurcated pricing frameworks distinguishing grid-connected projects from embedded generation serving creditworthy commercial offtakers. Market intelligence suggests solar-plus-storage systems with dollar-denominated PPAs to mining operations, data centers, or manufacturing facilities command materially lower PRI premiums than comparable grid-connected capacity, reflecting fundamentally different risk profiles that eliminate subsidy dependency.

Forward-Looking Risk Assessment

Nigeria’s power subsidy phase-out is inevitable-the only variables are timing and management. The April 2024 tariff increase to ₦225/kWh for Band A customers (15% of the consumer base) signals government recognition of unsustainability. However, extending cost-reflective tariffs across all consumer bands remains politically deferred, perpetuating the liquidity crisis.

President Tinubu’s approval of a ₦4 trillion bond to clear verified GenCo debts represents the largest power sector intervention in over a decade, but implementation timelines remain uncertain. For insurance and reinsurance markets, this creates a binary outcome distribution: managed subsidy removal that enables sector recovery, versus fiscal collapse forcing abrupt subsidy termination amid widespread defaults. The latter scenario would trigger simultaneous claim events across multiple policies-precisely the scenario insurers structure books to avoid.

The underwriting imperative is clear: differentiate between projects whose viability depends on subsidy continuation versus those insulated from subsidy policy volatility. Price accordingly, or decline the exposure.

Published: November 2025