With a low penetration rate of below 2%, Papua New Guinea’s insurance sector has significant growth potential. The economy is expected to benefit from a range of new extractive projects and this, coupled with growing awareness about the benefits of insurance coverage, is set to increase demand. However, some notable challenges will need to be addressed to ensure the long-term expansion of the industry.
While efforts have been undertaken to modernise the sector in recent years, the legislation governing the industry is not fully aligned with international best practices, and uncertainty remains regarding the division of responsibilities between different regulatory authorities. Despite a host of challenges, efforts to expand coverage across PNG to lower-income households are being made, with micro-insurance a key driver of penetration. While the majority of households lack sufficient income and financial literacy to take advantage of insurance coverage, the promise of a maturing economy bodes well for the sector over the long term.
Insurance has yet to become a feature of most household and SME financial statements. As it stands, larger and more complex commercial cover is more often than not provided by international insurers, with risks underwritten offshore. However, these larger accounts and reinsurance have been hindered by a lack of access to foreign currency, which in turn has affected the ease of doing business. While international and domestic insurers offer a range of wealth-protection products, there is currently little uptake of insurance beyond the formal economy. Indeed, given the low levels of disposable income, coupled with a general lack of knowledge about the benefits of insurance, most households are not covered.
Pacific Re is the only reinsurance company based in PNG. In August 2019 the domestic insurance market was composed of 13 general insurers – down from 14 in 2017 – eight general insurance brokers, four life insurers and four life insurance brokers. There are only a few insurers operating in PNG that provide both general and life products, including Capital Group, National Teachers Insurance and Pacific MMI.
The state-owned Pacific MMI, which provides a range of personal, commercial and corporate insurance, offers both life and non-life products. Pacific MMI was established in 1998, through a joint venture between the Motor Vehicles Insurance Trust and Allianz New Zealand, but since 2009 the former entity has been the sole shareholder. While there is some agency distribution in PNG, this segment is small and agents tend to engage directly with underwriters, largely because current insurance laws do not recognise agents. Broadly speaking, the two main channels which dominate insurance distribution are brokers and direct selling.
Policyholder protection is provided in the form of solvency and capital adequacy requirements, but there are no separate policyholder protection funds in general insurance. Life insurance policyholders can benefit from a statutory fund that gives priority to policyholders, with restrictions on expenditure and liabilities.
Risk & Capital
PNG’s general insurers have adopted a similar risk-based capital to that of the Australian Prudential Regulation Authority to calculate recommended minimum capital levels for licensed insurers – which may be above the minimum capital requirements of PGK2m ($607,000) for general insurers and PGK4m ($1.2m) for life insurers – providing insurers with an added buffer. Life insurers are also required to establish a statutory fund for all policyholder assets, with separate funds to be established for PNG policies and offshore policies. PNG places no limits on foreign investment in the sector, and numerous foreign insurers are active as investors as well as indirect participants through reinsurance and brokerage. Although the market appears crowded, the insurance sector is limited in size and reach, and is driven by the non-life corporate segment. Subsidiaries and branches of foreign-owned insurance companies are present in the general insurance segment – such as Australia’s QBE Insurance and New Zealand’s Tower Insurance – though there domestically owned Capital Insurance Group is one of the largest players in the market.
PNG’s insurance sector is an admitted market, meaning that coverage sold in the country must be underwritten locally and an attempt must be made to utilise domestic insurers before taking policies out from abroad. While this theoretically protects the domestic industry, in reality the sector has long been plagued by leakages, with some firms – particularly large ones and those operating within extractive industries – receiving exemption from the Office of the Insurance Commissioner (OIC) to insure offshore if the cost of insuring in the country is 17.5% more than using an overseas insurer. While this provides support and protection to domestic players, it has also led to aggressive pricing campaigns by inexperienced market participants.
Although the sector in PNG has significant growth potential, it has experienced a number of liquidations as well. Most recently, Pacific Assurance Group filed an application to liquidate due to solvency issues in November 2017. This came after the board of the OIC compelled the insurance commissioner to petition the court to liquidate the company, in accordance with section 60 of the Insurance Act 1995.
Regulation & Oversight
In terms of oversight, PNG’s insurance sector is regulated by two authorities, namely the OIC and the Bank of PNG (BPNG), the central bank. The former is responsible for non-life insurance activities, while the latter oversees life insurance. Under the Insurance Act of 1995 the OIC – under the Department of Treasury (DoT) – is responsible for administering general insurers, reinsurers, brokers and loss adjusters. The BPNG issues licences to life insurance firms and brokers in line with the Life Insurance Act of 2000. In terms of funding, the OIC’s activities are supported by a 1% levy charged on all premium income, while life insurers pay an annual licence fee. Under the Life Insurance Act of 2000, insurance contracts must extend beyond one year in order to be considered a life product. However, third-party liability vehicle insurance was made mandatory in 1974. All insurers in the country must be locally incorporated, apart from those licensed abroad, while all foreign insurers must be authorised to conduct business under the Investment Promotion Act of 1992. Licensed insurers, reinsurers, agents, brokers and loss adjusters must be authorised to operate in the country, and must renew their accreditation annually.
Traditionally, life insurance products offered in PNG provided a combination of life cover and lifetime savings in a single product. More recently, the trend has been for life insurance to be either annual life coverage or a savings instrument in the form of insurance bonds, but not a combination of the two. Given the different regulatory roles of the BPNG and the OIC, confusion has arisen over which entity is responsible in instances where insurers offer products that combine life insurance and medical insurance, or otherwise combine features of life insurance with general insurance. The Financial Services Development Strategy (FSDS) 2018-30 envisages a more coordinated and integrated insurance market. Under the strategy, insurance supervision is set to be restructured, with prudential supervision of general insurance shifting to the BPNG, which will become PNG’s single prudential supervisor. “The appointment of a permanent regulator is a welcomed change that will boost the existing regulatory framework and reinvigorate industry governance, further strengthening consumer and business confidence in PNG’s insurance industry,” Jeremy Norton, general manager of Tower Insurance, told OBG. However, industry stakeholders have called for the proposed changes to contribute to the sector playing a greater role in socio-economic development, and not be solely focused on creating a more coordinated insurance market.
Insurance premiums comprise just 1.4% of GDP in PNG, below the 3% average for the Asia-Pacific region, according to the Pacific Financial Inclusion Programme (PFIP). Furthermore, the market has been fairly quiet in terms of new business.
“Aside from a number of new buildings there was a lack of opportunities for new business in the first quarter of 2019,” Ian Balfour, CEO of domestic general insurance firm INSPAC, told OBG.
As with financial services more broadly, the sector’s performance has fluctuated in line with economic cycles. According to the first volume of the 2019 national budget, financial services and insurance sector activity is set to expand by 2.6% in 2019 compared to negative real growth of 2.3% in 2017. Driven by demand from new extractive projects, financial and insurance activity is expected to contribute around PGK1.48bn ($449m) to real GDP in 2019 compared to PGK1.44bn ($437m) in 2018. Around PGK25m ($7.6m) is forecast to be earned in premium from the state-run Motor Vehicle Insurance company during 2019. According to the most recently published figures from the BPNG, total superannuation assets valued PGK12bn ($3.6bn), while total life insurance assets amounted to some PGK264m ($80m) as of December 2017.
While PNG is susceptible to natural disasters, insurance awareness continues to be limited. This presents an obstacle to new business activity, but there is significant potential for future growth, particularly in the micro-insurance segment. Since the entrance of Swedish micro-insurance provider BIMA in 2014, the segment has expanded rapidly and has become a major driver of growth in the industry. Operating in partnership with Digicel, the largest mobile network operator in PNG, BIMA has boosted insurance penetration in the hinterlands. Under its Family Life scheme, which was introduced in July 2014, BIMA members can sign up via text message for PGK3.60 ($1.10) per month, while a person’s life can be insured for a minimum of PGK4000 ($1213). The maximum cover an individual can obtain under the scheme costs PGK10.80 ($3.28) a month with a payout of PGK12,000 ($3640).
The company’s second product, Hausik, was introduced in March 2015 and offers health insurance plans that range from PGK3.60 ($1.10) per month for basic cover, to PGK7.20 ($2.18) per month for medium cover and PGK10.80 ($3.28) per month for high cover. These three levels of coverage entitle the policyholder to payment of PGK32 ($9.71), PGK64 ($19.41) or PGK96 ($29.12) for each night they stay in a hospital. In a bid to accelerate financial inclusion, BIMA received a grant of over $500,000 from the PFIP in June 2015. This funding helped the micro-insurance company reach 213,536 additional customers across PNG in less than a year. By March 2016 around 400 claims had been paid out, amounting to over PGK3m ($910,000). With 120 agents and two branch offices, close to 800,000 policies were sold by BIMA in PNG between May 2015 and December 2017. While some market analysts were concerned that micro-insurance penetration would be hindered by the wantok system – the traditional pooling of community resources for mutual assistance – rapid uptake of micro-products highlights that demand is there. Studies reveal most Papua New Guineans still rely on their wantok community to fund expensive events like funerals or hospital treatments. “There has long been a form of social insurance within local communities,” Balfour told OBG. “Improving financial literacy and educating communities about the importance of savings is vital. It will take time to change mindsets about the importance of wealth protection, as you have to teach the teacher before you can educate the student.”
In early 2019 progress was made towards the development of a reliable public health insurance policy, with meetings held in March 2019 between the government and various trade unions to discuss a new public health insurance scheme. According to local media reports, once the new scheme has been approved, it will be compulsory and cover the country’s 915,000 government employees. The new health scheme is hoped to provide affordable, accessible, high-quality insurance coverage for all state employees, before eventually being expanded to all Papua New Guineans who wish to participate. The new scheme dovetails with the Workers’ Compensation Act, which requires that employers provide their workers with an insurance or indemnity policy issued by a licensed insurer, covering any injury arising out of or in the course of their employment.
The health insurance segment also stands to benefit from the rollout of a number of digital platforms and insurance initiatives in the years ahead. PNG Health Assurance announced plans in early 2019 to expand its digital presence, allowing members to access its services and apply for the new health insurance scheme via mobile phones. BSP Life also introduced new products to the market in 2019, which are also anticipated to help boost health insurance penetration rates. In March 2019 the firm launched its Wantok Group Term Life Insurance product, which provides the payout of a pre-agreed sum on the demise of the insured member.
The most common form of social security in PNG is superannuation funds. Any company employing more than 20 workers must offer coverage under a superannuation scheme. This product has become increasingly important as life expectancy has risen thanks to better health care services and awareness. According to data from the BPNG, there were four authorised superannuation funds active as of June 2019, namely Aon Master Trust PNG, the Defence Force Retirement Benefit Fund, Nambawan Super and the National Superannuation Fund, more commonly known as NASFUND. In addition, there were three licensed superannuation fund administrators Aon Hewitt, IP Wealth Management, and Kina Investment and Superannuation Services – along with five licensed investment managers: BSP Capital, Kina Funds Management, PacWealth Capital, Frontier Equities and Niugini Capital. In 2018 the authorities began a review of the legal framework governing the life insurance and superannuation markets, to ensure that current regulations are up to date and correspond to international best practices. This forms part of the Financial Services Sector Review (FSSR), which is being undertaken by a technical working group made up of staff from the DoT, the BPNG and the World Bank. The remit of the FSSR also includes identifying impediments to growth in the insurance sector and areas in need of reform, particularly in terms of financial reporting and corporate governance. According to the OIC, there are three priority areas that are currently under review, namely asset liability, risk and exposure. “As regulators, we try to make sure that the insurance industry remains solvent and continues to grow, particularly the non-life segment,” Raho Samuel, the insurance commissioner, told OBG. “There has been some stagnation in generating new business due to overall economic performance.”
While the future of the market will depend primarily on new business from planned extractive projects, underwriters anticipate expansion due to rising vehicle sales, infrastructure investments, the rollout of public health insurance and the digitisation of insurance products. Although considerable headwinds are forecast, the insurance sector has attractive growth potential, particularly in the micro-insurance segment. However, an inefficient regulatory framework, notably the separate supervision of the life and general insurance segments, presents a major bottleneck. While efforts are being made to address market shortcomings, a number of challenges remain for the insurance sector, including frequent offshoring of major accounts, a lack of enforcement regarding financial reporting requirements and limited domestic reinsurance. Nevertheless, the findings of the FSSR, coupled with the implementation of the FSDS 2018-30, are expected to streamline regulations, improve corporate governance and boost the business environment for companies.
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