Underwriting profits: The sector has expanded on the back of increased economic activity and rising incomes

Over the past five years, Papua New Guinea’s insurance industry has grown substantially, in line with the nation’s rapidly expanding economy. While still relatively small by international standards, the sector has posted solid returns since the mid-2000s, and most local players are looking forward to continued growth in the coming decade. The non-life segment, which accounts for the majority of gross written premiums (GWPs), has benefitted from a flurry of commercial and industrial development and a low incidence of major losses in recent years. Property, fire and other commercial policies have been the largest contributors to growth over the past half decade, and comprise the majority of GWPs. A substantial percentage of the recent expansion has been fuelled by ExxonMobil’s PNG liquefied natural gas (LNG) project, which is currently under construction and is projected to begin producing in 2014. The insurance industry stands to continue to benefit from this project and others like it in the coming years.

CHALLENGES: While most projections call for continued expansion, PNG’s insurance industry currently faces a number of challenges. In general, a substantial percentage of the country’s rapidly growing economy remains uninsured. “The industry really only covers about 25% of the overall economy,” said Wayne Dorgan, chairman of the PNG Insurance Council (PNGIC), an industry association, and the managing director of Pacific MMI Insurance, the nation’s largest insurer. Some local insurance firms cannot cover high-risk projects and developments, due both to a lack of capacity and expertise. Consequently, a substantial percentage of the major ongoing energy and mining projects in PNG are insured offshore. On the retail side, many locals are relatively unaware of the benefits of insurance, which has contributed to the low penetration rate. That said, strong fundamentals and steadily increasing levels of expertise at most firms bodes well for future growth. Indeed, according to an April 2009 impact report by the Australia-based economic consultancy ACIL Tasman, the LNG project – which represents a capital investment of more than $15bn – has the potential to double the nation’s GDP over the coming decade. Local insurers, many of which have worked to boost capacity and risk assessment practices in recent years, have issued a number of policies during the on-going construction phase, and are poised to benefit from economic expansion once the project is operational.

OVERSIGHT & REGULATION: Oversight of the industry is shared between two groups: the Office of the Insurance Commissioner (OIC), which regulates non-life or “general” insurance, and the Bank of Papua New Guinea (BPNG), the central bank, which regulates the life segment. PNG has had general insurance legislation on the books since 1979, when the Insurance Act was introduced. The initial version of the act, which was based on the insurance legislation in place in Australia and New Zealand at the time, served as a basic outline for a burgeoning industry. A decade and a half later, in 1995, the OIC introduced an updated version of the act that is still in place today. Under Section 36 of the 1995 act, all risks within PNG are required to be insured within the country. If a company wishes to insure outside of PNG, it must apply for an exemption from the OIC. Many energy and mining projects (not to mention risks in the aviation sector and property market, among others) are insured offshore.

MEETING STANDARDS: Since the mid-2000s the OIC has been working on another legislative update to bring the regulatory framework up to international standards. Recent improvements include the introduction of risk-based capital valuation throughout the general insurance industry; a new general insurance contracts law; and a complaints tribunal, which serves as a legal framework within which the OIC can deal with disputes – previously the regulator looked to common law. The new legislation is underpinned by principles developed by the International Association of Insurance Supervisors (IAIS), the Switzerland-based international insurance standards body. “Most emerging countries do not make use of IAIS recommendations, because they are more principle-based than risk-based,” Salamo Elema, the insurance commissioner, told OBG. “But we think they have something to offer. Plus, it will send a positive message to the industry as a whole.”

The new risk-based capital valuation regime, in particular, is expected to transform the industry. Until recently, local insurers operated on a solvency-margin basis, which involved maintaining a set excess of assets over liabilities, much like a capital adequacy requirement at a bank. Under the new regime, however, capital requirements are based on the amount of risk a firm is holding at any given time. Developed with funding from the World Bank’s Financial Sector Reform and Strengthening Initiative, the OIC began work on the project in 2007. In 2010, after three years of development, the commissioner’s office introduced risk-based capital tests for PNG’s insurers. The programme is based on a model developed by the Australian Prudential Supervisory Authority, though it has been tailored to fit the contours of PNG’s unique insurance market. The OIC maintains a minimum capital requirement of PGK2m ($952,000) for all insurers.

The relatively small life insurance industry went unregulated until December 2000, when the government introduced the Life Insurance Act, which was subsequently amended in 2002. BPNG oversight of the life segment (as opposed to the OIC) is largely a reflection of the Australian system, where a substantial percentage of the life insurance market is in superannuation (retirement) funds, which are in turn regulated by the central bank. While the OIC has lobbied to take over the regulation of the life insurance industry – most recently in 1999, just before the Life Insurance Act was put in place – BPNG appears to be intent on maintaining control of the segment for the foreseeable future.

BY THE NUMBERS: Reliable insurance statistics are hard to come by in PNG. In late April 2011 the IMF completed work on a “Financial System Stability Assessment” report on the country. According to the publication, at the end of 2010 the life insurance segment boasted total assets of PGK356m ($169.4m), up from PGK172m ($81.9m) in 2009, PGK169m ($80.4m) in 2008 and PGK134m ($63.8m) in 2007. The 2010 figure was equal to around 1.3% of PNG’s total financial sector assets for the year. The general insurance segment reported total assets of PGK1.2bn ($571.1m) at the end of 2009, the most recent year from which OIC statistics are available, up from PGK1.1bn ($523.5m) in 2008, PGK907m ($431.6m) in 2007 and PGK713m ($339.3m) in 2006. The 2009 figure was equal to around 5% of total financial sector assets. In general, according to the IMF report, the insurance segment has been profitable in recent years. The non-life segment has posted both solid underwriting profits and investment profits in recent years, while the life segment is primarily supported by investment revenues, as GWPs are not yet sufficient to cover claims and expenses.

According to early 2012 estimates from Pacific MMI, the industry is worth around PGK800m-900m ($380. 7m-428.3m) in total GWPs, which includes about PGK550m650m ($261.7m-309.3m) in general insurance policies and PGK15m-25m ($7.1m-11.9m) in life policies. The remainder – an estimated PGK200m-300m ($95. 2m-142.8m) – is covered by Lloyd’s of London, a UK-based insurer and reinsurer that is active in more than 200 countries around the world. As of early 2012 the national insurance workforce was 200-300 strong, as indicated by estimates from Pacific MMI.

THE PLAYERS: According to the IMF report, at the end of 2010 PNG was home to 14 non-life insurance companies and five life firms. Additionally, the market has six brokers, five loss adjustors and one relatively small domestic reinsurer. Both locally headquartered companies and major international firms are active in the industry. The sector is dominated by a handful of larger players. According to Pacific MMI estimates, the top six insurers account for around 90% of total GWPs, with the top two firms controlling around 50% of GWPs. The brokerage segment is dominated by two international firms – Aon and Marsh – and is very active in PNG. Some 80-90% of business goes through brokers.

Lloyd’s is an anomaly in the local market. The firm underwrites a substantial amount of local risk but does not maintain a presence in PNG and is seemingly exempt from some of the regulations that govern the rest of the industry. For example, Lloyd’s does not hold capital onshore or submit annual audited industry data to the OIC or any other government body. This gives the company a slight competitive advantage over PNG’s other insurers, which are required to comply with the OIC’s capital requirements and financial reporting standards. Additionally, while Lloyd’s is technically registered in PNG, its clients are required to apply for an exemption from local coverage before they can list with the company. This special treatment is largely a reflection of the fact that Lloyd’s is able to offer more capacity and, in some cases, more complex products than most of the other local insurers. Additionally, many multinational companies that are active in the nation have longstanding arrangements with Lloyd’s in other markets, and so prefer to carry out business with the firm in PNG as well.

LEADING INSURERS: Pacific MMI, which controls a substantial share of the market, was established in 1998 by a joint venture of Allianz New Zealand and Motor Vehicles Insurance Limited (MVIL), a state-owned firm that continues to hold a monopoly on the motor third-party liability (TPL) segment. Soon after it was formed, the new company took over the portfolio previously controlled by the Niugini Insurance Corporation, a state-owned firm that was founded in 1992. In 2009 MVIL acquired Allianz’s 50% stake in the insurer, becoming the sole shareholder. Pacific MMI offers a variety of life and non-life products, including medical, comprehensive motor, property, personal accident, mortgage protection, term life and worker’s compensation. The great majority – in excess of 95% – of the firm’s business is on the commercial side, according to Dorgan. “Property policies are big business for us, followed by motor and then civil construction,” he told OBG.

QBE Insurance, an Australia-based firm that is active in 52 countries worldwide, was launched in PNG in 1886 as the North Queensland Insurance Company. Since then, primarily as a result of major acquisitions in 1997 and 2001, QBE has become one of the country’s major general insurance players. The company offers a wide range of products, including packaged commercial coverage for corporates and small and medium-sized enterprises (SMEs); property coverage; comprehensive motor coverage; machinery and plant coverage; marine cargo and hull coverage; worker’s compensation; group medical coverage; and personal accident coverage, among others. QBE operates three offices in PNG – namely in Port Moresby (the capital), Lae (the second-largest city) and Kokopo (the capital of East New Britain province). QBE’s Asia-Pacific operations, which include PNG (in addition to most of the rest of South-east Asia and the Pacific), pulled in GWPs of $680m in 2011, up 13% from $601m in 2010. Property policies contributed 23.4% to total the Asia-Pacific region’s total GWPs in 2011, while marine coverage comprised 16.1%, motor accounted for 12.1%, professional indemnity brought in 11%, liability was responsible for 9.3% and worker’s compensation contributed 8.6%. Other major contributors to GWP in 2011 included accident and health, engineering, financial and credit, travel and household. While these areas do not precisely reflect the PNG market, they are broadly representative of major insurance trends in the region at large.

Tower Insurance, a local subsidiary of the New Zealand-based firm Tower Ltd, launched in PNG in 1980 when it acquired Southern Pacific Insurance. The company is active in fire and other general underwriting. Other insurance players in PNG include Japan-based Mitsui Sumitomo Insurance and the US-based Chartis (an American International Group affiliate), among others.

BROKERS: While six brokers are active in PNG, the two international brokers, Aon and Marsh, dominate the industry, accounting for the majority of business. Both firms work closely with a handful of the nation’s largest insurers, in addition to international policy writers that cover risk in PNG under exemption agreements with the OIC. Aon, which has been active in the country since the early 1970s, currently offers brokerage and consulting services. “Aon is traditionally the mid-market insurer in PNG,” said Phil Gribble, the company’s chief operating officer. “We are currently working to set up a handful of alternative products.” Marsh, with offices in Port Moresby and Lae, began operations in PNG in 1979. Meanwhile, Insurance Partners, a locally owned broker, effectively functions as an affiliate of Willis, the multinational London- and US-based brokerage house.

The PNGIC is an industry association for the country’s insurers, brokers and related players. The council currently represents 26 insurance-related firms, which is nearly the entire industry. “While we all compete for business on a day-to-day basis, we work together on legislative issues,” said Dorgan, the PNGIC’s chairman. “The council is very active – we meet every month.” The council serves as a mediator between the industry and the regulatory bodies, namely the OIC and BPNG.

MARKET SEGMENTATION: The majority of growth in the insurance market in recent years has been a direct result of investments made to support the $15.7bn PNG LNG project. Set to begin producing in 2014, the project is expected to bring in estimated revenues of around $152.5bn over the course of its lifetime. The construction phase has resulted in a substantial amount of new business for PNG’s construction and property industries. Thus, the property segment has become a major contributor to insurance coverage in recent years. “There has been significant growth over the past five years on the back of the LNG project,” said Gribble. “This is primarily the result of property and related policies issued to local subcontractors.”

Other potential growth segments include medical policies, microinsurance and life coverage. The medical segment has grown substantially in recent years, though it remains small by international standards. With a large percentage of the population living below the poverty line – around 37%, according to UN Development Programme figures – private health insurance remains out of reach for much of the population. As a result, the primary beneficiaries of private health coverage are the employees of multinational companies and expatriates. Taking into account the country’s expanding middle class, the medical segment could be a growth driver in the coming years.

Microinsurance is also expected to be a major contributor in the coming years. PNG’s informal economy is estimated to account for some 85% of overall economic activity in the country. With this in mind, many insurers and brokers are currently working to tap into the informal economy, primarily with microinsurance products. “We recently launched a microinsurance line in conjunction with Pacific MMI,” said Tony Westaway, the managing director of Nationwide Microbank, PNG’s largest microfinance institution. “We are doing more research in this area, as we expect to see rising demand for microinsurance products in the coming years.” The OIC is currently in the process of developing new legislation to regulate microfinance products, including microinsurance. The segment faces a number of challenges. Perhaps most daunting is the lack of awareness about financial products (including insurance) among large swaths of PNG’s population, especially the 80-85% of the populace that resides in rural areas. In 2009 only around 8% of the population had access to a bank account, according to Microfinance Pasifika, a nongovernmental organisation based in Fiji. With this in mind, raising awareness about the benefits of insurance among the population is a priority.

LIFE COVERAGE: The life insurance segment has grown substantially in recent years, though it continues to rely on investments (as opposed to underwriting profits) for the majority of its revenues. Four local firms offer life policies, including Pacific MMI, Kwila Insurance, Capital Life and the Life Insurance Corporation. As of the end of 2008, the sector was heavily invested in property (around 42% of total assets), equities (17%), cash and bank deposits (10%), and government securities (3%), according to IMF data. The high incidence of HIV/AIDS in PNG means that life firms include exclusion policies for the disease.

While the life insurance segment is expected to post steady growth in the coming years, life insurers face a number of challenges. In general, the industry remains relatively underdeveloped – according to the IMF, for example, only around 0.68% of overall GWPs for the segment were reinsured as of the end of 2008.

Other coverage areas include worker’s compensation and the motor segment. While worker’s compensation is technically mandatory in PNG, according to anecdotal evidence only 70-80% of firms actually cover their employees. Motor TPL coverage is mandatory for anyone that owns or rents a car. Although the segment is monopolised by MVIL, a government-owned firm, many insurers offer policies, which have proven popular among the nascent middle class. “We see PNG’s growing middle class most clearly in the number of new automobiles on the road,” said Westaway. “Vehicle loans are our fastest-growing product.”

REINSURANCE: Pacific Reinsurance (Pacific Re) is the only local reinsurance firm in PNG. The firm incorporated in 1997 and is controlled by the government via MVIL, which has a 52% stake. Industry investors own the remaining 48%. Technically, Pacific Re has a monopoly on reinsurance in PNG – by law, all local insurance firms must reinsure domestically. In practice, however, a substantial percentage of the local market is allowed to reinsure offshore under OIC exemptions.

OUTLOOK: Despite solid growth in recent years, the industry faces many hurdles. The dearth of reliable, upto-date statistics is a major issue for insurers and market observers. As part of the current legislative update, the OIC is working to improve reporting. Human resources is also an ongoing issue – with high-quality employees hard to come by. “One of our biggest challenges is finding good human resources,” said Dorgan. “Additionally, retention is an issue – once we have trained people, it can be hard to keep them from leaving for other firms.” Other challenges are the high crime rate, extreme geography and climate, which make risk assessment expensive. However, solid returns and a rapidly expanding economy are positive signs. Insurers will continue to benefit from the LNG project and other energy and mining developments, while rising incomes and public awareness of financial services could grow underwriting revenues across all segments.


You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Papua New Guinea 2012

Insurance chapter from The Report: Papua New Guinea 2012

Cover of The Report: Papua New Guinea 2012

The Report

This article is from the Insurance chapter of The Report: Papua New Guinea 2012. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart