Interview: Wayne Dorgan, Salamo Elema and Philip Tolley
To what extent have repetitive fires been affecting the growth of the insurance industry and how they should be contained?
WAYNE DORGAN: Although the idea of a risk management association sounds appealing, there is not enough capacity domestically to form one, as the science of underwriting is a very detailed one. In any case, contrary to some perceptions, the issue of repetitive fires is not a risk management issue in Papua New Guinea. The root cause of the problem is poor maintenance of premises by landlords or the landowners. The solution is to penalise them, and this is currently being applied. Many of the properties are insured without underwriting information, which is a major obstacle to properly rating businesses, as high-risk activities in the premises are not declared. Only a few domestic insurers are up to standard, but many others have to deal with a growing number of claims as a consequence of poor monitoring and risk assessment. An example would be a business which describes itself as a trading store when in fact it is a night club, which has a completely different set of risks from an insurance point of view, especially fires, as most likely they will deal with food and smoking. An increase in levies is being suggested as a solution to cope with the shortcomings in the industry. The way this idea is perceived depends on a set of factors, such as an increase in transparency regarding government levy funds and where they are allocated. A strong insurance sector is possible with a strong regulator.
SALAMO ELEMA: Obviously this is a big concern for the industry, but I should stress that most fire cases are settled with reinsurers abroad, and as long as there is progress in this process, I do not think that the situation is so alarming for the industry itself. Nevertheless, we have been consulting actors in the sector and have introduced the idea of a risk management association in the hope of obtaining a wide membership to get the ball rolling. Insurance is only part of risk mitigation, while the other essential part has to do with the Building Board, which is obviously responsible for safety codes, as well as non-insurance industries, like retailing or mining, among others, which will have to tell us what sort of standards they are taking up to ensure safety measures within their organisations.
We can start as a 100% insurance industry-backed association, but hopefully with time it will be represented by other sectors as well. This can lead to more information on risks and standards on all sides involved, as most of these fires are caused by electrical systems which have been unattended for too long. These fires are a good example of where more regulatory measures must be undertaken on the side of insured businesses, whether it be construction companies or operators. On the other hand, the fire service department would like to introduce a levy on the insurance sector to be adequately financed, but my stance has been that it will make insurance premiums very expensive, and we should not forget that our sector represents only a small part of the economy. I have proposed instead that it should be levied on broader sectors or commodities like water, for example, even though we have had issues with unpaid bills in certain areas around the country.
PHILIP TOLLEY: Repetitive fires are disruptive events for insurers, as they are difficult to budget for, cause discontent among our reinsurer panels and have the capacity to destroy profitability for a whole industry, rather than just the premium associated with the property classes. The cause of these fires is varied; however, a large number have been attributed to electrical faults. I am not a fan of taxes on insurance, but in the current environment a fire services levy on insurance premiums, while unpopular, could be the most effective way of generating sufficient revenue to adequately fund the fire brigade, so they can enhance and improve their service delivery and migrate from a reactionary operating model to one which is proactive and focused on protection and risk minimisation, rather than principally extinguishing fires.
Can you describe the environment for domestic competition and the standard of services as new players enter the market?
ELEMA: This market will always be open and leave room for competition for improved services. I encourage new insurers, be they brokers, reinsurers or insurers, to enter the market, and I will assess them according to exactly the same criteria that have been applied to previous entrants. The current numbers do not show any recent changes in the amount of players in the sector, and the context has remained the same for the past decade.
The market size offers a certain amount of space for service demand, and I personally consider there to be room for at least two additional players for each segment of the industry. Competition, therefore, is the way forward for the industry, in my opinion, even though I would prefer to see more local involvement in the sector. Despite recent cases that have led to opening more doors for foreign reinsurance brokers, there are still opportunities for local players to get involved. Traditionally, there have been 13 insurers, six brokers and five loss adjusters in the past 15 years, but again I think there is room for expansion, and we have seen a certain amount of interest from both local and foreign companies to enter the market.
TOLLEY: In my view, domestic competition is healthy, both for the industry and for the consumer. While the number of insurers in the PNG marketplace is high compared to the current size of the market, both in terms of revenue and customer numbers, competition brings innovation and invariably a higher degree of service as insurers strive to demonstrate that they have something a little bit better to offer.
Insurance, of course, is an intangible, and all that we sell is a promise to look after you in the event of the unexpected. PNG is the land of the unexpected, so if competition brings a better result for the customer when that something does go wrong, that has to be a positive story. One aspect of competition can be a degree of irrationality with pricing, and it is important, particularly in a developing market, that the regulator keeps a close eye on solvency among market participants, particularly as the capital requirements for insurers in PNG are relatively low by international standards. The lack of reliable data is another challenge, as it is difficult to assess the market share of the companies operating in the market when the statistics are four or five years old.
DORGAN: New licences are in the market and domestic companies are emerging in the sector. Licences have been issued, but these companies are allowed to operate for 12-24 months without reporting, and this is a double-edged sword as they operate aggressively by writing business under market prices during this period. The market is not growing and the increase in licensed insurers is not serving the best interests at the moment. As is the case for the economy, the insurance cycle is at the bottom and there should not be any expectations for growth in size or number of insurers. The largest obstacles to any optimism are the impacts of foreign currency issues, with reinsurers who react by casting doubt on the local market.
What is the potential of the PNG insurance industry to service large energy projects in terms of their hard assets and workforce?
TOLLEY: It is important to remember that there is more to a large energy project than the valuable hard assets associated with it. Energy projects also demand substantial human capital, and while the local insurance market may not have the capacity or appetite for insuring high-value hard assets, we can certainly provide quality products to assist with protecting the workforce, whether through workers’ compensation or employer-sponsored life and medical products. There are also a host of mobile assets which can be locally catered for, whether light or heavy vehicles and plants, which PNG insurers have a strong appetite for.
DORGAN: There is a potential for market growth as a result of energy projects, but the blanket exemption policy annuls this potential. Effectively, the impact on the industry is considerable, such as a great loss in job creation. There is capacity in PNG for insuring large-asset projects, and the expected developments in the economy should keep local players on their toes. However, global market volatility and country-specific constraints keep the local insurers from obtaining reinsurance capital and also limit their underwriting capacity. Sourcing locally would be more attractive for companies leading large resource projects, provided we see greater strengthening of regulation in the insurance sector for more attractiveness.
ELEMA: In the aftermath of the first energy project, the insurance market did not welcome the views expressed by investors that claimed PNG was an unknown insurance destination and that insurance claims were not paid. Our answer was simple and consisted in underlining investors’ responsibility to conduct due diligence with regard to the country in question, and that we counted among our reinsurance brokers some of the top-tier companies in the world. The domestic insurance market was prepared before PNG’s first liquefied natural gas project and will be at par for the next one for the simple reason that it operates on the basis of its capacity and will never fail on that; the stakes are too high to lose our share.
Should the PNG insurance industry be regulated by a single institution instead of two, or should the staus quo be maintained?
DORGAN: Back in the year 2000 the World Bank, IMF and International Finance Corporation pushed both the government of PNG and the central bank to modernise and sophisticate the domestic financial services industry, including banking, superannuation funds and insurance, which should have been split between life and general. I believe this to be the best way forward, and I find it odd that other institutions would think differently on the matter, considering the capacity of the central bank to regulate much more effectively the two segments of the industry and, therefore, avoid duplication. Basic things such as risk-based capital, which measures the minimum amount of capital that an insurance company needs to support its business operations, are not fully regulated as one might expect. The same is true for the companies that write life insurance without a licence, and a stronger regulator could certainly assist in these matters.
ELEMA: Initially, it was envisioned that the OIC was going to regulate both industries, but that changed in the year 2000, when the Bank of PNG, the central bank, was brought in to regulate life insurance instead. At this point, I am in favour of keeping the status quo. Furthermore, the fact that we have been regulating general insurance since 1974 without any major hiccups is a reassurance of our capacity as a regulator.
TOLLEY: Better efficiency and more up-to-date statistics would certainly help the growth of the industry, also from a regulatory point of view, but at the end of the day this is something that we have seen in many other countries in the region, as insurance tends to be, in general, quite an inefficient industry.
Once insurance companies’ operations reach a certain scale though, they tend to rely on their own experiences to assess the potential of any given market, and it is our duty, I suppose, to reach that critical mass in PNG. The regulator for general insurance so far has been an advocate of the national interest by making the exemption process for the onshore placement rule quite rigid, and this is something to be commended for, in my opinion.