In Papua New Guinea insurance makes up a small part of the overall economy when compared to international levels. The penetration rate as a percentage of GDP is under 2%, while the global average is 7.5%, according to the UN Development Programme. Insurance in the country is also a sector of great opportunity. Access is straightforward given the regulations and low capital requirements, so international participation is high and newcomers are relatively free to enter. In addition, because penetration is low, the market is well placed to grow.
On the ground, the sector is dynamic and quickly evolving. Banks are showing an interest in getting involved in the business, new and innovative products are being introduced, micro-insurance is booming and local companies are seeking to further expand outside of the country. However, concerns remain. Competition is severe and some companies may be undercutting the market, leading to a lack of margins in some lines, according to insurance broker Marsh Australia. Slower overall growth has meant slower premium growth, and economic troubles have the potential to weigh on the safety and soundness of the sector. “In the last five years, have gross written premiums gone up? Yes, but not at the rate of the five previous years,” Ian Balfour, CEO of local insurer Inspac PNG, told OBG.
Insurance in PNG is in some ways well developed and highly competitive. The Pacific country of around 7.5m currently has 13 insurance companies, one domestic reinsurer, and seven brokers, according to the Office of the Insurance Commissioner (OIC). Of the seven brokers, four are qualified to sell life insurance products.
On the non-life side of the business, QBE is the oldest insurance company in the market, having entered in 1899 as North Queensland Insurance, when it also established a presence in Fiji. The company has grown in part through successive acquisitions over the years. It bought General Accident in 1998, Zurich Pacific Insurance Company in 2001 and Mitsui Sumitomo in 2013. QBE has three offices in the country: in Port Moresby, Lae and Kokopo.
Pacific MMI was founded in 1998 as a joint venture between Motor Vehicles Insurance (MVIL), the provider of third-party liability insurance in the country, and Allianz New Zealand. Pacific MMI then acquired the insurance book of Niugini Insurance. The company has been 100% locally owned since 2009, when MVIL bought out the foreign partner, though ownership was recently transferred to state-owned Kumul Consolidated Holdings. Capital Life Insurance was formed in 1993, while Capital General was formed in 2009. The group’s shareholders are the Teachers Savings & Loans Society, Credit Corporation, Nambawan Super and Nasfund, with the last two being superannuation funds.
Century Insurance, which was originally founded in 1988 as a non-life insurer in the Commonwealth of the Northern Mariana Islands and registered as a domestic insurer in PNG in 2008. Its ownership was moved in 2008 to the group’s parent company, Tan Holdings, a Saipan-based diversified conglomerate. Pacific Assurance Group was founded in 2006. It has offices in Port Moresby, Lae and Kokopo.
Inspac Insurance is a locally owned specialty insurer founded in 2005. The company’s shareholders include landowners, individuals and resource owners, and it offers a diverse range of products, including home, motor and personal accident, fire and perils, industrial specialty risk, contractors’ plant and equipment, contractors’ risk, workers’ compensation, liability and general property.
Other general insurers include Southern Cross Assurance, which was founded in 2011 and is locally owned; National Teachers Insurance, which was founded in 2001; and Trans Pacific Assurance, which was founded in 2014. Croesus is also on the OIC’s 2016 list of licensed insurers. The country has four life insurance companies. In addition to Capital Life Insurance and Pacific MMI, there is Kwila Insurance Corporation and Life Insurance Corporation. Kwila Insurance was founded in 1977. Life Insurance Corporation was formed in 2003 and is in the same group as National Teachers Insurance. The insurer provides a broad range of life and medical policies, including those targeting the self-employed and rural individuals.
The country has seven brokers: Aon Risk Services, Marsh PNG, Kanda International Brokers & Risk Consultants, Insurance Partners, Niugini Islands Insurance Brokers, Asian Pacific Insurance Brokers and new entrant Sunrise Insurance Brokers. Pacific Reinsurance was founded in 1997 as the country’s first local reinsurance company.
The life side of the business is governed by the Life Insurance Act of 2000. Under this act, life insurance is defined as a contract which covers the death of an individual, investment accounts or provision for continuous disability. Contracts shorter than one year do not qualify, and the act also established the central bank as the regulator. As such, the Bank of PNG licenses insurance companies, is responsible for their regulation and supervision, and sets standards for the sector. Third-party liability insurance has been required since the passing of the Motor Vehicles (Third Party Insurance) Act of 1974, which was amended in 2002. MVIL became a regulated entity in 2002.
The general insurance regulator is the OIC, and the subsector is governed by the Insurance Act of 1995. The OIC reports to the Department of Treasury. According to the act, all insurers, brokers and loss adjusters must be licensed. The act also sets out how funds can be invested and how accounts are to be audited, and it requires that audited accounts be published in the National Gazette and submitted to the commissioner. General insurers must pay 1% of their premiums to the commission.
The Insurance Act of 1995 stipulates that all risks in PNG must be insured locally. The commissioner may grant exceptions, and is required to do so if the cost of insuring in the country is 17.5% more than insuring with a licensed insurer outside the country. However, this restriction is often ignored, and the commissioner issued a written warning in 2016 reminding companies that they are required to insure locally unless they received a specific exemption from the government or they are related to the PNG Liquefied Natural Gas (LNG) project. The notice read, “The Office of the Insurance Commissioner wishes to inform these offenders that Section 36 of the Act prohibits placement of insurance with unlicensed persons, whether they are a reinsurer, reinsurance broker insurer or a retail broker for any insurable risk in PNG unless an exemption is granted.”
“They are placing business offshore without exhausting local capacity,” Ludwig Repo, deputy insurance commissioner at the IOC, told OBG. The commission has shown some flexibility when it comes to how risks are reinsured. For a time, companies were required to do so through the only local reinsurance company. But the policy was quickly modified and a workaround was offered to the market. Repo said, “In a 2013 circular we required all risk to be placed with a local reinsurer. But we relaxed that policy in 2014. We now ask them to get a quote from Pacific Re. If they can underwrite the risk, the risk should be placed with them. If they cannot underwrite it, 100% goes offshore.”
Open To The World
The sector is open and welcomes foreign investment, and there are no specific foreign investment restrictions in place. However, certain steps must be taken for companies wishing to operate locally. They must be incorporated in the country (though some foreign insurers are grandfathered to operate as branches) and all insurance-related entities require authorisation to operate. This includes not only the insurance companies, but also insurance agents, brokers and loss adjusters.
When an investor buys more than 15% of a life insurer, the investor must have the approval of the central bank as a shareholder controller. Standard fit-and-proper requirements are also in the relevant laws and must be met. However, the sector is not closed, and basic capital requirements are relatively low. According to Norton Rose, the minimum capital for general insurers is PGK2m ($683,000), while it is PGK4m ($1.4m) for life insurers. “The barriers to entry are not that high,” Philip Tolley, managing director of Capital Insurance, told OBG.
The Independent Consumer and Competition Commission (ICCC) has some say in the operations of the sector and has been active recently. In early 2016 the monopolies body and MVIL entered into discussions about the increase in motor vehicle premiums for the year. As a regulated entity, MVIL’s rates are controlled by the ICCC, and the new rates for 2016 seemed excessive and were the subject of public complaints. The cost of registering a “low risk” vehicle had increased from PGK500 ($171) a year to PGK1300 ($444). By March 2016 the situation was resolved, with the MVIL announcing that there had been a mistake with vehicle classification.
Capital Insurance has been particularly innovative in terms of expansion and development. It has, for example, been creating partnerships with local hospitals so that health insurance customers have better access to facilities when needed. The company is also continuing to look at opportunities abroad, applying to open an insurer in East Timor. Capital Insurance already has significant business throughout the region, with operations in the Solomon Islands, Nauru, Fiji, Tonga and Vanuatu. One of the company’s products has also been internationally recognised. Capital Insurance’s Haus Krai policy helps families of a deceased individual meet cultural obligations related to funeral ceremonies. These gatherings can be expensive and push families into debt.
Coordination between the two sides of the business are fundamental to the policy. According to international ratings agency AM Best, the workers’ compensation component is written by Capital Insurance’s non-life arm, while the death benefit portion is written by the life company. Two levels of coverage are offered – PGK5000 ($1710) and PGK10,000 ($3410) – and the pay out is set at three days, so the funds can be available for the families when most needed. Haus Krai was first offered in 2013 and the firm has announced that the introduction of the policy has been one of the drivers of sales growth in the workers’ compensation segment.
Some significant corporate moves are also being considered or in the works. While AIG remains active in the country, it is expected to withdraw from the market as it has stopped writing for some lines of business. However, their retreat may be more related to the parent firm’s priorities than the market itself, much as when Mitsui Sumitomo exited PNG in 2013.
New Regulatory Framework
Bank South Pacific (BSP), the country’s largest bank by far, has expressed interest in getting involved in the insurance business, either directly through a subsidiary or through acquisition. BSP Life, a Fiji subsidiary of BSP, could be part of that development, with the human resources and systems assets of that organisation being used for the PNG business. It is also possible that MVIL could be privatised, as the company is on a list of targets for public sale, though that list is being reviewed. Increasingly, the market has been discussing a change in the way the financial sector is regulated. While the central bank currently supervises the banks, superannuation funds and life insurers, the capital markets and general insurers are regulated separately, the former under the Securities Commission of the PNG and the latter under the OIC. International organisations have suggested that regulation be brought under one roof to improve credibility and operations.
One possibility is to form a completely new entity along the lines of a financial regulatory commission. Another suggestion is to have the central bank take responsibility for the entire financial sector. The Bank of PNG is well run and one of the most respected institutions in the country, so while there are some concerns about that level of consolidation, the idea does have considerable support. “There is a proposal that all regulated entities be under one institution, and that would be the Bank of PNG,” Repo told OBG. “It may create some conflicts of interest to be regulated by the bank, but we want reform. It would be good.”
The foreign currency crisis has also created problems within the insurance sector. Much of the risk covered domestically must be reinsured offshore, and the relevant policies are usually paid in US dollars, so the lack of dollars has made it difficult to pay premiums. Balfour told OBG that representatives from the sector have already gone to the central bank and argued that reinsurance premiums should be top priority. He added that if the policies were to lapse, insurance policies would have to be cancelled and banks would be unable to make many of their loans. This would very seriously and negatively affect the economy. Balfour told OBG the central bank relented and placed reinsurance premiums near the top of its list for dollar allocations.
While the sector is generally in good health, some companies are struggling, many of which are small, not well capitalised and overly aggressive in their pricing. The larger players say this “dumping” is upsetting the market and making it difficult to write policies for some risks. Balfour told OBG, “There is some concern about the financial standing of some companies.” There is also concern that should one of these companies collapse, the financial system as a whole could take a hit.
The regulators confirm that some insurers are under stress and that they have had trouble getting some companies even to file their required audited statements. This has created a degree of uncertainty in the sector due to the lack of transparency and reliable data. Without all audited statements, the OIC has not been able to issue its own annual report since 2011 and does not even have internal numbers on gross written premiums after 2013. “We have a 150% solvency ratio, but some companies fall below that level,” Repo told OBG. “We allow them to continue, but we monitor them.”
According to Marsh, the market is highly competitive, although perhaps too much so in some segments. In its “Pacific Insurance Market Report 2016”, Marsh noted weaknesses across a number of lines. Most lines, including health, life, accident, liability, directors and operators, and environmental, were rated stable, with premiums changing between -5% and +5%. Motor and property were up by as much as 10% in some cases. However, marine cargo was down by as much as 15%. Continued rate reductions are expected into 2016.
PNG was ranked as the ninth most risk-prone country in the 2015 World Risk Index by the UN University’s Institute for Environment and Human Security. Vanuatu is first, followed by Tonga and the Philippines. The country is in the Ring of Fire, has active volcanoes and is subject to tropical storms. The risks are not as high as that rank would suggest, however, as population densities are relatively low and earthquakes have not historically caused much damage, but the chance of catastrophic loss is always present.
The operating environment in the country rates poorly. AM Best classifies PNG as Country Risk Tier (CRT) 5, the highest. In South-east Asia most countries are ranked CRT 3 or 4, with only Singapore being classified as CRT 1. In the region only PNG and Micronesia are rated CRT 5. Outside of the immediate area, Pakistan and Uzbekistan are also CRT 5. According to the agency, political and economic risk are both high, while economic risk is very high.
While it is difficult to assess the overall state of the sector, given the lack of reports from the OIC, some statistics offer a certain level of visibility, and they appear to indicate mixed results. According to the central bank, total assets for life insurance companies have declined in recent years, falling from PGK473.8m ($161.7m) in 2014 to around PGK416m ($142m) a year later. That is just slightly higher than the level hit in 2011 (PGK415.8m, or $142m). General insurance has also grown significantly in that same period, according to the Bank of PNG’s most recent figures. Total assets went from PGK963.3m ($328.8m) in 2014 to PGK1.01bn ($344.8m) in 2015, almost double the level in 2012.
Capital Insurance has done particularly well, and it provides extensive disclosure and allows for significant international scrutiny of its books. While it may not be representative, the information available does show how promising the market can be for those well positioned. At Capital Insurance both life and non-life revenues almost doubled from 2014 to 2015, according to the firm’s 2015 annual report. Group medical and life rose from PGK17.2m ($5.9m) to PGK33m ($11.3m). Motor vehicle commercial coverage increased from PGK4.2m ($1.4m) to PGK13.8m ($4.7m). Workers’ compensation went from PGK9.6m ($3.3m) to PGK11.8m ($4.03m). Marine declined from PGK2.4m ($819,000) to PGK1.9m ($649,000).
The vast majority of revenues for the company came from PNG, though the firm’s other Pacific operations are contributing. PNG generated PGK66.9m ($22.8m) of the company’s total revenues, Fiji brought in PGK28m ($9.6m) and the Solomon Islands contributed PGK3.5m ($1.2m). Growth in the other markets has been particularly strong.
In late 2015 AM Best affirmed Capital Life Insurance’s rating of “B-”. The ratings agency said the insurer has sufficient risk-based capital to cover its obligations and that its growth in 2015 has helped the company maintain prudent leverage. However, it added that the firm’s dependence on a single broker creates risk, while the underdevelopment of its risk-management strategies could be a problem given its rapid growth. The rating was positive and AM Best said the company could be upgraded if it continues to meet its obligations. AM Best reaffirmed its ratings in early 2016.
Another opportunity that those in the insurance sector are considering is coverage for small and medium-sized enterprises (SMEs). According to a May 2016 survey by the UN’s Pacific Financial Inclusion Programme (PFIP), SMEs are estimated to account for at least 200,000 jobs in the country and 10% of GDP, with this figure not taking into account the informal sector. Currently, SMEs can only choose from more conventional products, such as property and liability exposure. Furthermore, given how vulnerable such businesses can be to losses, new offerings will have to focus on affordability. The PFIP survey also revealed that the 12 leading insurers in the region are planning to improve SME coverage, with two-thirds of respondents considering the sector an essential part of their portfolio in the next year.
Given the state of the country overall and the financial condition of some players, performance may become choppy and inconsistent going forward. Insurance will follow the economy and be adversely affected by the actions of some of the more aggressive players. However, the more stable firms will likely outperform, and the sector is likely to stabilise as new, stronger competitors enter the market, such as BSP. New construction projects and the start of the Papua LNG project are likely to help business in the near to mid-term. The sector could ultimately be better served if the regulator is able to get financials out of some of the weaker insurers and push them to improve their solvency ratios.