Insurance in Papua New Guinea remains a sector of significant opportunity. With a low penetration rate – estimated at under 2% – and the overall economy set for rapid growth as a result of ExxonMobil’s liquefied natural gas (LNG) project, demand is projected to increase over time. Other trends and events also suggest good prospects. A new acting insurance commissioner has been appointed and is starting to push for increased and more effective oversight; banks have shown a growing interest in being more active in the sector; and more is being done to develop coverage for people and companies outside of urban centres.
Hurdles
Although there are a number of positive indicators, challenges remain. Laws underpinning the sector are unclear in certain respects, leading to weak governance and confusing lines of authority. A regulatory bias towards nurturing domestic companies has allowed for a number of weaker insurers to carry on operations. The result of this is overcapacity and aggressive pricing, with some insurers that should be encouraged to wind down or sell their operations continuing to offer services. Efforts to expand coverage into the hinterlands and to lower-income individuals are also facing difficulties (see analysis). Most of all, the economy is still maturing, making it difficult for companies and individuals to afford coverage. Therefore, while the sector has potential, it will have to face some headwinds in the near term and institute much-needed reforms to ensure stability and growth. In comparative terms, insurance activity in PNG is below the rates found in more advanced economies of the Asia-Pacific region, where penetration sits well above 3%.
Sector Players
The insurance sector is well established, diverse and large for a country of 7.7m people. According to the Office of the Insurance Commissioner (OIC), PNG has 14 non-life insurance companies in addition to one reinsurer, one reinsurance broker and three or four loss adjusters. The central bank, the Bank of PNG, which regulates the life insurance side of the business, lists five life insurance companies that operate in the country – one of which was in liquidation in spring 2017 – along with four life insurance brokers.
QBE Insurance, initially established as the North Queensland Insurance Company, has been in PNG since 1899 and is the oldest non-life company in the market. In the past two decades it has been in expansion mode, acquiring the portfolio of General Accident in 1998, Zurich Pacific’s business in 2001 and Mitsui Sumitomo’s operations in 2013. The company has three offices in the country, located in Port Moresby, Lae and Kokopo, the capital of East New Britain Province. Its business in PNG appears to be thriving. The company holds an estimated 30% of the non-life market, and its Australian parent reported double-digit growth in gross written premiums in PNG in 2016. The company also operates in Fiji and the Solomon Islands.
Pacific MMI was formed in 1998 as a joint venture between Motor Vehicles Insurance Limited (MVIL), the country’s provider of compulsory third-party liability insurance, and Allianz New Zealand. After formation, the insurer acquired the portfolio of Niugini Insurance, a state company founded in 1977. Pacific MMI has been wholly locally owned since 2009.
Another player, Century Insurance, was originally founded in the Northern Mariana Islands in 1998. It registered in PNG a decade later and is now part of Tan Holdings, a Guam-based company. Other non-life companies include National Teachers Insurance, founded in 2001, and Capital General, formed in 2009. Inspac PNG was established in 2005 and is 100% locally owned, as is Southern Cross Insurance, which was founded in 2011. Pacific Assurance Group was formed in 2006 and has offices in Port Moresby, Lae and Kokopo, while Trans Pacific Insurance got its start in 2014.
Alpha Insurance is the newest general insurance player, following a buyout in September 2016. According to regulators, Croseus, another non-life insurance player, is expected to end operations in 2017.
Life insurers include Capital Life, formed in 1993 and in the same group as Capital General; Pacific MMI; Kwila Insurance; and the Life Insurance Corporation, belonging to the same group as National Teachers Insurance. Workers Mutual Insurance is the company in liquidation. The four life insurance brokers are Aon Risk Services, Asia Pacific Insurance Brokers, Kanda International Insurance Brokers and Risk Consultants, and Marsh.
Pacific Reinsurance, also known as Pacific Re, is the country’s only reinsurer and was founded in 1997. MVIL, a major shareholder of Pacific Re, was established one year later under the Motor Vehicles (Third Party Insurance) Act. It currently operates 23 branches throughout the country. In addition to selling mandatory thirdparty liability insurance, the company also issues drivers licences and registers vehicles. MVIL became a regulated entity under the Independent Consumer and Competition Commission in 2002.
Open Market, New Rules
Non-life insurance companies in PNG are governed by the Insurance Act 1995 and regulated by the OIC, which is overseen by the Department of Treasury. Third-party liability vehicle insurance has been compulsory since 1974. Life insurance companies are regulated by the Bank of PNG, the governing legislation being the Life Insurance Act 2000. Under the act, an insurance contract must cover more than one year to be considered life insurance. The country’s social safety net is highly limited and support comes mainly via superannuation funds. In PNG, companies with more than 20 workers need to cover their employees under one of these schemes.
The domestic insurance market is an open one – no restrictions exist on foreign investment in the sector. Life and general insurers, however, must be locally incorporated, although some companies that have been grandfathered in under earlier regulations operate as branches. Shareholders who own more than 15% of a life insurer need the approval of the central bank. Life insurers must have minimum capital of PGK4m ($1.27m) and general insurers must have at least PGK2m ($634,000). General insurers have also been required to follow the Australian Prudential Supervisory Authority’s risk-based capital model since 2008. All risks must be insured within the country, but the OIC can grant exemptions. Risk is allowed to be covered in international markets if the premiums offered by domestic insurers are 17.5% higher or more than premiums quoted by foreign providers.
In recent years the Bank of PNG has been working to improve supervision of the life side of the business. In 2012 it issued a standard on corporate governance for the relevant companies titled the Life Insurance Prudential Standard 9/2012. Among other things, the rules require a majority of independent directors, an audit committee, a policy on whistle-blowing and a policy on conflicts of interest. It also supplements the Life Insurance Prudential Standard 8/2008 Fit and Proper Requirements, and calls for all insurers to have a risk management framework in place.
Additional guidance has been provided since then. In 2016 the central bank issued the Life Insurance Prudential Management Standard 10/2016. The document calls for life insurance companies to create systems for “identifying, measuring, evaluating, monitoring, reporting and controlling or mitigating material risks.” The affected institutions must publish a risk management framework and a risk management statement, and employ the appropriate audit procedures to ensure that the framework is followed.
Lines Of Authority
In a 2015 report delivered to the Department of Treasury and the Bank of PNG, the World Bank identified a number of deficiencies in the structure of the insurance sector. It found the Insurance Act 1995 particularly problematic. According to the report, the act fails to clearly state the objective of the OIC and is vague regarding the minister to whom the regulator should report. Regulations to follow up and support the act had not been published, leaving significant gaps, while the dividing line between life and non-life products is not precisely defined. The OIC and the central bank have been discussing that very issue for years without resolution.
A number of recommendations were made in the World Bank’s report, including a review of the insurance act, the construction of a more robust framework and a wholesale reform of the governance structure. It suggested that the lines of authority in the sector be more clearly defined and that consolidation of regulatory authority be undertaken. This would include first bringing the regulation of non-life companies under the central bank and then creating a sector-wide financial authority. The idea has significant support and the eventual establishment of such an authority is accepted within the industry. “Some time in the future a financial services authority will be created,” Raho Samuel, the acting insurance commissioner, told OBG.
A number of other less fundamental recommendations were also outlined. The authors suggest that efforts be made to boost the life insurance segment, which they note has not grown in years. In addition, they recommended that the superannuation funds start making life insurance mandatory for all members.
Hitting A Plateau
The publication of data from the OIC is a number of years behind schedule, mainly due to the fact that a few key players have yet to submit their audited reports. However, general consensus within the office is that after 2010 general insurance grew rapidly and then tapered off, while life insurance has been relatively stagnant during that period. Central bank numbers reflect this trend. In the third quarter of 2016 total assets of the general insurance segment were PGK1bn ($317m) – unchanged from a year earlier but double the level of 2012. Life insurance assets have seen little change since 2012. Even without published reports to support these trends, sector players can feel it in the market. “Business has plateaued in the last couple of years,” Ian Balfour, CEO of Inspac, told OBG. The insurance sector overall, on an asset basis, is less than 4% of the financial sector total.
Still, the market is seen as healthy due to the high number of players and intense competition, but that is challenged by the fact that some companies are under strain because they do not have the resources to hold up in such a dynamic environment. According to the insurance broker Marsh, insurance in PNG is highly competitive. In a 2016 market report that presented figures from the fourth quarter 2015, it noted that rates in all categories were either stable or had increased, with decreases only reported in marine cargo.
“There’s been a flight to quality,” Philip Tolley, managing director of Capital Insurance, told OBG. He says that Capital Insurance experienced 5% growth in the top line in 2016, and much of that was from accounts leaving the competition. “It is a bit crowded for a small market,” Balfour added. “Capital should be PGK10m15m ($3.17m-4.76m) minimum.”
The general economic situation is weighing on the business of insurance. Falling prices for natural resources, the end of the construction phase of PNG LNG and single-digit GDP growth have meant that demand for insurance has been particularly weak. “The insurance industry as a whole looks at assets in the market, and in PNG there are not many more assets this year than last,” Tolley told OBG. “Revenues are down across the board, particularly in payroll, workers compensation and big-ticket products like employer-sponsored life and medical. The same will follow in 2017.” Revenue gains, if any, are a result of business being won away from other insurers or from company-imposed price increases. Even low-cost, mass-market products are not selling as before. BIMA, which markets insurance by mobile phone and introduced its first policies in the country in 2014, has hit a ceiling after a period of rapid expansion. “We are doing well, but we are not growing anymore; we are stable.” John Vance, country manager of BIMA, told OBG. “Mobile phone spending is discretionary,” adds Tolley, in reference to the way customers pay for their BIMA coverage. “They are not topping up as much as they used to.”
Currency Shortage
Many companies choose to under-insure their assets during challenging economic times. While this may help cash flow in the short term, it can leave them in great difficulty if they receive a claim. In turn, that sort of under-coverage can damage the economy if the practice is widespread. Another concern is the rise in fraud as people seek creative ways to make money. In some cases it was found that police staff had been working with individuals to submit false claims for vehicle damage.
While future LNG projects are expected to result in an economic upturn, the direct impact on insurers is less certain. In the past, international companies involved in large resources projects have asked for exemptions to the requirement of placing all risk onshore. It is expected that new projects will ask for the same. Most business accruing locally from these large-scale investments is indirect, resulting in higher economic growth in general, but it could also result in policies written for local businesses that supply the projects of larger international companies.
Still, the most significant problem facing the sector is a lack of dollars to pay reinsurers. Because of currency shortages in the country and a backlog of orders that has developed since 2014 when the Bank of PNG tightened the trading range and caused a rapid appreciation of the kina, it has been difficult to obtain enough currency to pay foreign bills. Insurers have been personally and aggressively lobbying the central bank to free up dollars for the sector. They argue that without reinsurance, many policies may be impossible to write and the entire economy could be effected. In early 2016 the central bank offered exemptions that allowed insurers to access foreign exchange, but sector players say that it is still difficult to get enough dollars on time when they are needed. Furthermore, some insurers choose to write contracts denominated in foreign currencies. This practice is seen as detrimental to the economy as it causes stress on the system when large claims have to be paid. Insurance executives say that premiums should be billed and claims paid in kina.
Other, more routine issues weigh on insurers. Marsh notes that the cost of repairing automobiles is particularly high in PNG. Fires have been prevalent in recent years as a result of poor construction, failure to follow safety standards and limited fire services. Marsh adds that litigation activity is low, however, which helps.
Corporate Moves
The sector saw some reorganisation activity in 2016. AIG sold its PNG operations in a management buyout in August and the company was renamed Alpha Insurance, a provider of homeowners, flood and commercial insurance. The new entity is under the leadership and ownership of the CEO prior to the sale, Bruce Avenell. Also in 2016 Bank of South Pacific signed an agreement with Kumul Consolidated Holdings that would have the bank take over the operations of Pacific MMI. The venture would allow for the expansion of Pacific MMI into Fiji. However, by June 2017 the deal had not yet been completed.
Significant corporate activity could also be seen in the near future. It is expected that in the next few years the size of the sector will be reduced as weaker players leave the market. The OIC has confirmed that a few companies continue to hold back on providing current financials, adding that under the direction of a new commissioner it will be forging ahead with on-site inspections. Furthermore, it notes that insurers are still not enthusiastic about the efforts. “In the initial stages we were resisted by the industry,” Samuel told OBG. “They ask, ‘Why fix what’s not broken?’”
In addition to increasing transparency, the commission is continuing its work to prevent the loss of business to offshore providers. It says that while it will allow companies to sign contracts with foreign insurers, they need to follow procedures and go through the commission. The OIC slightly eased the policy on non-admitted products in 2014, simplifying the process, but in 2016 it issued a written warning on the matter after it found some companies going directly to other jurisdictions without taking the necessary steps. “We do allow them to go offshore, but first they must utilise the capacity of the domestic market,” Samuel told OBG. Ludwig Repo, the deputy insurance commissioner, added, “There are many fronting arrangements we need to look into.”
Building Networks, Improving Service
Insurers continue to invest in improvements and expansion during the slow period. MVIL has been particularly active. It has opened new offices in Madang, Kiunga, Tabubil, Minj, Tari, Kavieng, Popondetta, Buka, Lihir, Arawa, Wabag, Kerema and Lorengau, and is working to achieve claim turnaround times of three months as opposed to the required processing time of six months. MVIL is also training its staff so claims can be handled in all provinces. In late 2016 MVIL issued a dividend to its parent, Kumul Consolidated, of PGK35.4m ($11.2m).
The Pacific Financial Inclusion Programme, in conjunction with the EU and Australia, has partnered with BIMA to increase the company’s presence in rural markets. The programme supports the establishment of presences in Lae, Mount Hagen and Madang. It will also help in the provision of insurance education.
Not Too Risky
In some ways, PNG is a disaster-prone country, ranking 10th on the world risk index 2015 by United Nations University. It has a better risk rating than the Philippines, Brunei, Tonga, Vanuatu and Solomon Islands, but it is judged to be more at risk than Indonesia, East Timor and Fiji. Globally, PNG is ranked 6th in terms of earthquake hazard and, with a total of 16 active and 22 dormant volcanoes, it is first in terms of the number of people exposed to volcanic risk. In recent years the country has faced the El Niño climatic phenomenon (2015), floods (2015), a tropical cyclone (2014), heavy rains (2013), a landslide (2012), major flooding (2010) and a volcanic eruption (2010).
While natural disasters are quite common in PNG and actual damage caused can be significant, the damage is typically not very widespread. This is due in part to the fact that most of the population is rural and tends not to be concentrated in any particular area. Structures in the country also tend to be simple and cheap to replace.
In late 2016 the World Bank initiated the sixth round of the Pacific Catastrophic Risk Assessment and Financing Initiative (PCRAFI). An insurance company in support of the initiative was formed in 2016. Domiciled in the Cook Islands and called the PCRAFI Facility, it provides insurance support for catastrophic events. PNG, however, is not directly involved with the facility. Regional catastrophic insurance initiatives are programmes primarily designed for smaller island states and they do not have the capacity to help an economy the size of PNG’s in a meaningful way.
Outlook
Insurance in PNG appears to be on the verge of significant change. With a number of insurers predicted to leave the market in the next few years, it is possible that pricing will firm and the margins of some lines will improve. Retail will continue to be a challenge, and no big upswing in the mass market is expected, but growth is predicted in other areas. In the near to medium term, recrafting the regulatory framework is likely, with improvement to underlying legislation and a consolidation of authority. These moves are broadly supported and would help boost confidence and accelerate positive changes in competitive dynamics.
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