The insurance industry of Papua New Guinea holds considerable potential for long-term growth, although insurers and brokers face notable challenges, including a lack of enforcement and compliance regarding financial reporting requirements, limited domestic reinsurance capacity, and the frequent offshoring of major accounts and business.
Despite being a country that is susceptible to an array of natural disasters, there continues to be limited insurance awareness and penetration. There is, therefore, significant potential for future growth, particularly in the micro-insurance segment, which expanded rapidly between 2014 and 2018 to become a major industry growth driver.
Ongoing reforms aimed at improving financial reporting and corporate governance should also help support expansion in 2018, with both life and non-life segments set to be impacted by the recent Financial Services Sector Review (FSSR) that was completed by a technical working group comprising staff from the Department of Treasury and the central bank, the Bank of PNG (BPNG), with technical support provided by the World Bank.
Sector Rules
PNG’s insurance sector is overseen by two regulators: the Office of the Insurance Commissioner (OIC), which is responsible for non-life insurance activities; and the BPNG, which oversees life activities. Third-party liability vehicle insurance was made mandatory in 1974, while the Life Insurance Act 2000 mandates that insurance contracts extend beyond one year in order to be considered a life product. Superannuation funds are the most common form of social security in PNG, and any company with more than 20 workers must offer coverage under a superannuation scheme. This product is increasing in importance as life expectancy is rising as a result of better health care services and awareness. Under the Insurance Act of 1995, the OIC administers general insurers, reinsurers, brokers and loss adjusters, and is overseen by the Department of Treasury. The BPNG administers the Life Insurance Act of 2000, issuing licences to life insurance firms and brokers. All insurers, reinsurers, agents, brokers and loss adjusters must be authorised to operate in PNG, and licences must be renewed annually. OIC activities are funded by a 1% levy charged on all premium income, while life insurers pay an annual licence fee. All insurers in the country must be locally incorporated, apart from those licensed as overseas branches under now-amended legislation. All foreign insurers must be authorised to conduct business under the Investment Promotion Act of 1992, but London-based global law firm Norton Rose Fulbright reports that there are no further restrictions on foreign direct investment in the sector. BPNG regulations state that no entity can become a shareholder controller or an indirect shareholder controller of a life insurance provider without BPNG approval. The bank defines a shareholder controller as any individual owning more than a 15% stake in a licensed firm.
Market Movements
PNG’s insurance sector is composed of 12 general insurers; four life insurers; one company offering both products, the state-owned Pacific MMI; and one reinsurer, Pacific Re, which launched operations in 1997. The general insurance segment is dominated by subsidiaries and branches of foreign-owned insurance companies, including QBE Insurance and Tower Insurance.
Previously, there were 14 general insurance companies active in the market, but in November 2017 OIC authorities filed an application to liquidate Pacific Assurance Group due to solvency issues. The company’s major clients and creditors included City Pharmacy, PNG Namba Wan Trophy and the Pacific International Hospital in Port Moresby. Local media reported that the liquidation application came after each of these companies petitioned the OIC to assist in the settlement of outstanding policyholder claims.
In the life segment, Bank South Pacific (BSP) announced in February 2018 that the BPNG officially granted approval for the creation of a new life insurance company operating under the BSP umbrella, BSP Life. The unit had already been offering consumer credit insurance following conditional approval from the BPNG to operate in November 2017. The bank will now also offer mortgage and group term life insurance products.
The insurance industry as a whole had PGK1.2bn ($374.6m) of assets and PGK597.3m ($186.5m) of liabilities in 2016, for PGK618.1m ($193m) of net assets. According to OIC figures, 2016 was a profitable year for PNG insurers, with PGK144.8m ($45.2m) of income against PGK44m ($13.7m) in expenses. The industry paid PGK13.9m ($4.3m) in taxes and recorded PGK87m ($27.2m) in profits after tax.
General Insurance
General, or non-life, insurance continues to dominate the insurance industry, and the segment’s gross written premium (GWP) stood at PGK417m ($130.2m) in 2016. Earned premium, meanwhile, totalled PGK327.6m ($102.3m), or 78.5% of GWP, according to reporting from the OIC. Gross claims stood at PGK157.9m ($49.3m) in the same year, with claims recoveries amounting to PGK55.4m ($17.3m), or 33.2% of total claims.
Total claims incurred amounted to PGK112.6m ($35.2m), or 71.3% of gross claims. Underwriting expenses included PGK47m ($14.7m) of net commissions, PGK47.4m ($14.8m) of management expenses and PGK75.7m ($23.6m) of other expenses, for an underwriting surplus of PGK44.9m ($14m).
Data from the OIC shows that growth in the general insurance industry has fluctuated in recent years, with total assets falling from PGK979.4m ($305.8m) in 2013 to PGK963.3m ($300.7m) in 2014, before recovering to PGK964.6m ($301.1m) in 2015 and reaching a five-year high of PGK989.5m ($311.7m) in 2016. In 2017 assets moderated to PGK986.4m ($307.9m). According to the OIC, GWP in the non-life segment stood at PGK416.1m ($129.9m) in 2016, of which PGK4.4m ($1.4m) was ceded to domestic reinsurance and PGK101.5m ($31.7m) to reinsurers outside of the country. Reinsurance claims were valued at PGK909,800 ($384,000), for PGK311.2m ($97.2m) of net premium income. Earned premium, or net premium income with premium provisioning expenses, stood at PGK327.6m ($102.3m) in 2016.
“The general insurance industry has recorded steady growth over the past four years, but it is unclear whether this is as a result of real business growth or inflation. Reinsurance costs are also passed on to policyholders here, which is a supportive factor for premium growth,” Raho Samuel, the acting insurance commissioner for PNG, told OBG.
OIC data shows that fire insurance accounts for the largest share of GWP in the non-life segment, with PGK99.8m ($31.2m) of GWP recorded in 2016, the most recent year for which statistics are available. Fire is followed by compulsory third-party liability vehicle insurance, at PGK83.5m ($26.1m); comprehensive motor insurance, at PGK71.5m ($22.3m); accident insurance, at PGK41.1m ($12.8m); and worker’s compensation, at PKG31.6m ($9.9m).
Life Insurance
The life insurance industry is less developed, with penetration at 2-5% of GDP. At the end of 2017 the BPNG reported the life insurance industry was valued at PGK500m ($156.1m). However, life insurance assets have grown since 2013, rising from PGK463.7m ($144.8m) to PGK473.1m ($147.7m) in 2014, moderating to PGK419.7m ($131.1m) in 2015 and PGK388.1m ($121.2m) in 2016, before recovering to PGK513.6m ($160.3m) in 2017.
INSURERS & BROKERS: Brokers also recorded a profit in 2016, with the OIC reporting that total onshore premium stood at PGK170m ($53.1m), against PGK864,200 ($270,000) of offshore premium. Total broker income reached PGK211.7m ($66.1m) in 2016, with onshore brokers recording PGK50.9m ($15.9m) of net profits, against PGK1.2m ($374,600) of net offshore profits. Life insurance brokers in particular have recorded strong growth, albeit from a low base. BPNG data show assets rising from PGK66m ($20.6m) in 2013 to PGK67m ($20.9m) in 2014 and PGK80m ($25m) in 2015, before moderating to PGK69.7m ($21.1m) in 2016 and reaching a five-year high of PGK86.1m ($26.9m) in 2017.
Risk & Capital
Although minimum capital requirements are set at PGK2m ($624,300) for general insurers and PGK4m ($1.2m) for life insurers, the BPNG may decide to apply a requirement that life insurers hold an approved guarantee of at least PGK4m ($1.2m). In addition, life insurers must establish a statutory fund for all policyholder assets, with separate funds for PNG policies and offshore policies.
Since 2008 general insurers have been required to follow the Australian Prudential Regulation Authority’s risk-based model, in which minimum capital requirements are equivalent to combined liability risk, asset risk and excessive exposure risk capital charges. Life insurers are also subject to a risk-based capital regime. Policyholder protection is provided in the form of solvency and capital adequacy requirements, although there are no separate policyholder protection funds in the general insurance business. Life insurance policyholders can benefit from a statutory fund that gives priority to policyholders, with restrictions on expenditure and liabilities.
Reform Agenda
Reforms to corporate governance and financial reporting standards could be forthcoming over the short to medium term, as a result of the FSSR. Current challenges include the limited availability of data, which is often the result of companies failing to submit financial results to the OIC within the specified timeframe.
“One of the issues we’re working on in 2018, as part of the FSSR, is the recent financial review of the insurance sector. The review’s three priority issues for insurance were asset liability, risk and exposure, and we anticipate that any reforms that result will directly affect the industry here,” Samuel told OBG.
Reforms could also be coming to the life insurance segment. In February 2018 national media reported that PNG’s National Executive Council received an application for a review of life insurance and superannuation regulations, with Ellison Pidik, assistant governor of the financial system stability group at the BPNG, telling media that a review would ensure policies are up-to-date and properly regulated.
Under the purview of the FSSR, the Department of Treasury requested a task force be established to examine industry stumbling blocks and areas for potential reform, including superannuation regulations that have been the focus of some criticism.
“We haven’t heard too much about legislative changes yet, but we feel it is time,” Rajeev Sharma, CFO of the National Superannuation Fund, told OBG. “A key change would be to regulations regarding fund withdrawal. Under current regulations, anyone who has been unemployed for over three months can make a partial withdrawal and anyone who has been unemployed for a year may withdraw all of their contributions. This is not superannuation, but a glorified bank account.” Other private players have also called for further regulatory intervention. “Although the regulator is positive, using their powers more now than in the past in terms of auditing, there are no real changes in terms of new legislation. However, the Insurance Act is currently under review,” Matthew Kearns, general manager at QBE Insurance, PNG’s oldest non-life company, established in 1899, told OBG.
Local Support
Under section 36 of the Insurance Act, all risks underwritten in PNG must be insured by PNG-licensed insurers, and the OIC holds Life insurance policyholders benefit from a statutory fund that gives priority to policyholders discretionary power to grant exemptions on foreign insurance and reinsurance, in the event that domestic insurers’ premium are 17.5% or higher than those on offer outside of PNG. Each company active in the market must sign an exemption document provided by the OIC, indicating that they are unable to cover the risk under these conditions. Approval of all insurance providers is meant to be mandatory before an exemption is granted, although some companies have reported that this has not always been the case with select accounts. “Most insurers will look at some risks and grant an exemption immediately because they cannot or will not underwrite the risk, but there are other risks that they can and want to underwrite, such as state-owned enterprise PNG Power, which have been allowed to be placed offshore when the local market could have underwritten them,” Ian Balfour, CEO of locally owned Inspac, told OBG.
The most recent OIC data shows the industry’s reinsurance cession rate was 25.4% in 2016, with PGK105.8m ($33m) out of a combined PGK417m ($130.2m) of GWP ceded to reinsurance. Of the total, PGK101.5m ($31.7m) was ceded to offshore reinsurers and PGK4.4m ($1.4m) to domestic reinsurers. “We have been pushing for training and exposure to international best practices, because insurance is an international business and it keeps getting offloaded offshore. Every good account in PNG goes offshore, but we believe local skills development could change the situation,” Samuel told OBG. Legal analysts at Norton Rose Fulbright attribute the continued offshoring to issues that arise due to the limited capacity of PNG’s onshore reinsurance market. The country’s sole reinsurer reported a significant loss in 2016; OIC data show that earned premium in the reinsurance segment were PGK961,655 ($300,200) in 2016, against PGK4.3m ($1.3m) of claims incurred, and PGK4m ($1.2m) of underwriting expenses, for an underwriting deficit of PGK7.3m ($2.3m).
Micro-insurance
In a 2017 Euromoney report on micro-insurance growth in emerging markets, Swedish micro-insurance provider Bima – which is underwritten by PNG’s Capital Insurance Group – is presented as a case study worthy of consideration. In 2010 the company noticed an increase in mobile penetration in Ghana and developed a paperless application procedure using mobile phones. The platform was deployed to sell life, personal accident and hospital insurance, and required only basic information be provided. Claims payments averaged $2000, and policyholders were charged as little as $0.04 per day using mobile phone credit. Targeting the lower-income mass market through partnerships with mobile operators proved to be a winning strategy for Bima, which began operating in PNG in 2014.
In March 2016 the company partnered with telecoms operator Digicel to offer hospital cover and family life insurance to underserved customers in PNG between 18 and 60 years of age. As in other markets, policyholders do not need to use paper forms, undergo preliminary checks or meet any formal employment requirements. Premium are paid via pre-paid mobile credit. According to the same report, Bima has become the largest insurance provider in the country as a result, and the total number of people with coverage rose by 266% to reach 380,000 as of September 2017, with insurance penetration rising as high as 25% of the population in some urban areas.
Outlook
Although the insurance industry will continue to feel the impact of subdued macroeconomic growth and frequent offshoring and foreign exchange challenges, there continues to be considerable potential for growth. The improved deployment and uptake of micro-insurance products is likely to see penetration rise in the coming years, while the FSSR is positioned to support reforms to improve solvency, risk management and corporate governance, helping the insurance industry to expand and mature.
Read More from OBG
