On the challenges to and opportunities in boosting the penetration rate
How does the insurance sector in Papua New Guinea differ from other countries in the region?
DAVID LEE: First and foremost, PNG is very rich in natural resources; however, the wider economy is underdeveloped and is therefore subject to boom-and-bust cycles. The influx of ancillary services to PNG’s energy sector generates opportunities for insurance, even though the mega-investments required for such projects are usually insured offshore due to local capacity constraints. Nevertheless, typical inputs that require coverage in support of major projects include plant, machinery, workers’ compensation and employee life and medical, all of which can generally be covered by local capacity. The large PNG LNG project, which came on-stream in 2014, jumpstarted a host of activity and opportunities for the insurance sector. Although the economy is currently showing few signs of growth, the market is looking forward to the next wave of investments.
Second, PNG is a very diverse country in terms of terrain – which makes accessibility an issue – as well as in culture, with many different customs and languages. Customers, brokers and insurers have diverse backgrounds, and not everybody speaks Pisin or Motu – let alone English. This poses challenges in communication at all stages.
A final standout characteristic of PNG is that it has two industry regulators: the Bank of PNG, which covers life insurance; and the Office of Insurance Commission, which covers non-life. This is an unusual system and poses challenges around approach and interpretation, particularly for the three insurers in the country that are dual providers.
Which international developments have had the greatest impact on the local insurance sector?
LEE: The impact of Australia’s Royal Commission on the regulatory environment in PNG and the Pacific is well known, and its policies will affect certain arrangements between overseas brokers and local insurers, as single-insurer schemes, commission rates and profit-sharing arrangements come under scrutiny.
In addition, due in part to high financial losses resulting from natural catastrophes, the global reinsurance industry is hardening. Reinsurance is the main input cost for insurance companies, as it provides the capital used to package and supply products to the domestic market. However, the cost of reinsurance is starting to climb, which is already having an impact on domestic insurance premium. This trend might affect insurer profitability and penetration rates – or both – and will depend on how insurance companies, brokers and clients work together. Communication with brokers is vital, especially as the added value of brokers comes from the advisory role they play to the client.
PNG is a small premium pool with high risk, so reinsurers are already cautious about providing capacity here. Underwriting discipline and risk management will be key going forward. A shift in culture towards real risk management will allow insurers to retain reinsurance support and is in all stakeholders’ best interest. Small investments can have big effects here, so it is important to understand the common risks and then try to manage them appropriately.
What would you identify as key opportunities to increase penetration rates?
LEE: With some 10m people in the country and low penetration rates, the opportunities are considerable but entail complex challenges that will require a concerted effort by the industry, the government and other stakeholders. There is consistent demand for medical insurance and coverage against other fundamental risks that insurers provide. However, growth is relatively flat due to the sluggish economy, which will continue until activity picks up again.
PNG is geographically challenged and inherently high risk. Therefore, while more than 80% of the population live outside the main cities and insurance penetration is low, which provides ample opportunity, few insurance companies are eager to increase activity in the rural or informal segment.
However, there are opportunities to form partnerships with other stakeholders and digital technologies can offer solutions for rural areas. With the rising prevalence of electricity and internet access, more people are being included in the financial and insurance segments. Although BIMA’s exit from PNG was damaging, I am optimistic that scalable, accessible and sustainable micro-insurance platforms can be developed here. Awareness, however, is key, and it remains very low. There needs to be a clear understanding in the community of the benefits of insurance. The insurance industry, through the PNG Insurance Council, must take a leading role alongside government to increase awareness in both rural and urban areas so that more families and communities can benefit from product innovation.