Robust growth draws in more competition and new regulations are in the works

While limited in size and reach, the insurance market in Papua New Guinea recorded double-digit growth in the five years to 2013. Driven by the non-life corporate segment, growth has attracted a number of new players. Although the market appears crowded for its size, underwriters have maintained profitability on the back of low loss ratios in key segments. Yet the market remains shy of its potential, with most larger mining and hydrocarbon risks insured offshore and low penetration for retail products.

As growth has slowed in line with the economy starting in late 2013, the non-life regulator is striving to retain a larger share of local risks in country. Striking a balance between supporting local insurers and allowing underwriters the freedom to tap into the increasingly competitive regional reinsurance market is a delicate process, however. As the life segment expands modestly, the superannuation (pension) sector is facing regulatory changes linked to corporate governance just as the slowing property market places funds under pressure. Consolidating growth and expanding penetration through new products such as microinsurance and agricultural cover will be key to creating the foundations for medium-term growth.

Limited Reach

Penetration remains very low in all three segments, highlighting the strong potential for growth. Non-life underwriters’ total assets reached PGK513.3m ($208.7m) by March 2013, equivalent to roughly 1.48% of GDP, according to data from the Bank of Papua New Guinea (BPNG), the central bank. This is behind the 4.3% penetration in Thailand, 4.1% in Malaysia, 3.89% in Fiji or 1.7% in Indonesia in 2012, according to KPMG. Insurance statistics do not reflect the sector’s recent growth, however. Given some underwriters’ slow reporting process, the non-life regulator, the Office of the Insurance Commissioner (OIC), an independent body reporting to the Ministry of Finance, produces statistics on average two to three years late, while the life and superannuation regulator, BPNG, provides more updated figures, albeit with no disaggregation between policy classes. Since 2011, however, BPNG has also produced more timely figures on non-life underwriters’ assets. The life segment remains smaller than in peer markets, given the segregation of the superannuation business. Life underwriters’ assets reached PGK467.5m ($190m), or 1.35% of GDP, in March 2013, while superannuation assets totalled PGK7.44bn ($3bn), or 21.5% of GDP, according to BPNG. The bulk of these assets stem from investment income rather than premium growth, with the International Finance Corporation (IFC) reporting total premiums of between PGK22m ($8.9m) and PGK25m ($10.2m) in 2012.

While still limited, gross non-life premiums have grown apace, rising 12.9% from PGK338.97m ($137.8m) in 2010 to PGK382.6m ($155.5m) in 2011, the latest period for which audited figures are available, a significant rise over the PGK274m ($111.4m) recorded in 2009. Growth in non-life, which averaged a compounded 12.3% annually in the five years to 2013, according to figures from Australian actuarial consultancy Finity Consulting, was spurred by growing disposable incomes amid construction of the liquefied natural gas (LNG) project, a rebound in automobile sales and a number of natural disasters that raised the sector’s profile.

Although aggregate premiums have grown, access remains highly constrained given low levels of disposable income – GDP per capita totalled around $2200 in 2013, according to figures from Standard & Poor’s – and corporate policies account for some 94% of nonlife premiums, as per estimates from Capital Insurance Group (CIG). BPNG reports less than 5% of PNG’s 7. 8mstrong population is covered by any form of insurance, even when including compulsory third-party motor liability and superannuation coverage for larger formal businesses. The IFC estimates around 5% of the country’s property market is insured.

Competition

Though limited in size, the market has welcomed a number of new players in recent years, testimony to the sector’s strong profitability. By 2014 the market hosted 14 licensed insurance underwriters, of which three composite underwriters write life policies and 10 operate only in non-life. Motor Vehicles Insurance Limited (MVIL), established in 1977 and held by state-owned Independent Public Business Corporation, also operates a monopoly in compulsory third-party motor liability (CTP), while the sole domestically incorporated reinsurer, Pacific Reinsurance (PacificRe), which is owned by the three major insurers, QBE, MVIL and American International Group (AIG), provides limited local reinsurance.

While market share data is distorted by the CTP covers underwritten by MVIL, accounting for 69.67% of net non-life premiums in 2011, according to OIC data, the market excluding CTPL premiums is dominated by a handful of players. The largest underwriter, the local subsidiary of Australia’s QBE Insurance, is the oldest insurer on the market, established in 1886 as North Queensland Insurance Company, controlling 30.91% of the non-CTP general market in 2011. Following approval from the Independent Consumer and Competition Commission (ICCC) in 2012, QBE acquired the PNG business of Japan’s Mitsui Sumitomo Insurance Group, which controlled 9.19% of the non-CTP market in 2011, at the start of 2013. This was its second acquisition after it bought Zurich’s PNG business in 2001. Consolidating the two businesses over the past year, QBE lost some of the Mitsui Sumitomo corporate business but retained most of the Japanese underwriter’s book.

The latest acquisition gave QBE a greater lead over its foreign-owned rivals, US-based AIG and New Zealand’s Tower Insurance, with 6.78% and 16.08% shares, respectively, of non-CTP general premiums in 2011. Like QBE, Tower has also grown through acquisitions since its first entry in 1980, buying out Southern Pacific Insurance, CIC Pacific Insurance and GPG Insurance, although it remains small and focused on the commercial market. The second-largest underwriter, Pacific MMI (PMMI) with a 25.45% share of the non-CTP market, has been wholly owned by MVIL since 2009, when the state-owned underwriter bought out the shares held by Germany’s Allianz.

While dominated by a handful of underwriters, the market has witnessed three new entrants since 2008. Century Insurance, owned by Hong Kong-based Tan Holdings, part of the Luen Thai International Group, was licensed in 2008 and ranks as the second-smallest insurer. Backed by finance company Credit Corporation, superannuation fund Nambawan Super, and the Teachers’ Savings and Loans Society, CIG was awarded two licences, for life and non-life, in 2009. The latest newcomer is locally owned Southern Cross Assurance, licensed since 2011. While this has added to the sector’s fragmentation, the new entrants have carved out niches for growth, although all underwriters have benefitted from rising premiums. “Given the rapid growth in premiums and despite a slight slowdown in 2013, underwriters will have to shore up their capital position,” Mark Hurst, actuary at Finity Consulting, told OBG.

CIG has established itself as the largest life underwriter just as Kwila shut operations, reducing the number of life insurance companies to three – CIG, PMMI and Life Insurance Corporation. Analysts see potential for sector consolidation given the growing number of players, but it is unclear whether local insurers have the appetite to buy out a player such as Tower Insurance, or would rather grow organically.

Non-Life Drivers

While competitive, the non-life market has benefitted from rising indirect investments associated with the PNG LNG project, though not the project itself. Indeed, although the 1995 (non-life) Insurance Act gives underwriters the right of first refusal for all risks in PNG, larger resource projects have also benefitted from exemptions. Twelve of ExxonMobil’s contractors on the LNG project were allowed to insure offshore out of more than 20 exemptions. Yet while the main projects were not covered domestically, underwriters saw significant rises in property/fire, contractors’ all-risk (CAR) and comprehensive motor premiums since 2009. Gross fire premiums grew 18.36% to PGK80.72m ($32.8m) in 2011, accounting for 21.1% of gross non-life premium, while comprehensive motor gross premiums grew 23.26% to PGK84.46m ($34.3m) in 2011, or 22.07% of non-life premium, according to OIC data. After several years of growth, CAR premiums dropped 27.11% to PGK11.32m ($4.6m) in 2011, or from 4.58% of non-life premiums in 2010 to 2.96%, given the slowdown in construction in 2011, before rebounding in 2012. The two compulsory insurance covers – CTP and workers’ compensation, offered by most underwriters and regulated by the Office of Workers’ Compensation – have continued to grow steadily, by 21.05% and 9.76%, respectively, in 2011.

Loss Ratios

Underwriting profit was supported by low and declining loss ratios until 2013, having rebounded from PGK36m ($14.6m) in 2009 and PGK18m ($7.3m) in 2010 to PGK93m ($37.8m) in 2011, according to Finity. The cost of claims has edged downwards from PGK77m ($31.3m) in 2009 and PGK92m ($37.4m) in 2010 to PGK60m ($24.4m) in 2011, according to OIC figures, with aggregate loss ratios of 42%, 44% and 24%, respectively. Indeed, even loss ratios on comprehensive motor, typically among the highest in peer markets such as Indonesia or Mongolia, remained a low 37.51% in 2011. Yet a series of losses in fire, marine and aviation in recent years spurred rising loss ratios in 2013 in these classes. “The benefit of a more benign period for natural catastrophes was partially offset by a higher frequency of large individual risk claims, mainly from the property and marine portfolios in Singapore and Papua New Guinea and largely emanating from risks that we have insured for many years,” notes QBE’s annual report for 2013. Incidents included a series of plane crashes in 2009-11 and the capsizing of the Queenin 2012, although marine loss was still outstanding in early 2014, as well as over seven fires in Lae in late 2013 and early 2014.

“While loss ratios remain quite low for many product classes, large losses for marine and fire have caused loss ratios to be high for some years. Some medical products have also had high loss ratios in recent years,” Finity’s Hurst told OBG. “Loss ratios for fire in particular have generally averaged around 30-40% over the long term, although there have been some very high loss ratios experienced in recent years (above 100%). This varies according to each company’s exposure to fire losses, however,” he added.

Rates for property (both policies exposed to catastrophes and those not) had already risen in the fourth quarter of 2013 by 5-15%, while general liability rates increased by 0-10%, according to underwriters’ estimates. All other rates remained stable, but marine cargo rates have dropped given the global nature of the container insurance market.

Life & Superannuation

The life segment has started to expand again after years of contraction from 2007 to 2011, but it remains less than a tenth of the size of non-life in terms of the value of premiums. As in Australia, the segregation of superannuation funds from life insurance is one reason for the segment’s small size. Anecdotal reports of non-life insurers writing life policies in contravention of the 2000 Life Insurance Act are another reason.

Group term-life policies and short-term investment products account for the majority of premiums, according to PwC, given the resilience of informal networks that pool resources within specific ethnic community for incidences like deaths. “Life insurance remains a very challenging market to break into given the traditional local system of wantoks[wherein housing is considered the property of the family or group],” Philip Tolley, managing director of CIG, told OBG.

PMMI has a micro-life product in 2013, aiming to drive retail policy volumes through a mobile platform (see analysis). Meanwhile, the government’s efforts to support local small and medium-sized enterprises (SMEs) are likely to lead to a growing demand for employee benefits, which could be bundled with credit to midsized firms (see Banking chapter).

Assets of the more sizeable superannuation industry, accounting for 22% of the financial sector, have grown much faster, rising from PGK5.263bn ($2.1bn) in 2009 to PGK7.44bn ($3bn) by March 2013, according to figures from BPNG. These private pension funds manage contributions from both formal-sector employers and staff, although smaller SMEs are exempt from the scheme. Seven funds are in existence, but the two largest funds dominate the market: Nambawan Super, covering civil servants and some private firms with 131,000 members and PGK4bn ($1.6bn) in assets by end-2013, and NASFUND, covering only the private sector with 173,000 members and assets of PGK3bn ($1.2bn). The other funds include one for the military, one for Ok Tedi staff and a fund managed by AON.

Much of the government coverage is legacy business, meaning that Nambawan has poor visibility on coming withdrawals. “Nambawan is making considerable strides in improving the data in relation to its members,” Michael Block, Nambawan Super’s chief investment officer, told OBG. “At this stage Nambawan has reliable information on around 60% of members.” Another challenge for Nambawan is the poor government contribution record. Although the government pays roughly PGK100m ($40.7m) in contribution arrears annually to cover members exiting the fund – and paid its 2013 contributions on time, according to the IMF – it still owes the superannuation fund some PGK1.9bn ($772.4m). Nambawan has proposed converting the debt into government inscribed stock, which would yield a single-digit rate of return. “Government arrears on superannuation contributions for public sector employees have grown by the same rate of return as Nambawan over the past 10 years, at 14.9% per annum,” Block told OBG. “We are hopeful that the state and Nambawan can come to an arrangement to reduce the liability that is in the best interests of members and the government: one possibility is for the state to offer government inscribed stock as part payment for the liability, thus reducing the cost of funding the liability.”

Distribution

Two main channels have long dominated insurance distribution, brokers and direct selling, as neither law on insurance recognises agents. “There is some agency distribution in PNG, but it is small, and they are engaged directly by the underwriters,” Salamo Elema, acting insurance commissioner, told OBG. While total premiums collected by brokers fell from PGK253m ($102.8m) in 2010 to PGK162.2m ($65.9m) in 2011, the channel continues to account for some 65% of non-life underwriters’ premium income, according to data from OIC. “There has been some growth in direct sales, but distribution is still dominated by brokers,” Finity’s Hurst told OBG. The market hosts six insurance brokers, of which four also sell life, and since 2013 one reinsurance broker. Five loss adjustors also compete on the market, according to Finity, although Crawford’s dominates. The largest player, Marsh, brokered PGK104.8m ($42.6m) in onshore premiums in 2011, having acquired Heath Lambert’s PNG operations in 2004, while the second-largest, locally owned Insurance Partners specialising in government business, intermediated PGK35m ($14.2m). AON ranks as third, writing PGK17.5m ($7.1m) in 2011, though its affiliate is also active in superannuation fund management. Locally owned players like Kanda International Insurance Brokers and Niugini Islands Insurance Brokers, the latest entrant licensed in 2011, are much smaller. With requirements of only PGK200,000 ($81,300) in capital, PGK50,000 ($20,325) in deposit to the OIC and professional indemnity cover of PGK5m ($2m), the barriers to entry are relatively low. Despite some forays into bancassurance, such as Tower’s selling through the ANZ network, the low level of retail policy sales has hindered development of this channel. The roll-out of the PMMI microinsurance product through Nationwide Microbank’s mobile banking platform has potential to drive retail sales through an innovative distribution channel (see analysis).

Oversight

Although structured along the old Australian regulatory model, PNG’s insurance laws appear increasingly dated as the OIC plans for an overhaul of the 1995 Insurance Act. The segregation of non-life from life and superannuation creates a two-tier regulatory structure, split between the OIC and BPNG, respectively. The ICCC also regulates CTP policies written by MVIL.

“The industry is expecting significant changes with the new Insurance Act, which has been with the government for the last three or four years and had consistent private sector input,” Tolley told OBG.

Capital requirements stand at PGK2m ($813,000) for non-life insurers and PGK4m ($1.6m) for life; life underwriters must also have an approved guarantee of PGK4m ($1.6m) and establish a statutory fund for policyholder assets. While the regulator implemented a risk-based capital (RBC) framework in 2009, the risk weightings per asset class remain looser than in Australia. Indeed, Finity’s Hurst argues that although PNG’s RBC is simple and calculates capital requirements according to the greatest risk faced by an underwriter, insurers are not expected to maintain a buffer above the minimum requirements and capital charge calculations do not take account of catastrophe exposure. With 16 active volcanoes in PNG, the most in the Southwest Pacific, according to the UN Office for the Coordination of Humanitarian Affairs, this is a significant gap.

Insurers’ auditors usually require an actuarial report of assets and liabilities as part of the audit – a boon to Australian-based Finity, which has provided actuarial services since 2004 to approximately 60% of insurers (foreign-owned underwriters tend to use actuaries from affiliated companies in other jurisdictions). The OIC can also require underwriters to produce financial condition reports from an actuary, as it has increasingly done over the past two years. “The OIC has increased their number of on-site visits and have asked a few underwriters to produce financial condition reports, which is encouraging,” Finity’s Hurst told OBG. “Generally, however, underwriters are given time to adjust their capital positions to comply with RBC rules.”

Insurers must reapply for their licence annually, and the OIC either renews the licence or withdraws it. Since 2010 the OIC has prepared an overhaul of the 1995 Insurance Act, receiving submissions from the industry in 2012. While the review is not expected to change RBC risk weightings, it is likely to strengthen sections 36 and 37 of the act, which require all risks domiciled in PNG to be placed with domestic insurers. It may also clarify rules for insurance intermediaries and distribution channels. “Our external consultant is finalising the report on the review of the Insurance Act following submissions from the industry in 2012,” Elema told OBG. “We hope to present a draft bill to Parliament in 2015.”

In the life and superannuation segments the regulator, BPNG, has focused on new prudential and governance standards by issuing new rules in November 2012. Aiming to improve the governance of superannuation trustees, the rules limit CEO terms to five years, board positions to nine years and the number of board positions per person to five, a majority of whom must be independent. BPNG also requires all superannuation funds to have boards of at least five directors, with the chief financial and investment officer positions mandatory, alongside quarterly reporting requirements. Although the new rules were to be implemented from January 2014, BPNG extended the deadline to 2015, recognising the limited pool of human resources for which funds and insurers would need to compete.

Circulars

Awaiting an overhaul to the non-life act, the insurance commissioner used two circulars in 2013 to refine the application of the existing law. The first, in June, reiterated the need to offer reinsured risk to PacificRe before being allowed to place it offshore. While the 1995 Insurance Act already required this, the circular allows PacificRe to take as much of the risk as it wants. The firm’s financial capacity is limited, however; its premium income from PNG underwriters rose from PGK6.43m ($2.6m) in 2010 to PGK7.46m ($3m) in 2011, according to OIC. While it is not rated by rating agencies like AMB est, usually a precondition for underwriters reinsuring risks, it would be capped at “B” under PNG’s sovereign rating ceiling.

A second circular in July required all offshore reinsurance – both facultative and treaty – to be placed through the sole reinsurance broker, GlobalRe. Licensed in July 2013, GlobalRe concluded strategic partnerships initially with Oxford Insurance Brokers and with Cooper Gay, two London-based brokers.

Although most global reinsurers, including MunichRe, SwissRe, CATLIN, KoreaRe, CathedralRe and the Lloyd’s market, handle at least some treaty and facultative reinsurance out of PNG, the new rules would require local underwriters to use GlobalRe’s broking services to access the global reinsurance market. The smallest insurer on the market, InsPac, was the first to face the new rules as its treaties came up for renewal in December 2013, prompting a judicial review of the case that was still ongoing in the first half of 2014.

Shallow Investments

PNG’s relatively shallow financial sector means investment options, particularly for life insurers and superannuation fund managers with longer-tenor liabilities, are constrained. Non-life insurers are limited to placing 15-25% of their assets in government securities, 0-15% in property and 55-65% in commercial bank term deposits. The illiquid nature of trading on the local stock exchange means non-life underwriters typically hold far less than the 15-25% cap on commercial equity ownership.

While non-life insurance firms are less reliant on investment yields for their profits – and life insurers have only limited assets to invest – superannuation funds, which invest through the three local investment managers (Pacwealth, BSP Capital and Kina Funds Management), have taken significant positions in the property market as well as offshore. As of March 2013 superannuation funds held most of their assets in listed and unlisted equity (PGK2.68bn, $1.1bn) and in non-financial assets (PGK1.22bn, $495.9m).

In light of slumping property prices in Port Moresby in particular, Nambawan reduced its exposure to local equity and property from 65% of assets to 60% in 2013, according to Block. The IMF noted that the two main superannuation funds are significantly more exposed to a downturn in the property market in its Article IV consultation published in December 2013. “Banks appear less exposed to the slowdown in the property market than superannuation funds, which may face write-downs on their commercial property exposure,” said Craig Michaels, S&P’s sovereign credit analyst for PNG. Yet while their property holdings are substantial, the ability to mark investments to market is impaired by the wide variations in property valuations on the market (see Real Estate chapter).

Still, NASFUND returned 11% to members’ accounts for 2013, up from 10% in 2012. “Superannuation funds have sought to diversify their assets including through foreign investment because of increased attention to risk in the property sector and the limited domestic market,” the IMF also noted in its December 2013 Article IV consultation. As superannuation funds pare down their exposure to property, their appetite for government debt is likely to increase and fill the gap posed by banks nearing their sovereign exposure limits. In a February 2014 sale of government inscribed stock, for example, Nambawan bought over 95% of the issue.

Outlook

A profitable industry with low loss ratios, despite the recent uptick in fire, PNG’s non-life market is witnessing growing competition at a time when the regulator is seeking to retain more risk domestically. Despite growth slowing down in 2014, underwriters still anticipate expansion in key policy classes due to rising vehicle sales, construction work as a result of government infrastructure investments and other business from state-owned enterprises. In life and superannuation, government efforts to promote indigenous SMEs should support expanding employee benefits and retirement savings products. Establishing and enforcing consistent rules will be key to support medium-term growth. Expanding penetration for individuals and businesses will be critical as well, in line with the state’s financial inclusion strategy. In the long run the risk of natural disasters is still a concern, with the Asian Development Bank forecasting losses linked to climate change-related disasters of as much as 15.2% of GDP by 2100.