Will reforms boost insurance penetration in Papua New Guinea?

Papua New Guinea’s insurance market is closely indexed to the country’s economy, which prior to the Covid-19 outbreak in early 2020 had been projected to grow at an average of 3% per year through to 2022. However, the pandemic effectively shuttered PNG for several months, and reduced global demand for the commodities that drive its export earnings. As a result, multiple agencies now forecast that the country’s real GDP will contract in 2020, although a return to growth is expected in 2021.

In response to the pandemic the government launched a PGK5.7bn ($1.7bn) stimulus package, with a focus on supporting the health and security sectors, and workers and businesses. The outcome of this initiative and the government’s wider efforts to protect citizens and the economy from Covid-19 will play a significant role in determining the future of the country’s insurance market. The sector’s future will also be contingent on the government’s ability to continue important financial sector reforms, as well as the level of demand for mega-project risk-mitigation services and insurers’ ability to pay out on pandemic-related claims.

Regulation & Oversight

The PNG Insurance Council, which represents insurance companies, brokers and loss adjusters, plays a vital role in guiding industry development. The central bank, Bank of PNG (BPNG), supervises the life insurance market, while the PNG Insurance Commission, under the Department of Treasury, regulates general insurance. This has resulted in difficulties determining which institution is responsible where insurers bundle together life and medical insurance, as well as regulatory issues for the three insurers that operate in both segments. As part of its Financial Sector Development Strategy 2018-30, BPNG has acknowledged that the separate regulation of life and general insurance is inefficient, and stated its intention to bring the supervision of general insurance companies under its own remit. This should result in stronger consumer protections for policyholders in line with ongoing efforts to improve legal and regulatory structures, which build upon a financial consumer protection diagnostic review undertaken by Australian Aid and the International Finance Corporation (IFC).

The life insurance market is governed by the Life Insurance Act of 2000, and general insurance is guided by the Insurance Act of 1995. Amendments to both laws have been tabled for several years but are understood to be a relatively low priority for the current administration, according to sector players.

PNG’s insurance sector is an admitted market, meaning that an attempt must be made to use domestic insurers before taking out policies from overseas. While in theory this protects the domestic industry, some firms – particularly larger companies and those operating within extractive industries – are permitted by the Office of the Insurance Commissioner (OIC) to use an overseas insurer if the cost of insuring in PNG is 17.5% higher. There are no limits on foreign investment in the sector, and numerous overseas insurers are active as investors, or indirect participants through reinsurance and brokerage.

Structure

As of August 2019 the domestic market comprised 13 general insurance companies – down from 14 in 2017 – as well as eight general insurance brokers, four life insurers and four life insurance brokers. However, given the economic effects of the Covid-19 pandemic, smaller local insurers with weak capitalisation may struggle to stay afloat in the current environment, while larger companies are likely to consider aggregation. Regional firms QBE Insurance and Capital Insurance Group (CIG) both command significant shares of the general insurance market. There are only a handful of companies that provide both general and life products, including CIG, National Teachers Insurance and Pacific MMI. In late 2019 South Korea-headquartered DB Insurance signalled its confidence in the potential of PNG’s insurance market by acquiring a subsidiary of Century Insurance Company (CIC) in PNG, as well as subsidiaries in Guam and Saipan.

Performance & Size

According to the most recent BPNG data, total financial industry assets reached PGK51bn ($15bn) in September 2018. Of this total, superannuation funds and life insurance assets represented 25.8%, or PGK13.2bn ($3.9bn), with superannuation funds accounting for the majority. According to ratings agency AM Best, gross written premium (GWP) in the life insurance sector amounted to $15m in 2019, while non-life GWP was recorded at $133m. This represented a 17.1% contraction in overall GWP compared to 2018. Although insurance industry exposure to Covid-19 still remains unclear, AM Best expects a rise in medical, personal accident, mortality, travel and business interruption claims in 2020. However, other segments are expected to be negatively affected by the crisis. “We have already seen a contraction in the discretionary home, contents and car insurance segments,” Jeremy Norton, general manager of Tower Insurance, told OBG. “As the economy tightens, these are the areas where households are likely to cut back.”

At the end of 2019 BPNG reported that life insurance assets reached PGK233.5m ($68.9m), up from PGK198.7m ($58.6m) the previous year, marking an increase of 17.5%. Foreign assets represented PGK18.5m ($5.5m) of this total, while liabilities excluding shares and other equity accounted for PGK133.1m ($39.3m), of which PGK99.3m ($29.3m) were net technical reserves. Assets of life insurance brokers amounted to PGK118.9m ($35.1m), and their liabilities totalled PGK71.5m ($21.1m). General insurance assets totalled PGK595.1m ($175.5m), a 1.4% increase from PGK586.9m ($173.1m) in 2018. Foreign assets accounted for PGK3m ($884,800), and liabilities excluding shares and other equity amounted to PGK313.1m ($92.3m), of which PGK237.3m ($70m) were net technical reserves.

As the OIC does not issue statistics, estimates of the share of premium held onshore and offshore vary. Some predictions suggest that the value of premium placed onshore has grown in recent years, pointing towards a more level playing field, but regional insurers are still often disinclined to insure in PNG due to a perceived higher risk of doing business in the country and the rising global costs of reinsuring against those risks.

Premium is high in PNG due to the number of risks and the difficulty of assessing them, and a crowded market seeking to serve the limited number of citizens in formal employment. Some brokers face issues finding local insurers with whom to place their business, particularly for insuring high-risk resource projects. From the client perspective, placing offshore ensures that claims will be paid in US dollars, a currency often in short supply (see Economy chapter).

Growth Potential

Looking ahead, opportunities are dependent on the government’s ability to successfully negotiate a series of large-scale resource projects, which have the potential to boost the economy and drive demand for both commercial and consumer insurance. The proposals include a $13bn investment by ExxonMobil and Total to double PNG’s liquefied natural gas exports, and a multibillion-dollar investment by Harmony Gold and Newcrest Mining in the Wafi-Golpu gold-copper mine, as well as Twinza Oil’s development of the Pasca A offshore gas reserve (see Energy and Mining chapters).

Areas that typically require coverage in extractive projects include plant, machinery and workers’ compensation, and employee life and medical cover – all of which can generally be covered by local insurers. Meanwhile, investments required for the projects themselves are insured, and reinsured, offshore.

Under the World Bank’s PNG Country Partnership Framework 2019-23, the Multilateral Investment Guarantee Agency (MIGA) is working alongside the IFC to assess the possibility of supporting private sector investment in hydropower and gas-to-power facilities in the Highlands Region. Such projects come with high risks, and are therefore likely to require risk-sharing instruments such as MIGA’s guarantee facility to attract private investment.

MIGA’s role in facilitating the initial development of the Lihir gold mine illustrates how the agency’s involvement could provide opportunities for international insurers. In 1996 MIGA issued $10m in coverage to UK-Australian company RTZ Overseas Holdings, now known as Rio Tinto Overseas Holdings, for a portion of its equity investment in the mine. The agency also issued $66.6m in coverage to a syndicate represented by Union Bank of Switzerland (UBS) for a $300m loan to the project. This was reinsured by Export Development Canada for $26.6m and co-insured with Australia’s Export Finance and Insurance Corporation, with MIGA’s guarantees covering RTZ’s investment against risks relating to currency transfer, expropriation, and war and civil disturbance. Looking ahead, similar arrangements may once again convince investors that their interests in PNG are secure.

In addition to large-scale extractive projects, a survey conducted by the UN Pacific Financial Inclusion Programme in 2019 found that insurers in the region see the greatest growth potential for growth within the small and medium-sized enterprise market, as well as the country’s expanding middle class. However, a lack of awareness among business owners has limited progress to some extent. With this in mind, the government launched a nationwide campaign in June 2020 to increase insurance uptake, as part of the Financial Inclusion Strategy 2016-20. Media company Pidgin Production plans to coordinate a four-month multimedia campaign to educate the public about insurance products, backed by the Centre for Excellence in Financial Inclusion, industry partners and the Insurance Council.

Life Segment

The vast majority of Papua New Guineans rely on the wantok system, the traditional pooling of community resources for mutual assistance, as a form of social protection. For example, if the head of a family dies or children are left as orphans, the wantok community will step in to provide an informal social safety net to ensure families are cared for by sharing money, food, housing and other resources. The prevalence of the wantok system, combined with limited financial literacy, particularly in rural areas, remains a barrier to the understanding of risk mitigation through insurance.

In the absence of a formal social security system, employees must contribute to one of four superannuation funds: Aon Master Trust PNG, the Defence Force Retirement Benefit Fund, Nambawan Super or the National Superannuation Fund. Contributions are remitted by employers at a rate of 6% for employee contributions after tax and 8.4% for employer contributions before tax. Distributions are currently available as a lump sum on retirement, but the option to pay out in instalments was outlined as a point for discussion in BPNG’s 2018-30 roadmap.

Another possible move outlined in the development strategy is the provision of protection for dependents during the member’s working life, by enabling or requiring life insurance to be included as part of the superannuation product, potentially on an opt-out basis. A task force is being established to investigate this option, and is scheduled to report to the minister for treasury by the end of 2020. As part of the Covid-19 stimulus package, the government also announced that it would offer PGK500m ($147.5m) in support from superannuation savings to employees affected by the economic slowdown.

The life insurance penetration rate stands at around 3%, according to BPNG, but the launch of new services signals the potential to increase uptake. In January 2020 BSP Life PNG, part of Bank South Pacific Group, launched Wantok Delite, an endowment product with policy terms of 15, 18, 21 or 24 years. Premium will be invested in various assets with an annual bonus indexed to the policy based on asset performance. The policy is aimed at job starters and small business owners, who can add policy benefits such as term-life protection, accidental death cover and permanent disability insurance. Wantok Delite complements BSP Life’s existing consumer credit and group term-life insurance products. The latter aims to encourage companies to offer employees life cover. Nilson Singh, country manager for BSP Life PNG, told local media in January 2020 that, since its launch in 2018, the insurer had paid out 200 claims totalling PGK3.5m ($1m). Of this total, repayment of outstanding loan balances accounted for PGK2.5m ($737,300), and funeral benefits represented the remaining PGK1m ($294,900).

Despite recent efforts to increase insurance uptake, the market was heavily impacted by the exit of micro-insurance firm BIMA in mid-2019 after a wave of false claims were made, forcing the company to leave PNG. Previously, BIMA had offered family life and hospital cover through Capital Life Insurance (CLI), part of CIG, via mobile phone, in partnership with Jamaica-headquartered telecoms services provider Digicel. AM Best also reduced the financial strength and credit ratings for CLI as a result, but the player has since restructured.

General Insurance

Following the recommendations of an inquiry into misconduct in the banking, superannuation and financial services industries conducted by the Australian Royal Commission, some PNG banks have stopped accepting commissions on the mandatory insurance of motor and property loans. The motor insurance market accounts for the majority of corporate assets and insurance, largely because there are several barriers to property insurance uptake. The motor segment is relatively stable and driven by loss experience, but premium is high due to high vehicle and auto parts costs, poor road conditions and a lack of safety training.

Property insurance in PNG is limited as companies rarely own their own their own real estate and premium is extremely high as a result of various risks, particularly fire hazards. Insurers often seek to reduce property and home contents premium by overseeing the installation of security and sprinkler systems, and checking the distance between properties in compounds. Managing these risks is a test for insurers that demands strong risk management and technical knowledge. Some companies choose to cut the cost of their premium by foregoing coverage against key potential risks, such as natural disasters.

Worker compensation is compulsory by law and covers full medical costs, but it does not include auxiliary benefits. Alternative placement structures, such as claims-adjusted programmes, are available for major commercial clients. It is unlikely that the Covid-19 pandemic will trigger a wave of workplace compensation claims – even if cases were to rise above the 63 confirmed as of late July 2020 – as it may be challenging to prove that employment caused infection, except potentially in medical settings.

Medical 

Despite advances made by BIMA in the provision of term-life and medical micro-insurance, with more than 500,000 policies issued across both segments before it exited the market, medical insurance penetration remains weak. Most policies exclude pandemics, making it unlikely that Covid-19 will have a direct impact on the number of claims. However, in response to the crisis, several workers unions – including those representing nurses and employees of the state-owned utility company PNG Power – petitioned the government in early 2020 to ensure that they have adequate medical coverage to continue working in essential roles. Private medical cover is also available. This includes Trans Pacific Insurance’s Hausik Moni benefit, which provides policyholders with PGK200 ($59) per day of their stay in hospital, beginning on the second night. However, affordabilty issues have meant that uptake is limited.

Distribution

Agency distribution is limited and agents tend to engage directly with underwriters. Broadly, brokers and direct selling dominate the market, but digital distribution continues to expand. For those not directly exposed to the insurance market, trust in the broker is paramount, and many clients choose to follow their brokers if they move firms. Established brokers include AON Risk Services, Asia Pacific Insurance Brokers, Kanda International and Marsh. As PNG’s insurance sector matures, market participants are increasingly investing in digital solutions. In mid-2019 BSP Life introduced a new online administration system designed to simplify policy applications through automatic assessments and pricing, automated billing, and digital claims and commissions processing. Insurers in the Pacific are also successfully conducting national and regional business online as a result of movement restrictions imposed after the outbreak of Covid-19.

Reinsurance 

Pacific Re remains the only reinsurer based in PNG, and the majority of reinsurance contracts are handled by offshore insurers through onshore brokerages. As awareness of the risks of climate change continues to grow, and claims from related natural disasters become more common, the reinsurance market is hardening amid resistance to extend coverage to the country’s most disaster-prone regions, such as Lae and East New Britain.

“Reinsurance is the main input cost for insurers, as it provides the capital used to package and supply products to the domestic market,” David Lee, CEO of CIG, told OBG. He added that the rising cost of reinsurance is beginning to impact domestic insurance premium, and might also have an effect on profitability and penetration rates. Indeed, access to sustainable reinsurance is viewed by some industry stakeholders as the largest constraint to the development of PNG’s insurance sector.

Disaster Relief

According to the Global Facility for Disaster Reduction and Relief, PNG has the highest percentage of people exposed to volcanic risk in the world and is in the top six in terms of percentage of the population exposed to earthquakes. The risks of insuring against natural disasters are consequently considered too great for the private sector or the government to bear, and while PNG has explored a number of multilateral efforts to offer protection, it has yet to sign up to a significant scheme. Such relief funds do exist in the region, notably the World Bank’s Pacific Catastrophe Risk Assessment and Financing Initiative. The programme has been in operation since 2007 and paid out $4.5m to Tonga in May 2020 to support recovery efforts after Tropical Cyclone Harold. While the segment is still in its early stages, parametric insurance is being explored as a means of covering large entities such as government agencies, NGOs, landowner associations and church groups.

Outlook

PNG’s insurance market faces an uncertain future. The impact of Covid-19 may pose a substantial challenge to the country’s health system and economy in the global recovery period – especially with the sudden increase in recorded cases towards the end of July – with repercussions for insurers. However, if PNG can continue to keep the infection rate under control, the economic pressures caused by the crisis may result in healthy restructuring of the industry, particularly as measures to reduce transmission drive the uptake of digital insurance services.