Working to extend insurance to PNG's general populace

Due to several factors, Papua New Guinea is one of the least insured countries in the world. It is estimated that premiums comprise just 1.4% of GDP, according to the Pacific Financial Inclusion Programme (PFIP). Other regional competitors and peers have significantly higher rates. The PFIP puts Fiji, for example, at 3.6%. Swiss Re, which does not publish data on PNG, places Indonesia’s insurance penetration rate at 2.1%, Malaysia’s at 4.0%, Thailand’s at 5.5% and Australia’s at 5.2%. PNG is better insured than just a few of the more remote and underdeveloped economies globally. Mongolia’s rate is estimated to be 0.54%, while Kazakhstan’s is 0.8%.

The low take-up of insurance is not, in this case, the result of a lack of experience. PNG has had an insurance sector for more than a century and it was once administered by Australia, an historically insurance-conscious society. The problem is more the result of geography, topography and income. Per capita GDP is just over $2000, and the population is spread out over a sprawling, rugged archipelago. Furthermore, many of PNG’s people are illiterate or speak only a local language, and less than 20% of the population is banked. Thus, insurance has been difficult to sell. Awareness is very low or, in some corners of the country, non-existent.

“People have only a vague idea of what insurance is,” said Simon Schwall, country manager at Bima, a global micro-insurance provider. Family tradition also plays a role in limiting uptake.

“One of the biggest obstacles to the growth of the insurance industry in PNG continues to be the tok system,” Ian Balfor, CEO of INSPAC, told OBG.

Under this system, people rely on their extended family members as a safety net in case of trouble instead of transferring the balance sheet liabilities of their risks to professional underwriters.

The economics of the country certainly weigh on the sector. While GDP has been grown rapidly in recent years, serious concerns about stability and sustainability remain and these feed through to the overall development of the insurance sector. According to the ratings agency AM Best, PNG is in the highest-risk category, “Country Risk Tier 5”, due to “unpredictable and opaque political, legal and business environment with limited or non-existent capital markets; low human development and social instability; nascent insurance industry”.

Open Market

Despite its many challenges, the PNG insurance market is healthy and competitive. The country has a total of 14 insurance companies (though some licences are composite and some are inactive). Most lines of coverage have significant participation and good pricing, according to a report by the consultancy Mercer, and the market is open, free and fair. PNG has no limits on foreign investment in the sector, and foreign insurers are active as investors and as indirect participants through reinsurance and brokerage.

As with all foreign activity in the country, international firms participating in the insurance sector are required to register with and receive approval from the Investment Promotion Authority (IPA). Life insurers must be locally incorporated, but general insurers can incorporate as PNG companies or they may operate as branches. Acquisitions, regardless of the nationality of the acquirer, must also receive certain permissions. Anyone buying more than 15% of an insurance company must gain the approval of the regulator before crossing that threshold. The Office of Insurance Commissioner, which is under the Department of Treasury, regulates non-life insurance, while life insurance is regulated by the Bank of PNG. The Insurance Act 1995 is the governing legislation for the non-life sector, while life is covered by the Life Insurance Act 2000.

The Insurance Act requires both general insurers and brokers to pay a levy to the Insurance Commissioner’s Fund (which is capped at 1% of total premiums), but this requirement does not apply to life insurance companies. Minimum capital is set at PGK2m ($756,800) for general insurers and PGK4m ($1.5m) for life insurers. Risk-based capital requirements have also been instituted.

Market Makeup

QBE Insurance has been active in PNG since 1899. The company has since acquired: Mitsui Sumitomo PNG in 2014 (increasing its market share by about 10 percentage points to 30% of non-compulsory coverage); Zurich Pacific Insurance Company’s PNG business in 2001; and the portfolio of General Accident Insurance in 1998. The company writes a wide range of business, from marine to workers’ compensation, and currently has offices in Port Moresby, Kokopo and Lae.

Pacific MMI, the next largest company (which holds about a quarter of the non-compulsory market) in the sector, was founded in 1998 as a joint venture between Motor Vehicle Insurance Limited (MVIL), the government-owned provider of compulsory third-party vehicle liability insurance, and Allianz New Zealand. After formation, it took over the insurance portfolio of Niugini Insurance Corporation. In 2009 MVIL then took control of Pacific MMI, leaving that company as a 100% locally owned entity.

The company, which still maintains its connection to the Allianz group, offers life and non-life covers, and it also sells a micro-insurance product through Nationwide Microfinance. MiLife, as the products are branded, is marketed in tandem with the bank’s MiCash accounts and provides life coverage for account-holders and families. The cost of opening an account and for one year of coverage is PGK55 ($21) and the payout is PGK5000 ($1892). Two additional major insurers, AIG and Tower Insurance, together share about 20% of the market.

Southern Cross Insurance entered the market in 2011 and started offering products in October of that year. The company was founded by two Papua New Guinean businesspeople, one with a background in resources and another having come from a career in insurance. The company currently writes cover for property, motor, workers’ compensation, liability, marine and medical. Other insurers in the country include Croesus, Inspac Wealth, Life Insurance Corporation and Century Insurance.

Innovative Offerings

To better compete, firms are using new angles to reach customers. For example, Capital Life Insurance, Capital General and their parent, Capital Insurance Group, are owned by four local financial institutions: the Teachers Savings & Loan Society, Nambawan Super, Credit Corporation and Nasfund. Capital General offers home, motor and marine insurance and workers’ compensation.

The group has developed some innovative local offerings. In 2013, for example, Capital Life started selling a workers’ compensation policy with an attractive add-on. The haus krai policy pays an extra PGK5000 ($1892) or PGK10,000 ($3784) if a covered worker dies, so that his or her relatives can afford the haus krai ritual, in which visitors come to the home of the departed for several days. These multi-day get-togethers can become quite expensive and can be a heavy burden on the bereaved family, especially if it has lost their primary breadwinner.

Capital Life Insurance received a strong review from AM Best in late 2014. While the ratings agency gave it a financial strength rating of B-, it expressed concern about the insurer’s dependence on a single broker for 50% of its distribution and noted that a significant percentage of its portfolio was in local equities. It also said the outlook for the insurance group was positive, that capitalisation was sufficient, that leverage was low and that exposure to volatile business was limited.

The group as a whole is diversified regionally. It acquired Dominion Insurance in 2014, giving it exposure in Fiji, Vanuatu, Tonga and Nauru. It also has offices in the Solomon Islands, where it is the only composite insurer in the country.

Micro-Insurance

Capital Insurance underwrites two micro products for Bima: family life and a daily indemnity policy. The former was introduced in July 2014. Under this programme, the life of a customer can be insured for PGK4000 ($1514), PGK8000 ($3027) or PGK12,000 ($4540). All people between the ages of 18 and 60 years of age are qualified and the premiums are the same for everyone. The lowest level of coverage costs PGK3.60 ($1.36) per month, and the highest level is PGK10.80 ($4.08) per month. The company deducts the premiums on a daily basis from the customer’s mobile phone account (ranging from PGK0.18 [$0.07] to PGK0.54 [$0.20] a day for 20 days a month). The policy does have some exclusions, such as war, epidemics and tribal fighting, but it is simple and straightforward. Registration is easy. Potential clients can call and speak to an agent or simply dial a code on their handset. A confirmation SMS is sent.

In 2015, hausik was introduced. Under this programme, a customer can choose three levels of coverage: PGK96 ($36) per day; PGK64 ($24) per day; or PGK32 ($12) per day. They receive the payment from the second night in the hospital through to the 30th. A small death benefit is included also, ranging from PGK600 ($27) to PGK1800 ($111). Premiums range from PGK3.60 ($1.36) to PGK10.80 ($4.08) per month, and are withdrawn daily – PGK0.18 ($0.07) to PGK0.54 ($0.20) per day for 20 days per month.

The programmes have been incredibly successful thus far. As of the end of February 2015, the company had sold 83,830 life policies and 27,371 health policies, according to Bima. Of those, 67,894 life policies and 11,871 health policies were active, with premiums being paid on a regular basis.

In December 2014, BIMA received an investment of $5m from Digicel Group, the parent of the dominant mobile carrier in PNG. Bima was already collaborating with Digicel in Haiti.

The segment also has several distinct challenges. “Fraudulent claims and associated practices are a global problem for the insurance industry. The potential for fraud in PNG may inhibit the development of a successful micro-insurance offering in this market,” Bruce Avenell, the country CEO at AIG, told OBG. “Further, little data is available to allow proper and thorough actuarial assumptions to be done for micro-insurance here. This reduces market confidence in this segment as the chance of success is diminished.” Additionally, selling micro-insurance is not easy in PNG. Even Bima’s technology can be a challenge as not everyone in the country knows how to send an SMS, and many people speak local dialects. Still, Bima has largely overcome these problems with simple product design and customer support.

Business Challenges

As with the banking sector, the insurance sector has had a difficult time with the economic cycle. It was largely left out when most risk associated the PNG liquefied natural gas (LNG) project went offshore. Meanwhile, the ancillary growth from the project has not resulted in a material increase in insurance business. Chinese investors have entered the economy, but they have not been purchasing local financial products, instead handling their insurance needs elsewhere. “Exxon received an exemption and it all went offshore,” said Philip Tolley, managing director of Capital Insurance Group. “There are significant opportunities in PNG now, but the builders are mostly Chinese. This flyin, fly-out money creates a boom/bust cycle.”

“The sector was growing quickly until 2013, until the construction phase stopped,” said Paul Affleck, CEO of Pacific Assurance Group. However, business has slowed significantly since then. Between 2012 and 2013, non-life assets jumped 86.6% to PGK979.4m ($370.6m), but during 2014 growth stagnated, with assets dropping to PGK908.8m ($343.9m) by the third quarter, according to central bank statistics. Life insurance assets grew from PGK275.1m ($104.1m) in early 2010 to a high of PGK483.8m ($183.1m) in June 2014. AM Best reports that overall premium growth was up 30.1% in 2013 over 2012. Anecdotal reports from the sector suggest premium growth was flat in 2014, with the exception of the Capital Insurance Group, which said its business doubled that year, with the economy expected to grow by 33% in 2015 and 25% in 2016.

Rates are generally firm, but have started to show some signs of weakness. According to a report by Marsh, general liability insurance was stable in the fourth quarter of 2014, with growth ranging from - 5% to +5%. But in the fourth quarter of 2013, rates were up by between 0% and 10%. In all other sectors, however, the rates of growth have been the same between the quarters.

Onshore Coverage

PNG is an admitted market, meaning that insurance sold in the country must be underwritten locally, and an attempt must be made to utilise domestic capacity before taking business offshore. However, in practice, the sector faces considerable leakage. Some firms, for example, have a blanket exemption, in particular those involved in energy and extractive projects. Others can apply to send risk offshore, and the Office of the Insurance Commissioner can waive the requirement if it believes it is in the national interest to do so. Some firms simply ignore the requirement.

Capacity is limited domestically and some premiums must be sent overseas, but local firms want to see more risk placed onshore and believe they can get more of the business. This is possible, as the second phase of the PNG LNG project starts and the Total LNG project begins. Insurance participants indicated the matter had been discussed with the insurance commissioner and that exemptions may not be so easily granted in the future. “Exemptions for offshore placements will be more difficult to achieve,” wrote Marsh in its “Pacific Insurance Market Report 2015”. While local players recognised the lack of capacity and expertise at home, they argue that they should write more of the policies so they can build capacity and develop expertise. “The industry will never get the experience to work with big risks if it is limited in what it can do,” said Affleck. “We are happy to take a small percentage.”

Motorists' Risks

Third-party motor vehicle liability insurance is compulsory and has been since the passing of the Motor Vehicles (Third Party Insurance) Act 1974. In 2002, MVIL, which provides the compulsory third-party insurance, became a regulated entity under the Independent Consumer & Competition Commission (ICCC). As such, premiums are controlled by the monopolies body. In 2014, the ICCC took additional action to regulate the insurer. Under an agreement between the two, MVIL must pay claims within six months, and ideally within two to four months. In the past, the insurer had taken as long as two years to pay vehicle claims. MVIL owns Pacific Reinsurance in addition to Pacific MMI.

Pacific Assurance Group (PAG) was founded in 2006 and has offices in Port Moresby, Kokopo and Lae. The firm covers non-life risks, such as marine, fire and liability. It also offers health insurance, and this is its leading growth segment.

PAG is working to create a better environment for provision of services. The company also established a network of medical facilities for policyholders, with a total of 15 providers in Port Moresby (including the Pacific International Hospital); three in Lae; two each in Madang, Kokopo and Mt Hagen; and one each in Kimbe and Kainantu. “Some 25% of our business is health insurance, and health insurance is the fastest growing,” said Affleck.

PAG said that its customers are primarily corporate, as awareness is still low among the general population and most people cannot afford premiums, while corporate customers understand the products and are able to pay.

The firm also found that corporations could use health insurance to attract talent. Labour costs are low, but a shortage exists when it comes to high-quality managers and companies compete to get people of calibre into their ranks. Health insurance is a perk. “Retail does not work here, so we sell to corporations,” said Affleck. “We are not going to advertise for the man on the street.”

Challenges

The sector faces a number of challenges in addition to the obvious issues inherent in operating in such a sparsely populated country with a difficult geography and a high-cost environment. Some of the operators complain that the competition is too severe at times and that extreme price cuts can be observed in some segments. They say insurers may be quoting dangerously low premiums in order to gain market share, and that this has the potential to destabilise the sector.

Fire claims have been high in recent years, costing the sector dearly in terms of payouts. The fire brigades are often unable to respond quickly or at all, and structures sometimes burn to the ground. As much of the work in the sector remains manual, this adds to costs and squeezes margins.

Meanwhile, some market participants question whether the micro-insurance push will be successful. While the numbers have been good, with over 100,000 names being added to the ranks of the covered under the Bima programme, they argue that policies may not make business sense, given the cost of distribution. Micro-insurance helps individuals and can bring more business to both service providers and mobile phone operators, but it is primarily a corporate social responsibility exercise and a way for the country to fulfil international obligations with respect to increasing the number of insured.

Outlook

PNG’s insurance sector is open, profitable and has great potential. Given the low penetration rate and the growing economy, more policies will likely be sold and more risk can be covered. Still, the sector must develop, especially in terms of best practices and pricing, and some marginal players may vanish over time.

If local companies can get more of the business that is now flowing offshore and find a way to better serve the larger population, the insurance penetration rate could increase and the sector could grow substantially. In time, PNG may attract more foreign participation and the competitive sector could become more vibrant, especially in terms of both modelling and product design. Consolidation is also very likely, as insurers grow and absorb small players.