With maintaining its tight foreign exchange restrictions, the Bank of Papua New Guinea has granted exemptions to some PNG insurance companies to enable them to meet their commitments to international reinsurers. If there’s no insurance in the market, the economy basically stops, warns one of PNG’s leading insurers.

Pacific MMI Insurance’s Wayne Dorgan

‘The central bank has—rightly so—seen the difficulties that the insurance industry is facing at the moment and has, in some cases, provided exemptions to allow those funds to go out,’ the Managing Director of PNG-based Pacific MMI Insurance, Wayne Dorgan, tells Business Advantage PNG.

‘We purchase re-insurance in the global market.

‘The biggest issue the industry has at the moment is getting funds out to pay for that re-insurance. Most re-insurance contracts have premium payment warranties upon them. Without re-insurance, the direct insurance companies here will stop trading.

‘And so, the central bank limiting the currency going out has created some issues for us, because we have a timetable for payments and if those timetables aren’t met you end up getting into penalty payments.

‘They say: “You haven’t paid, so maybe we start pulling the covers from you.”’

Economic impact

The Bank of PNG building in Port Moresby. Credit: BAI

Dorgan says re-insurers are ‘very tight on their credit control.’

‘If there’s no insurance in the market, the economy basically stops,’ he says.

‘Anecdotal evidence suggests the orders outstanding are more in the order of K3 billion.’

The requirement for foreign exchange is being felt across the economy. A team of government officials is in Washington this week to negotiate a proposed US$250 million (K785 million) loan so that PNG companies can buy more foreign exchange, according to Prime Minister, Peter O’Neill.

However, the head of foreign exchange at Moni Plus, Mal Parsonson, believes even this may be insufficient to meet pent up demand, saying ‘anecdotal evidence suggests the orders outstanding are more in the order of K3 billion’.

Warning on underinsuring

Dorgan says the economy is flat at the moment, and is likely to stay flat for another 12 months.

‘There’s no money in the economy, so effectively there’s no disposable income that can be used for insurance purchases at a domestic level and, commercially, everyone’s cost cutting.’

‘One of the current trends, unfortunately, is fraud. We’re noticing electronic fraud. People are copying trends from overseas.’

He warns companies not to become so focused on cost cutting that they underinsure.

‘Underinsuring actually creates a bigger disadvantage than not insuring at all.

‘The biggest problem is that people still believe they’ll get their claims paid. But when you’re underinsuring, co-insurance average comes into play and if you underinsure by 30 per cent, your claim is paid 30 per cent less, as a “rule of thumb”.’

Fraud

‘One of the current trends, unfortunately, is fraud. We’re noticing electronic fraud. People are copying trends from overseas.

‘A lot of Total’s business will be based with their French insurers overseas; however, we represent a couple of the overseas insurers here.’

‘I believe the unofficial figures are that about five per cent of all claims are fraudulent. In Australia, it’s about eight per cent,’ says Dorgan.

Second LNG project

With the prospect of a second LNG project (Papua LNG) in the offing, to be led by the French oil and gas major Total, Dorgan expects there will be some insurance business written onshore.

‘A lot of Total’s business will be based with their French insurers overseas; however, we represent a couple of the overseas insurers here, which should mean some insurance will stay onshore.

‘But I’m also assuming they will ask for what the previous LNG project operators asked for and that was to get a full exemption over all covers, except for the statutory covers.’