INSPAC (PNG) Ltd v Salamo Elema

• Jurisdiction: Papua New Guinea
• Judge: Gavara-Nanu J
• Judgment Date: 28 August 2015
• Citation: (2015) N6074
• Court: National Court
• Year: 2015
• Judgement Number: N6074

Full : OS (JR) NO. 775 OF 2014; INSPAC (PNG) Limited v Salamo Elema, Acting Insurance Commissioner (2015) N6074

National Court: Gavara-Nanu J

Judgment Delivered: 28 August 2015

N6074

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE]

OS (JR) NO. 775 OF 2014

BETWEEN:

INSPAC (PNG) LIMITED

Plaintiff

AND

SALAMO ELEMA, Acting Insurance Commissioner

Defendant

Waigani: Gavara-Nanu J

2015: 17th July & 28th August

PRACTICE & PROCEDURE –Insurance Act, 1995; ss. 36 and 37 - Powers of the Insurance Commissioner to regulate insurance industry – Risk insurance and reinsurance – Statutory requirements - Exemption under s. 37 – Construction of s. 36 (1) and (2) – Engagement of insurance and reinsurance brokers by insurers and reinsurers.

PRACTICE & PROCEDURE – Insurance Act, 1995 – General policy on insurance industry – Rights of insurers to reinsure offshore – Rights of insurers to engage offshore brokers – Contractual and fiduciary duties of insurers to policy holders.

Case cited:

Papua New Guinea Cases

Avia Aihi v. The State [1981] PNGLR 81

Gari Baki v. Allan Kopi (2008) N4023

The State v. James Yali (2005) N2932

Kekedo v. Burns Philp (PNG) Ltd & Ors [1988-89] PNGLR 122

Pacific MMI Insurance Ltd v. Salamo Elema (2010) N4032

Ramu Nikel Limited v. Honorable Dr Puka Temu, MP (2007) N3116

Reference by East Sepik Provincial Executive (2011) SC1154

Salamo Elema v. Pacific MMI Insurance Limited (2011) SC1114

The Independent State of Papua New Guinea v. Downer Construction (PNG) Ltd (2009) SC979

Other cases:

Associated Provincial Picture Houses Ltd v. Wednesbury Corporation [1947] 2 All ER 680; [1948] 1 KB 223

Council of Civil Service Unions v. Minister for the Civil Service [1984] 3 All ER 935

R v. National Rivers Authority [1997] Env. L.R. 14; (1996) 8 Admin. L.R. 567

Counsel:

I. Molloy with R. Thompson, for the Plaintiff

G. Egan with N. Ako, for the Defendant

28th August, 2015

1. GAVARA-NANU J: This is an application by the plaintiff to review the decision of the defendant made on 5th November, 2014, refusing its application dated 27 August, 2014, under s. 37 of the Insurance Act, 1995, for an exemption from the requirements of s. 36 of the Act in respect of its treaty reinsurance program.

2. The plaintiff is a licensed insurer in Papua New Guinea. It had a treaty reinsurance program which was due to expire on 30th November, 2014. It wanted to negotiate a new program, hence its application of 27 August, 2014 for an exemption. It should be noted that s.36 (1) makes it mandatory for all risks situated in Papua New Guinea to be insured or reinsured with local (licensed) insurers unless exempted under s. 37.

3. Central to this application are two Circulars the defendant issued to all licensed insurers, reinsurers and brokers on 5th June, 2013 and 15 July 2013 respectively.

4. The subject of the 5th June, 2013, Circular, was – “Placement of Treaty Insurances”. In that Circular the defendant stressed the requirements of ss. 36 and 37 (5) and (6). The defendant among other things said:

“….It is clear from the above provisions that the intent of the Act is to ensure that risks situated in Papua New Guinea are being (sic.) insured or reinsured by licensed insurers or reinsurer(s) include treaty insurance as well (sic.). This is clarified under s.37 (5) of the Act where the requirement for an application for exemption relating to Treaty Reinsurance may be submitted to and considered by the Commissioner for off shore remittance, if required. (refer extract above(sic.).

As you are all aware in applying for exemption, there is a requirement imposed on the applicant under s. 37 to provide evidence that:

i. the risk has been offered to all the license insurers but all are unable to provide the cover; and

ii. in the event that the license insurer(s) are able to provide cover the applicant must provide evidence that the costs to the insured person of insuring or reinsuring the risk with a licensed insurer are greater by 17.5% than the costs to the insured person of insuring or reinsuring the risk with an offshore insurer or insurer.

…. In the same way that all licensed insurers are given the first preference to provide cover for risks situated in Papua New Guinea, the licensed insurer(s) must also be given the first preference to provide reinsurance support for those risks. In the event that the licensed insurer(s) is not able to provide the required insurance support then an application for exemption can be made as provided under s. 37 of the Act.

The circular does not force any insurer by way of instruction to arrange treaty insurance with the local reinsurer(s) only. What it intends to advise, however, is to require all insurers to first approach the local insurer(s) for their treaty insurance needs.

We are aware of the issues relating to capacity, facilities, level of security, expertise, etc. These however, are issues that the licensed insurer(s) will have to deal with and decide whether or not to accept the treaty reinsurance to its own balance sheet.

In accordance with section 36 of the Act, if the licensed insurer is unable to provide the treaty reinsurance support, an application for exemption under section 37 may be made to the Commissioner to have the treaty reinsurance placed offshore.

Accordingly the industry is advised that any new treaties or any treaty renewals must be first offered to the licensed reinsurer(s) as of the date of this Circular.

Proposals for reinsurance brokers are being evaluated and will be considered for entry into market as soon as license requirements are satisfied” (my underlining).

5. In the 15 July, 2013, Circular, the subject was – “Reinsurance Placement Through Licensed Reinsurance Broker(s)”. In that Circular, the defendant stressed that, that Circular and the 5 July, 2013, Circular were both issued in accordance with the spirit of the Act and were intended to “protect the industry from unlicensed entities and for the licensed entities to operate within the Act”. In the Circular, the defendant, among other things, said:

“….We wish to clarify the placement of reinsurance business by licensed reinsurance brokers as follows:

i) All licensed insurers may opt to directly approach the licensed reinsurer to seek reinsurance support. In the event that the licensed reinsurer is not able to provide the required reinsurance support, the licensed insurer may apply for exemption from the Insurance Commissioner to place the reinsurance offshore;

ii) The licensed insurers will not be allowed to use the services of an off shore reinsurance broker.

The licensed insurers must not mislead this Office by applying for placement with offshore reinsurer(s) but then place with an offshore reinsurance broker(s) either directly or indirectly to do the actual reinsurance placements.

Hence it is recommended that the licensed reinsurance broker should be utilized due to the risk of non-compliance with the Act.

iii) Alternatively, should the placement of the required reinsurance involve the participation of a reinsurance broker, then that reinsurance broker must be licensed under the Act. That is, all licensed insurers are required to utilize the services of the licensed reinsurance broker, should their insurance needs require the involvement of a reinsurance broker.

The licensed reinsurance broker then can apply for offshore exemption on behalf of the licensed insurer, in the event that the licensed reinsurer is not able to provide the reinsurance support.

The licensed reinsurance broker must provide evidence to the Commissioner that the licensed reinsurer and insurers are not able to provide the reinsurance cover either partially or fully before the Commissioner grants approval.

The existing placement of treaty and facultative reinsurance will continue until expiry. Upon expiry we expect the renewals to comply with this Circular.

The reinsurance business referred to here will encompass both treaty and or facultative reinsurance.

I expect your full cooperation and compliance with this instruction” (my underlining).

6. It is not disputed that an insurance company called Pacific Re Limited is the only licensed reinsurer in Papua New Guinea. The company itself needs reinsurance offshore because obviously it cannot reinsure itself.

7. In order to comply with the two requirements imposed by the defendant on the licensed insurers in the Circular of 5 June, 2013, which in essence were the requirements under ss. 36 (1) and 37 (6) of the Act, the plaintiff approached Pacific Re Limited, with an offer to place its (the plaintiff’s) risk reinsurance with it (Pacific Re Limited). The latter agreed to accept only 15% proportion of the risk offered. Thus, it was plain that, Pacific Re Limited did not have the capacity to accept a proportion of risk higher than 15%, and more significantly, the costs to the insured person of insuring with Pacific Re Limited would have been greater by 17.5 % than the costs to the insured person of insuring or reinsuring with an offshore insurer or reinsurer. This is a requirement under s. 37 (6) (b) of the Act. These two factors would have met the two requirements...