World's top brokers linked to overprice

Philippine Center for Investigative Journalism (Second of the series)

Government Service Insurance System (GSIS) president and general manager Winston Garcia admits his friendship with insurance agent Rufino Antonio "Boy" Mijares dates back to their law school days in the 1970s. The GSIS chief says he himself "couldn’t be a facilitator" for any insurance deal because he "knew nothing about insurance."

"Who am I in the industry? Nothing!" Garcia says. "I was just a provincial board member practicing law in Cebu so why would people like Boy Mijares align with me?"

Apart from these connections, allegations of favoring certain brokers have been hurled against Garcia, who has nixed a public bidding in the case of National Power Corp. (Napocor)’s insurance contract to continue dealing with Jardines.

The GSIS Resident Ombudsman, George Ramos, filed a graft complaint against Garcia whom he said issued Order 10-01 without the approval of the Board of Trustees. The GSIS charter says all policies and guidelines affecting the insurance coverage of government properties should pass through the board.

Weeks after the complaint was filed, Garcia ordered Ramos’ office padlocked because the Resident Ombudsman "is not entitled to his own office."

Garcia defended issuing the order, saying it was "management prerogative" and he had already informed the board of trustees about it.

Two weeks after issuing that order in February, two division chiefs and a manager of the GSIS Reinsurance Division were transferred to another department. On March 12, General Insurance Group senior vice president Julio R. Navarette ordered the reshuffle without stating the reason, despite an election ban against the transfer of state employees.

GSIS sources, however, say the three officers were removed from the Reinsurance Division after they recommended the blacklisting of some insurance brokers that have received huge advances from the state fund. The sources did not name the brokers, but confirmed that one of them is Jardines.

The GSIS advances the payment of insurance premiums and commissions to the reinsurance brokers and companies even before it gets paid by the insured government agencies. These receivables are treated in the GSIS books as part of current assets instead of money due from the reinsurers, which would be reflected as current liabilities. The simple accounting trick thus creates an illusion of improving financial health.

As of end-1999, GSIS reported only P432.6 million in premiums due from reinsurers, while P1.4 billion was booked as premiums receivable. A request for the latest figures was denied.

In 1994, COA already recommended a ban on the practice of advancing payment. Back then, the practice was carried out in reverse: when the insured government agency files a claim, GSIS would pay its share of the risk and advance that of the reinsurers.

COA discovered the scheme when the GSIS booked a "staggering" P666.5 million in 1994 as outstanding claims from 117 reinsurance firms and brokers. Of the amount, 81 percent was due from only 10 favored companies. Not all of the claims were recovered as some of the companies had collapsed.

COA said this practice, in effect, made the GSIS absorb all the risks instead of reinsuring them.

Even if this were done in reverse, GSIS also in effect assumes all the risks when it advances the premiums to favored reinsurers and brokers. But there is a reason for this: as soon as the GSIS releases the premiums to brokers, commissions are paid out.

Unfortunately, the other side of the deal does not usually move as fast: the payment of claims to the insured government agencies.

The scheme, coupled with allegations on favored brokers, would have gone unnoticed were it not for Napocor president Jesus N. Alcordo. He was scraping the barrel of Napocor’s finances when he discovered that the state power firm had accumulated $41 million (around P2 billion) in insurance claims from GSIS in the past five years.

Intrigued, Alcordo ordered a closer look into the five-year history of the insurance policy and found that the contract was "seriously overpriced." He says: "I was shocked with what I discovered."

Alcordo accused the world’s biggest foreign reinsurance brokers–Jardines and Marsh & McLennan–"with possible complicity of the underwriting companies and syndicates involved in the reinsurance placement" of Napocor’s $10-billion assets last year.

‘Anomalous policy’

On Sept. 4, Napocor did what no other government agency had done before. It filed a complaint against the GSIS, the insurer of all state assets, for what it said was an "anomalous insurance policy" — worth nearly $14 million — that Napocor got last year.

In a complaint filed before the Presidential Commission Against Graft and Corruption (PCAGC) and the Insurance Commission (IC), Napocor also charged Jardine Lloyd Thompson Insurance Brokers Inc. and Marsh & McLennan Cos. Inc., insurance brokers that reinsured the Napocor account with companies abroad, for colluding with the GSIS to inflate insurance costs.

The power company said there was fraud in the complex layers of reinsurance deals that were coursed through GSIS, and asked both the PCAGC and the IC to endorse the investigation to the financial regulatory and criminal investigative bodies which have the legal jurisdiction over foreign reinsurance brokers and the technical know-how to handle cases like these.

These bodies are: the Monetary Authority of Singapore, the Hong Kong Office of the Insurance Commissioner, the US Department of Justice and the Financial Services Authority in the United Kingdom.

If the international regulatory bodies cooperate, this could be the first investigation on an international scale and involving a state agency of two of the world’s biggest insurance brokers, Jardines and Marsh & McLennan. Jardines alone earned about $3.3 million in fees and commissions from the insurance issued to Napocor.

This is the first time the GSIS was publicly charged with conspiring with favored brokers even if, insurance industry officials say, the state pension fund has for years been silently skimming off fat commissions from the government’s billion-peso reinsurance business.

Alcordo said the consumer bears the exorbitant cost of the power firm’s insurance: "It shows up in his monthly electricity bill in the form of a PPA or power purchase adjustment." This is the additional cost that electricity users pay on top of the cost of the power they consume and the foreign exchange adjustment.

In its complaint, Napocor charged the GSIS and the brokers with irregularity in the negotiations for its old insurance policy that covered $10 billion worth of assets for 18 months.

For one, Napocor said the policy was not publicly bidded out. It was also overpriced by $8.3 million and extended to 18 months, even if the law bans unprofitable government corporations from signing contracts longer than 12 months.

These irregularities arose from padded insurance claims made by the GSIS and Napocor, whose officials appeared to be more interested in the fat commissions that could be made from an inflated insurance contract, insurance industry insiders say.

Despite offers by other insurance firms, the GSIS insisted on negotiating with Jardines, which charged Napocor more than double that of the offer made by a rival foreign firm.

Napocor cited other "fundamental elements" of the insurance contract that were "missing," in violation of Philippine insurance regulations. The contract did not have a policy number and the date of issuance; it didn’t even bear the signatures of the GSIS representative who authorized it.

Napocor added the policy was negotiated in London between the brokers and the reinsurers last year. "The manner in which the renewal terms was procured was done in a covert and inappropriate manner," Napocor alleged.

Documents show that even before the London negotiations took place in March 2000, the GSIS had already renewed the contract of Jardines as "sole broker."

(To be continued)