Special Report: A can of worms at GSIS

MANILA, Philippines - When the Government Service Insurance System (GSIS) conducted a bidding to reinsure the insurance requirements of the National Grid Corporation of the Philippines (NGCP), little did the new GSIS management realize that it was going to open a can of worms, so to speak.

But the NGCP suspected all along that there was something amiss. From 2008 to 2010, NGCP (formerly TransCo) was paying a premium ranging from $5.57 million to $6.69 million.

In spite of these huge premiums, the industrial all risks (IAR)/submarine cable and sabotage and terrorism policy had a high deductible amount of $5 million in the aggregate and $2 million for each and every loss thereafter. This basically meant that the loss has to breach these amounts or NGCP will not be able to recover.

This was also the reason why NGCP was not indemnified either partially or in full for damages to its transmission assets caused by typhoons “Ondoy” and “Pepeng,” and the bombing in Lanao del Norte. The damages amounted to P172.82 million, obviously short of the threshold, and because NGCP could not recover, it had no other recourse but to pass on the loss to the public.

NGCP then filed a petition with the Energy Regulatory Commission (ERC) seeking the recovery of these losses in the form of “force majeure event-pass through” claims that would be charged to power consumers in Luzon and Mindanao.

And because of the high deductible level under its previous policy, power consumers will have to pay a total of P1.14 per kilowatt-hour over the next five years starting this year.

GSIS is mandated to insure all government properties. It, however, resorts to reinsurance to lessen its exposure and risks.

Reinsurance is defined as insurance that is purchased by an insurance company (insurer) from another insurance company (reinsurer) as a means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer’s losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer.

With the entry of the new administration, the NGCP requested the new GSIS management to institute changes in its reinsurance so that power consumers do not have to shoulder NGCP losses that could not be recovered from its insurance.

The new board agreed and extended the compliance period for submission of documents by prospective bidders. Because of the changes, GSIS attracted quite a number of bidders and conducted a successful bidding.

Technically, it is the first time in several years that the reinsurance of NGCP was bid out by the GSIS. In the past, it had always been renegotiated with the former reinsurer.

And surprisingly, almost all the big names in the reinsurance business showed up for the bidding, something that never happened in the past, GSIS sources revealed.

From $5.57 million to $6.69 million, the premium was lowered to $4.7 million, while the deductible level was reduced from $5 million aggregate and $2 million for every loss thereafter to $1 million aggregate and $1 million for succeeding losses.

NGCP suspects that in the past, the bidding terms were being tailor-fit by the GSIS to favor the existing reinsurer because other bidders were simply not taking part in the exercise.

For instance, the old GSIS board only gave interested bidders 12 days to submit all the documents required. Prospective bidders in the past had time and again requested GSIS to extend the period, given the voluminous documents that needed to be submitted, to no avail. And because no other bidder could comply, GSIS resorted to renegotiating with the current reinsurer. Now the period is 60 days.

In 2007-2008, GSIS was able to bid out the reinsurance, only to extend it in 2008-2009, 2009-2010, and 2010-2011 due to failure of bidding.

In 2007-2008, the amount of insurance was $1.94 billion, followed by $2.26 billion in 2009-2009, $2.55 billion in 2010-2011, and $2.31 billion in 2011-2012.

The amount of premium for the period 2007-2011 was between $5.47 million and $6.69 billion. For 2011-2012, it is down to $4.7 million.

The amount of deductible during the 2007-2011 period was fixed at $5 million in the aggregate and $2 million for each and every loss; for 2011-2012, it is down to $1 million for each and every loss.

Had the new GSIS management not instituted the changes, NGCP, a private entity, was considering asking Congress to pass a law that would allow private companies operating public utilities to choose their own insurer.

Suspicions have been raised that GSIS’s reinsurance program had been a source of graft and corruption in the past. If the NGCP reinsurance involved such amounts, then how much more the other insurance policies being reinsured by the GSIS?

After all, it insures all government assets, and we are talking about hundreds of billions worth of assets here.