FOR years, local firms in collusion with some of the biggest insurance companies in the world, including the likes of the British company Jardines, have fattened themselves from bloated premiums and commissions from government agencies.

Their accomplice: no less than the Government Service Insurance System (GSIS).

Republic Act 656, enacted in 1951, gave the state pension fund the sole authority to insure all property owned by the government—from power plants to roads and bridges to office buildings.

The GSIS estimates it currently insures P1.5 trillion worth of state assets. To limit potential losses from such a big exposure, it passes on much of the risks to private insurance companies that then “reinsure” what the GSIS had not covered. The GSIS employs the services of brokers that negotiate with private reinsurers, most of them based in London, the world’s insurance capital.

“The spirit of the law gave GSIS the advantage of a monopoly for it to be in a position to command rates in the market that will benefit the government,” says Honesto General, an insurance columnist and president of the Association of Insurance Brokers of the Philippines (AIBP).

But, says General, this has not been the case. Rather than using its monopoly to bargain for better rates, the GSIS has conspired with private brokers and reinsurers to skim off huge commissions that can be made from fat insurance premiums.

The GSIS, says Senator Sergio Osmeña III, has been part of “a never-ending scam” to defraud the government through inflated insurance fees.

Private insurers interviewed for this report say that since the Marcos administration, insurance firms and their brokers have made a killing on GSIS reinsurance contracts. These brokers normally set aside huge entertainment allowances to wine and dine officials of the GSIS and those of the insured government agencies, says a long-time insurance consultant who asked not to be named.

The GSIS, say several sources in the insurance industry, has consistently charged government agencies overpriced insurance premiums so it could pay fat commissions to favored brokers and reinsurers.

Such overcharging is done with the collusion of the top finance people of the insured government entities, who inflate the losses on insured properties to justify higher premiums. More premiums paid by the insured agencies translate to bigger commissions for the GSIS and its brokers, say insurance industry insiders.

The bigger and more complicated the risk, the bigger the number of brokers and reinsurers involved. The commissions in turn become heftier, as these are paid each time the transaction is passed from one reinsurer to another. Industry sources estimate commissions usually range from 2.5 to 10 percent of the insurance premium, depending on the nature of the risk.

For complex and jumbo deals, the GSIS usually retains just one to 30 percent of the premium. This means it reinsures 70 to 99 percent with foreign companies which have the financial clout to absorb bigger risks.

Ultimately, the high cost of insuring government property is borne by the public, either in the form of higher government fees or of deteriorating public services.

Osmeña says the scam continues because the public is not interested in the esoteric workings of the insurance industry. The reinsurance process is also made up of layers of deals, making it difficult to track down the extent of the fraud.

In 1994, a team from the Commission on Audit (COA) tried to go to London to investigate the reinsurance fraud, COA auditors say. This was after they had uncovered huge losses in the GSIS arising from premium advances to favored brokers, and unpaid insurance claims.

COA found that when the insurance claims of some government agencies rose, these brokers suddenly declared bankruptcies, leaving huge unpaid claims in the books of GSIS and the state agencies insured.

The Senate also did a probe in 1996, on the basis of a COA report that showed the GSIS had more than P500 million in uncollected claims from foreign and local reinsurance firms as of end-1994.

As a result of the Senate probe, the GSIS charter was amended in 1997, placing its investment activities under the Insurance Commission’s watch. Still, this did not plug the loopholes that made connivance on reinsurance deals possible.

Osmeña, who was a member of the joint Senate committee investigation in 1996, likened the reinsurance scam to the Russian matrushka doll. “Once you opened it, you end up discovering another doll inside. You won’t know how deeper it goes.”

Osmeña said close friends of Marcos cronies had set up reinsurance brokers with British-sounding names to create the illusion they were reputable members of the Lloyds Group of London. With the collusion of GSIS officials, these local brokers overpriced the insurance premiums on government property and got fat commissions, he said.

By the time the insured agencies filed huge claims, some of the reinsurance brokers had closed shop. For years, these brokers merely paid smaller claims out of the premiums from the insured state agencies but did not set aside a buffer to cover huge losses. When the claims mounted, they delayed payment as long as they could until they went belly up.

Lawyer Winston F. Garcia said he tried to learn from these mistakes and that his first acts as GSIS president and general manager was to “clean up” the reinsurance business, where “small-time” insurance brokers had made a killing on GSIS contracts by ceding the business to dubious reinsurers abroad.

Before he took over, Garcia said most of the reinsurance deals at GSIS were “broker-initiated.” Brokers offered insurance to a government agency, referred the business to the GSIS and then got a commission. The GSIS automatically renewed contracts with brokers “without the benefit of a public bidding.”

On Feb. 27, Garcia issued Office Order 10-01 directing GSIS to reinsure directly with National Reinsurance Corporation of the Philippines (National Re), a private company created by a Marcos decree that is composed of 74 local reinsurance companies. GSIS is National Re’s biggest shareholder with a 19-percent stake.

Garcia said the order allows GSIS to deal directly with the top 10 reinsurance companies and bans small-time brokers. The move, he said, was “in the spirit of transparency and objectivity.”

But the AIBP thinks otherwise. In a letter to Finance Secretary Jose Isidro N. Camacho last September, it said Garcia’s order restricts competition and disenfranchises small Filipino brokers.

Without insurance brokers, AIBP president Honesto General said, the GSIS could unilaterally impose its own terms on reinsurance contracts without the client government agency receiving financial advice from a broker who knows the market.

Brokers say GSIS could give “onerous” terms on premiums because it has the monopoly. This allegedly goes against the grain of RA 656, the law that gave that monopoly, which states that GSIS “shall not exceed the premiums charged by private insurance companies.”

They say Garcia’s move also favors only big-time brokers. A memorandum from GSIS senior vice-president for general insurance Julio R. Navarette issued last August required a net worth of at least P50 million for local brokers and $20 million for foreign brokers to qualify.

Garcia admitted only 10 brokers could meet the requirement, though General said only three could qualify. These are: Ayala AON Risk Services, Inc., J&H Marsh & McLennan Philippines, Inc., and Jardine Lloyd Thompson Insurance Brokers, Inc.—local companies majority-owned by the biggest insurance brokers in the world.

As of end-2000, however, Jardines’s financial statements submitted to the Securities and Exchange Commission showed a capital deficiency of P77 million, up from a deficit of P5.8 million in 1999.

Still, Garcia insists on Jardines’s participation in the public bidding for the National Power Corp.’s (Napocor) $6.5-billion reinsurance contract on the strength of the foreign broker’s parent firm based in London. Jardines is among the top 10 reinsurance brokers worldwide.

The problem is that while National Re is made up of 74 reinsurance agencies, the law says it can absorb only up to 20 percent of its members’ financial capability or its own net worth. The company has a paid-up capital of P421.5 million, which means it could cover at most only P84 million of the P1.5 trillion in state assets now insured by the GSIS.

Garcia, a former Cebu provincial board member appointed by President Arroyo to take over the scandal-wracked GSIS, is not new to the reinsurance business. Apart from sterling political connections—he comes from a prominent Cebu political clan and is associated with former Cebu Gov. and Arroyo ally Lito Osmeña—he has a reputation as a dealmaker and was charged with graft when he was a Cebu official.

Says the former head of a state agency: “Winston is a dealmaker, not a manager that would head a pension fund.” This official says a popular insurance agent called Rufino Antonio “Boy” Mijares represented Garcia in negotiations for the insurance contract of the government agency he headed.

Mijares is a Cebuano lawyer with a reputation in insurance circles as a maverick who handled Japanese accounts for the former FGU Insurance Corp. of the Ayalas. He is also known in the industry as a close business associate of Garcia, who bagged juicy insurance contracts from government agencies using Lito Osmeña’s political influence during the Ramos period. Inside GSIS, Mijares is described as Garcia’s “Man Friday.”

Garcia admits his friendship with 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!” he 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 Corporation’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’s 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 were 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 in effect this practice 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 has 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.



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