ON September 4, the National Power Corporation (Napocor) did what no other government agency had done before. It filed a complaint against the Government Service Insurance System (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.

Napocor president Jesus N. 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.”

In a January 19, 2000 letter, GSIS senior vice-president Julio R. Navarette informed Jardines president Gil E. Cortez that Jardines “shall continue to act as the appointed and sole broker with respect to the reinsurance requirements of GSIS” on the Napocor reinsurance policy.

This was a violation of GSIS business policy and procedural guidelines, which call for an open invitation for brokers to submit their tenders. A technical committee headed by the managers of the Underwriting Department and the Reinsurance Division then evaluate the tenders and recommend the award to Navarette.

Instead, the tenders were all evaluated and the contract was awarded to Jardines by just one official —Navarette.

This was corroborated by GSIS manager for underwriting Arnulfo R. Madriaga in a memorandum dated January 12, 2001 to Navarette.

Madriaga wrote: “As you are aware, this department was not in any manner involved from the very beginning in the negotiation/promulgation of the terms and conditions stipulated on the renewal (of the) policy. We were not even informed of what actually transpired when the agreed terms and conditions were finalized in London by the insured (Napocor), GSIS and the reinsurers.”

The memorandum also states that “the manner of conducting, soliciting quotes through the tender exercise” was “not undertaken in this renewal.”

In his letter, Navarette justified his decision by passing the blame to Napocor. The company, he said, “had stressed their wish to maintain a more stable relationship with international insurers and reinsurers which is reflected in their decision to avoid the usual annual tender process which they would normally be obliged to undertake and their desire for the continued participation of existing reinsurers.”

Navarette’s letter also belied Jardines’s claim that despite the policy renewal during the London negotiations, it still had to go through a tender exercise. The claim was contained in a Sept. 5 letter to Napocor president Jesus Alcordo, in which Jardines’ Cortez wrote: “The renewal terms secured through that negotiation with the London underwriters were subsequently endorsed to GSIS.”

He claimed Federico Pascual, then GSIS president, “still required a tender of the renewal to ensure transparency.” Cortez added: “As part of the process, we submitted the terms previously negotiated in London as our bid, which were later confirmed to be the best available in the market.”

Sources privy to the negotiations said the reinsurance contract to Jardines and the renewal terms were already finalized in Manila by GSIS as early as January 2000.

Yet the presidents of Napocor and GSIS still went to London in March 2000, one month before the power firm’s insurance was set to expire, to appease London reinsurers who belatedly discovered a substantial claim that had not been included by the GSIS and Napocor in computing the premiums.

Former Jardines senior vice-president for reinsurance Celestino Anacion, who knew about the negotiations in London, said this claim was a result of the damage to Napocor’s various facilities by typhoon Loleng. The loss amounted to a substantial $6.5 million.

Anacion said it was already in “the middle of the policy period when the London underwriters discovered the huge discrepancy in the reporting of Napocor’s losses.” The exclusion of the $6.5-million claim “made the underwriters mad” as they felt short-changed in the contract.

After the incident, the underwriters threatened to cancel the contract for 1999 as this was tantamount to breach of trust, Anacion said.

Those who negotiated with the London underwriters were representatives of Jardines Lloyd Thompson Asia, Jardines’ Singapore unit, GSIS president Federico Pascual, Napocor president Federico Puno, vice-president for finance Merle Pajarillo, and risk manager Antonio Ingco.

As a compromise, the London underwriters were offered an extended 18-month cover in 2000 for them to be able to recoup their losses from the earlier policy, Anacion said. But the underwriters rejected this and demanded 36 months.

Hostaged by the London underwriters, he said, Napocor ended up with an extended insurance cover good for three years instead of the original one year. The premiums were set at $27 million but since the policy is subject to renewal after 18 months, Anacion said, Napocor was billed for $13.5 million.

Jardines, which was able to keep its contract for three years straight after the renewal, said the extended insurance cover was “an attempt to save NPC future premiums due to the hardening market” that would have otherwise made the premiums pricey.

The contract was also extended “in anticipation of NPC’s privatization which at the time was anticipated to take place 18 months from renewal date.”

In an interview, Cortez said Napocor president Puno suggested an 18-month cover because the state agency’s privatization was expected to take place in 18 months. But sources who saw the documents on last year’s negotiations say Puno didn’t even mention the possibility of privatization when he presented the contract to the Napocor board.

In fact, when the contract was being negotiated in London, the Napocor privatization law was stuck in Congress and approved only in April this year.

Before the London trip, Ingco, Napocor risk management head, prepared the power firm’s inventory of losses, which would be the basis for computing premiums and commissions. A GSIS official who saw the tender documents said Ingco placed Napocor’s property damage at $20 million, more than double the $9 million the GSIS had estimated.

Ingco was one of the Napocor officials who, Alcordo said, were caught “holding secret meetings with GSIS people.” Alcordo has asked for their transfer, although they denied any connivance with the GSIS. These officials are now under investigation, following internal procedures, before a case against them is filed.

“Underwriters in London will necessarily increase the premium with the kind of loss experience portrayed by Napocor through its Risk Management Manager,” said a GSIS official.

Thus, from a net premium (excluding commissions) of $5.4 million in Napocor’s 1999-2000 policy, GSIS set a $9-million net premium in the tender for the 2000-2001 policy.

The deductibles—part of the insurance claim that will be borne by Napocor—were also adjusted to $500,000 for all types of losses and $1.5 million for a separate cover on submarine cables. The previous deductibles were only $150,000 and $300,000, respectively.

Despite the inflated adjustments, the GSIS received proposals lower than Jardines’. One foreign broker—Lambert Fenchurch—offered a net premium of $6.2 million for the placement. Still, the GSIS accepted Jardines’ offer of $13.5 million, more than double that of Lambert Fenchurch.

Jardines broke down the $13.5-million net premium as follows: five percent retained by GSIS amounted to $675,000; while the 95 percent reinsured through Jardines and Marsh totalled $12.8 million. Of the reinsured premiums, Jardines placed 60 percent in London while Marsh handled 35 percent.

Alcordo believes the policy has been “seriously overpriced” by $8 million. Excluding commissions, he said the reinsurance for the 18-month contract should have only cost Napocor $4.9 million.

Jardines, on the other hand, said $4.9 million only represents the premiums ceded to London underwriters who would bear the risk in excess of what the first-layer reinsurers would be willing to take, amounting to $7.5 million.

“It was a simple mistake. We don’t know why they can’t see that computation,” said Jardines chief executive officer Kevin Norman.

When Napocor asked Jardines for documentation on the placement of the “excess of loss” of $4.93 million, however, the broker could only account for the first layer handled by German firms Allianz, Munich Re, and a group of Lloyds syndicates.

In an October 17, 2001 letter to GSIS executive vice-president Robert Malonzo, Jardines’ Cortez admitted details on the placements ceded by the primary reinsurers “are not within the knowledge” of the broker.

On the other hand, Marsh & McLennan disclosed details on where it placed its 35-percent share of the risk, down to the excess of loss layer which involved three companies handling $79,875 worth of premiums.

Jardines’ letter to Malonzo also disclosed that the two brokers received a 25-percent commission for their placements. This, it said, is “allocated partly to survey fees and partly as reinsurance brokerage” paid out to Jardines’ and Marsh’s offices in London, Singapore and Manila.

The commission, it said, came from reinsurers “out of the premiums paid to them by the ceding company.”

In its April 12, 2000 billing statement, however, Jardines charged the GSIS a “broker’s fee” of $135,000, despite its claim that the commission and other fees were already included in the premiums paid by Napocor.

Marsh meanwhile claimed it received “less than 25-percent commission” taken from the gross premiums.

Industry insiders say 25 percent for brokers is “on the high side;” usually, commissions range from 2.5 percent to 10 percent. They said it is also unusual for brokers to charge fees as this is already tantamount to “double-dipping.”

So even as it only passed on the risk, Jardines ended up pocketing $3.3 million in fees and commissions—triple that of the GSIS which absorbed five percent of the risk and got only $1 million in reinsurance commission and premiums.

On top of the fat commissions paid to the brokers, the GSIS also charged Napocor a 10-percent expanded value-added tax of $1.3 million.

Both the GSIS and Napocor are tax-exempt. Reinsurance contracts are also exempt from taxes, says the Bureau of Internal Revenue (BIR), as the insurance premium has already been subjected to EVAT. Reinsurance is simply an insurance of an insurance.

Vida Chiong, deputy commissioner of the Insurance Commission (IC) agrees, adding that reinsurers are foreign institutions that carried out transactions offshore, therefore exempt from paying taxes here.

The tax, fees and commissions jacked up the cost of Napocor’s policy by 12 percent, with GSIS charging $15.2 million.

GSIS president and general manager Winston F. Garcia said it remits the EVAT payments to the BIR. A check with the IC, however, revealed the GSIS does not declare the taxes it collected or paid because it is a tax-exempt institution.

Napocor, however, is not the only government agency that was taxed by the GSIS. Where all the money went is still a mystery that the Department of Finance is now investigating.



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PHILIPPINE CENTER FOR INVESTIGATIVE JOURNALISM