GSIS: The Never -Ending Scam

Part One
GSIS INSURANCE MONOPOLY
The Never-Ending Scam
by SHEILA SAMONTE-PESAYCO
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This three-part story documents what has been called a "never-ending scam." It tells how the Government Service Insurance System (GSIS), in collusion with local brokers and some of the world's biggest insurance firms, has charged hefty commissions from overpriced insurance sold to government agencies.
The GSIS is mandated by a 1951 law to insure all state assets. The state pension fund has taken advantage of this monopoly to issue inflated insurance policies, usually in connivance with the top finance people of the insured government agencies. The series cites the particular case of the National Power Company (Napocor), whose officials allege that the $14-million insurance it got from the GSIS last year was overpriced.

In September, Napocor did what no other government agency did before: it charged the GSIS at the Presidential Anti-Graft Commission and the Insurance Commission. It also accused two of the world's biggest insurance brokers—Jardines and Marsh & McLellan—of complicity in the deal.

Parts 2 and 3 of the series shows how the current GSIS chief, Winston Garcia, appears to be bent on going on with "business as usual" as far as GSIS insurance transactions are concerned. The series also explains how Garcia—who in the past transacted reinsurance deals with the GSIS through a well-known insurance agent—has been partial to Jardines, which in 2000 earned a hefty $3.3 million in commissions and fees from Napocor's account. Napocor alleges that the contract was overpriced by nearly $8 million.
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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.

PART TWO
GSIS REINSURANCE MONOPOLY
World's Biggest Insurance Brokers Linked To Insurance Overprice
by SHEILA SAMONTE-PESAYCO

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.

Part Three
GSIS REINSURANCE MONOPOLY
Profile Of A Favored Broker
by SHEILA SAMONTE-PESAYCO

FOR years, Jardine Lloyd Thompson Insurance Brokers, Inc., the fifth-biggest broker in the world, cornered some of the biggest insurance deals in the country.

There is a simple reason for this: its biggest client is the Government Service Insurance System (GSIS), which is mandated by law to secure some P1.5 trillion worth of state assets.

In the 20 years that it has been operating in the country as a company owned by British firm Jardine Davies Inc., Jardines has not been questioned publicly about its dealings. But since September, when National Power Corporation (Napocor) president Jesus N. Alcordo blew the whistle on the “overpriced” insurance contract that GSIS sold to the power company, Jardines has been openly described by Napocor officials as a “favored broker” of GSIS.

In the insurance industry, Jardines’s close relationship with GSIS has been an “open secret” for many years, says one long-time insurance agent. In huge deals involving GSIS, Jardines’s name always surfaced, insurance brokers say.

Until recently, Jardines was the top reinsurance broker in the country. Last year, it was overtaken by the little-known Orient Pearl Insurance and Reinsurance Brokers, Inc., which started operating only in 1999.

Documents, interviews, as well as interlocking relationships indicate that Orient Pearl is actually a front for Jardines. The company was apparently formed so that Jardines could steer clear of the controversies that were bound to be generated by its dealings with the government.

A company insider added that Jardines’s London headquarters frowned upon the way the Napocor account had been handled and didn’t want the British firm’s name dragged into the fray.

Apart from Napocor, Jardines is involved in another controversial deal: the reinsurance of the EDSA Metro Rail Transit 3 project operated by the Department of Transportation and Communications (DOTC) and the winning private consortium, the Metro Rail Transit Corporation (MRTC) under a build-lease-transfer (BLT) agreement.

As one of the flagship projects under the Ramos administration, contracts on MRT-3 were monitored by the presidential flagship committee then chaired by Lito Osmeña, known to be the political patron of GSIS president and general manager Winston F. Garcia.

As soon as the contract was awarded in 1995, then DOTC Secretary Jesus B. Garcia, Jr.—a cousin of the GSIS president—ordered the private consortium to insure the project with GSIS.

The legal basis was Administrative Order No. 111, signed by President Ramos, directing GSIS to insure privatized corporations and BOT projects where the government has interest.

Sec. Garcia, in a Dec. 18, 1995 letter to MRTC chairman Robert John Sobrepeña, said the private consortium should advance the insurance premiums to the GSIS. He said the DOTC will reimburse the private company out of adjustments in rental fees on MRTC.

The MRTC, however, bought its own policy from local private insurer Prudential Guarantee and Assurance, Inc. The GSIS meanwhile gave the DOTC a “wrong” type of policy but still demanded payment of the premium, amounting to $6.9 million. For the next two years, the two agencies exchanged demand letters—the GSIS, on the payment of the premium; the DOTC, on the amended policy.

Finally in May 1998, GSIS senior vice-president for general insurance Amalio A. Mallari informed the DOTC that the state pension fund had already “fully paid” its reinsurer the premium for the policy. To this day, the DOTC has refused to honor the GSIS policy until it has been amended. Neither has it paid the premium.

Yet GSIS’s broker—Jardines—received $5.4 million in reinsurance premium in May 1998. Until now, DOTC and GSIS are still disputing the case.

Jardines president Gil E. Cortez defended the payments. “If they don’t pay on time, the policy lapses… so sometimes there’s an arrangement between the GSIS and the client” to advance the payment to reinsurers.

Cortez added that Jardines was not directly involved in the project as the Ayalas’ FGU Insurance got the business and reinsured it with Jardines. At the time, Cebuano lawyer Rufino Antonio “Boy” Mijares was the general agent who handled the deal for FGU. In the industry, Mijares is known as a close friend and business associate of Winston Garcia.

Apparently, this was not the only time GSIS had advanced the premium to Jardines. GSIS Reinsurance Division chiefs already called management’s attention to the huge advances to several brokers, including Jardines, and recommended their suspension from any dealings with GSIS.

But these division chiefs were hastily transferred to another department after they made the recommendation, GSIS insiders say.

As Jardine Aboitiz Insurance Brokers, Inc. (JAIB), the company was number one in terms of premiums and commissions from 1993 to 1998. In 1998, the company’s premiums peaked at P1.9 billion. This was when it first handled the Napocor account, the biggest in the country.

The following years, however, Jardines started to be in the red. In 1999, it booked net losses of P35.4 million. The losses doubled to P71.2 million in 2000 as operating expenses outgrew commissions.

The losses coincided with the years Jardines cut its ties with the Aboitizes, which then had a 51-percent stake but no management role in the company. They were also the years Jardines started concentrating on direct brokering and got out of the reinsurance business.

Industry players saw Jardines’s decision as mind-boggling, given that the reinsurance business had fattened the company with commissions for six years. Starting in 2000, Jardines moved down to second spot in the industry ranking.

This was when Jardines relinquished the throne to Orient Pearl. Last year, Orient Pearl was able to book P1.1 billion in premiums but declared gross commissions of only P8.5 million—not even one percent of its premiums. Its 2000 declared net income was only P570,723.

For a company staffed with only seven locals—the general manager even doubling as accountant—Orient Pearl strangely had huge operating expenses. Last year, this amounted to P7.7 million, from only P995,080 in 1999.

What is curious is that the company occupies the entire second floor of Jardines’s old office on Buendia in Makati. It is also run by Celestino Anacion, who headed Jardines’ reinsurance division until 1999, the year Orient Pearl was formed.

By their own admission, Orient Pearl and Jardines have been sharing commissions and fees from GSIS deals since 2000, when Orient Pearl became fully operational. This explains why Orient Pearl’s earnings are so small despite the volume of its business.

Jardines president Gil E. Cortez said the British firm does not own shares in the firm, although he admitted Orient Pearl was incorporated by his business partners and friends in the industry.

He said the two companies have a “technical services agreement” that compels Orient Pearl “to reinsure whatever business it gets through us.” Jardines then turns around and reinsures the business directly with its Singapore and London offices, he said.

Under the agreement, Orient Pearl “gets the credit” in producing the premiums and “it gets commissions out of the commissions that Jardines gets.”

Orient Pearl appears to be the front for Jardines’s dealings with the GSIS. In fact, all the premiums booked by the company last year were from the state pension fund. These included reinsuring power projects such as the Laguna hydroelectric power plant run by the Argentinian firm IMPSA Ltd. and the Sta. Rita co-generation facility in Batangas, where government interest is involved.

Because it is not a member of the Lloyds Group underwriting syndicate, Orient Pearl needs access to the London reinsurance market; hence, the “technical servicing” provided by Jardines, explained Cortez.

While Anacion concedes that Orient Pearl’s premiums were all from GSIS-related business, he considered these “private accounts” since it is the private contractor who is required to buy the insurance policy under its BOT agreement with the government.

Anacion said though Orient Pearl was barely a year old, it already established “a good relationship” with GSIS under a “reciprocity agreement” wherein the broker would solicit the business from a government agency or a private contractor and refer it to the GSIS, which would retain part of the risk.

In return, GSIS would tap Orient Pearl as a broker for the reinsurance which would then be passed on to Jardines’s Singapore and London operations.

GSIS’s dealings with Orient Pearl, however, violate its own policy of reinsuring directly with the National Reinsurance Corporation of the Philippines or with local and foreign reinsurers with a net worth of at least P50 million and $20 million, respectively. Records show that Orient Pearl has a paid-up capital of only P62,500 and resources of P1 million in 2000.

Anacion said Orient Pearl has so far already referred around five big “private” accounts to GSIS. He boasted that the premiums Orient Pearl now handles are “much, much bigger than Napocor,” totalling $14 million.

Justifying the business, he said: “I’m not a risk-taker so I just place from GSIS.” These are “facultative” placements where Orient Pearl does not have to absorb the risk but merely passes it on to another company like Jardines, he said.

This would explain why the company only earned P8 million in commissions last year, he said. “Even on a premium of, say, P500 million, I would be happy just to get a fee of P5,000 para lang kumita (just so I could earn),” Anacion said.

Though he left Jardines in 1999 when the British firm had decided to shut down its reinsurance business which he helped build and managed, Anacion said he continues to handle Napocor’s account for Jardines.

In fact, he claimed he was entirely responsible for the big-ticket account—from the solicitation, the preparation of tenders in the past three years, down to the documentation on negotiations for the renewal of the $13.5-million policy last year. Anacion said “God is so kind” to him that the Napocor deal has fallen on his lap since 1998.

This was partly because of Jardines’s maverick style in approaching the London market, he said, allowing it to beat global giants Aon Corp. and ALS Insurance Services-Willis Corroon in the last tender for Napocor.

In the March 1999 bidding, ALS-Willis Corroon was the original winner but failed to place the deal with international reinsurers in three weeks. Industry sources said ALS-Willis Corroon officials privately blamed the GSIS for changing the bidding terms in the middle of the placement period but this could not be independently confirmed.

Second-best bidder Aon, which teamed up locally with the Ayalas, also failed after the GSIS gave it only three days to make the placement abroad.

Anacion said Jardines, which then gave the third-best bid, was able to place it in just 24 hours to clinch the $5-million deal. He admitted Jardines already got ahead the commitment of London underwriters to support its $5-million quotation. The international reinsurers thus no longer supported the tenders of ALS-Willis Corroon and Aon, which only went to the market after winning in the bidding. They saw the promise of fetching bigger commissions from Jardines’s bid, he explained.

When Jardines was given the 24-hour deadline to place the deal, Anacion said he did not even see the need to go to London “because when I got the quotation, nakapirma na lahat yung underwriters na may rate na supported” (the underwriters have already signed up and indicated their pricing).

Local brokers working for foreign companies in Manila say this strategy may be effective but not usually done as no reinsurance brokers would be willing to stake their reputation if the tender goes awry. “What if you already got confirmations on your quote but you still lost in the bidding? You’ll just be embarrassed,” one broker says.

Honesto General, a long-time insurance broker and an insurance columnist, says the strategy could only be resorted to if the bidder was “very sure” it will eventually bag the deal. In the case of Jardines, he said, the foreign broker may have gotten an assurance from GSIS ahead of the bidding that is why it is confident it would end up with the account.

A repeat of the 1999 scenario may have happened last September when Napocor went to the market to insure its $6.5-billion assets and failed to lure reinsurers to its public bidding.

Prior to the bidding, Jardines already warned Napocor of a possible failed bidding due to “increasing signs of hardening” in the market that could make reinsurance at the time costly for the state agency.

In a September 20, 2001 letter to Napocor, JLT Risk Solutions Asia, Jardines’ Singapore unit, also said “at the request of GSIS” it tried to get reinsurers to agree on a 60-day extension on the policy but was rebuffed. Jardines instead offered to renegotiate its contract with Napocor.

Since Jardines was actively negotiating for the Napocor policy representing GSIS, foreign reinsurance brokers said this “created confusion” in the market and prevented underwriters from taking any interest in the broker tapped by Napocor for its own bidding.

Napocor blamed Jardines’s “blocking tactics” for its failed bidding for the 2001 to 2002 policy. Despite being the largest client of insurance firms in the country, Napocor found no takers and was unable to get insurance.

As a result, never has Napocor been exposed to so much risk as now, with its $6.5 billion worth of assets vulnerable to financial losses. Should one of its power plants bog down, the agency would not have the cash to fix it, nor the insurance to cover for the loss.


Copyright © 2001 All rights reserved.
PHILIPPINE CENTER FOR INVESTIGATIVE JOURNALISM