Philip­pines’ Non-Life Sec­tor: Meet­ing the Cap­i­tal Chal­lenge

THE PHILIP­PINE NON-LIFE IN­SUR­ANCE SEC­TOR IS GO­ING THROUGH A TRAN­SI­TION AS IT SCALES UP TO MEET HIGHER CAP­I­TAL RE­QUIRE­MENTS UN­DER A NEW REG­U­LA­TORY CODE. CHAL­LENG­ING MAR­KET CON­DI­TIONS, WITH LIT­TLE DRIV­ING MO­MEN­TUM IN THE IN­DUS­TRY, HAS LEFT MANY IN­SUR­ERS FEE

Insurance - - CONTENTS - Text Con­trib­uted by A.M. Best Asia-Pa­cific Ltd

Agrad­ual in­crease in cap­i­tal re­quire­ments should help to re­duce in­ef­fi­cien­cies and en­hance prof­itabil­ity, given the ex­ist­ing poor economies of scale and high op­er­at­ing costs. More­over, A.M. Best ex­pects cap­i­tal en­hance­ments should strengthen the abil­ity of com­pa­nies to re­tain more busi­ness and im­prove prof­itabil­ity. Con­se­quently, this could en­hance the in­dus­try’s pro­file, mak­ing it more at­trac­tive to in­vest­ment, ex­ter­nal cap­i­tal and new par­tic­i­pants. His­tor­i­cally, reg­u­la­tory change and re­form has been slow in the Philip­pines. The in­dus­try has still not seen vi­brant merger and ac­qui­si­tion ac­tiv­ity. Given cur­rent

The re­cent hike in cap­i­tal re­quire­ments has led to in­dus­try con­sol­i­da­tion. As a re­sult, the num­ber of non-life in­sur­ers is shrink­ing.

con­di­tions, A.M. Best be­lieves an abrupt change in the in­sur­ance land­scape is still a way off. The non-life sec­tor has gen­er­ated sta­ble un­der­writ­ing re­sults de­spite the coun­try’s high ex­po­sure to nat­u­ral catas­tro­phes. Low in­sur­ance pen­e­tra­tion in the Philip­pines, com­bined with low risk re­ten­tion by in­sur­ance com­pa­nies, has con­trib­uted to steady busi­ness per­for­mance for most non-life play­ers. Nev­er­the­less, most com­pa­nies have low cap­i­tal bases with less ca­pac­ity to write sub­stan­tial busi­ness and im­prove prof­its. Philip­pines’ non-life mar­ket space is crowded, with a large num­ber of small to medium-sized com­pa­nies of­fer­ing sim­i­lar per­sonal line prod­ucts. In ad­di­tion, non-life com­pa­nies have rel­a­tively high ex­pense ra­tios com­pared to their peers in the As­so­ci­a­tion of South­east Asian Na­tions (ASEAN). Go­ing for­ward, A.M. Best be­lieves the in­dus­try would be bet­ter served by mov­ing to­wards a leaner mar­ket with more ef­fi­cient oper­a­tion. The non-life sec­tor has posted slug­gish growth over the past few years. De­spite last Novem­ber’s dev­as­tat­ing dam­age from Typhoon Haiyan in Philip­pine’s cen­tral prov­inces, par­tic­u­larly hard-hit Leyte prov­ince, low in­sur­ance pen­e­tra­tion in the re­gion pre­vented a large im­pact on the in­dus­try’s bot­tom line. How­ever, the event prompted govern­ment and in­dus­try ac­tion for a na­tional, nat­u­ral catas­tro­phe in­sur­ance scheme. The coun­try’s de­mo­graphic struc­ture, with a high ru­ral and low in­come pop­u­la­tion, high­lights the po­ten­tial for mi­croin­sur­ance, which is ripe for fur­ther growth. Among ASEAN coun­tries, the Philip­pines has taken a lead in de­vel­op­ing mi­croin­sur­ance prod­ucts.

CAP­I­TAL STRESS BUILDS

The in­sur­ance in­dus­try is con­fronting reg­u­la­tory change with the ma­jor chal­lenge of stronger cap­i­tal re­quire­ments un­der the amended In­sur­ance Code, which was passed into law in Au­gust 2013. The new cap­i­tal re­quire­ments fo­cus on the level of net worth in­stead of paid-up cap­i­tal. The com­po­nents of net worth are broader, in­clud­ing paid-up cap­i­tal, re­tained earn­ings, unim­paired sur­plus and reval­u­a­tion of as­sets ap­proved by the in­sur­ance com­mis­sioner.

The re­quire­ment for min­i­mum net worth is 250 mil­lion Philip­pine pe­sos (PHP) (USD 5.5 mil­lion) by June 2013; PHP 550 mil­lion by 2016; PHP 900 mil­lion pe­sos by 2019, and PHP 1.3 bil­lion by 2022. New en­try in­surer needs to have PHP 1 bil­lion in paid-up cap­i­tal. Nine­teen out of 80 non-life com­pa­nies had a net worth lower than PHP 250 mil­lion in 2012, ac­cord­ing to the Philip­pines In­sur­ance Com­mis­sion (IC). In 2011, 35 out of 84 non-life in­sur­ers had a net worth lower than PHP 250 mil­lion. The re­cent hike in cap­i­tal re­quire­ments has led to in­dus­try con­sol­i­da­tion. As a re­sult, the num­ber of non-life in­sur­ers is shrink­ing. For ex­am­ple, three non-life com­pa­nies, Philip­pines Phoenix In­sur­ance & Surety Corp., Sum­mit Guar­anty In­sur­ance Co. Inc. and CAP Gen In­sur­ance Corp., were not is­sued li­censes for fail­ing to meet cap­i­tal re­quire­ments last year, ac­cord­ing to the IC. In ad­di­tion, two non-life in­sur­ers were merged into other com­pa­nies: Util­ity As­sur­ance Corp. was ab­sorbed by Strong­hold In­sur­ance Co. in Septem­ber 2012; and Manila In­sur­ance Co. was ab­sorbed by Pre­mier In­sur­ance & Surety Corp. Cap­i­tal­iza­tion has been a ma­jor is­sue for most non-life com­pa­nies. Small to medium-sized play­ers in the non-life in­dus­try, in par­tic­u­lar, are find­ing it dif­fi­cult to com­ply with in­creased cap­i­tal re­quire­ments. Lack of re­sources, the in­abil­ity of stock­hold­ers to raise funds, and too few in­vestors to in­ject cap­i­tal are among the dif­fi­cul­ties fac­ing in­sur­ance com­pa­nies, ac­cord­ing to the IC. Also, there has not been much in­ter­est in buy­ing into in­sur­ance busi­ness in the Philip­pines in re­cent years. For in­stance, Starr In­ter­na­tional has been the only com­pany to launch a branch in the coun­try over the past few years. Reg­u­la­tory changes are aimed at mak­ing the in­sur­ance sec­tor more com­pet­i­tive for the up­com­ing free trade agree­ment in the cre­ation of an ASEAN Eco­nomic Com­mu­nity (AEC) in 2015. Ac­cord­ing to the IC, “the com­pe­ti­tion to sell in­sur­ance prod­ucts would be greater as an even play­ing field will be es­tab­lished.” With in­creas­ing cap­i­tal re­quire­ments, the reg­u­la­tor be­lieves that merg­ers and con­sol­i­da­tions will re­sult in the pool­ing of re­sources, as­sets, man­power and li­a­bil­i­ties. This will im­prove the mar­ket’s struc­ture as smaller com­pa­nies merge with big­ger play­ers to cre­ate firms with stronger, more sta­ble fi­nan­cial po­si­tions. In other reg­u­la­tory de­vel­op­ments, the Philip­pines in­tro­duced a risk-based cap­i­tal (RBC) frame­work in 2006, but it has been im­ple­mented as a sup­ple­ment to the sol­vency mar­gin re­quire­ment. The reg­u­la­tor has stated that the cur­rent RBC frame­work “has to be strength­ened be­fore it be­comes the sole ba­sis for sol­vency de­ter­mi­na­tion of in­sur­ance com­pa­nies un­der the new In­sur­ance Code.”

SLUG­GISH DE­VEL­OP­MENT

The non-life sec­tor is shared by a large num­ber of in­sur­ers, mostly small to medium-sized do­mes­tic play­ers. The top 10 non-life in­sur­ance com­pa­nies gen­er­ated 62% of to­tal gross pre­mium writ­ten (GPW) based on the IC’s 2012 re­port on 81 in­sur­ers. The top five play­ers ac­counted for 41.2%. Fire and al­lied per­ils cover was the ma­jor line, ac­count­ing for 38% of non-life pre­mi­ums in 2012, fol­lowed by mo­tor at 27%. The Philip­pines has a small non-life mar­ket among ASEAN coun­tries, with a pre­mium size sim­i­lar to that of Viet­nam. The non-life in­dus­try posted a 10.9% in­crease in GPW to PHP 54.6 bil­lion in 2012, ac­cord­ing to the IC. The non-life in­dus­try has posted an aver­age an­nual growth rate of about 6.5% over the past decade with a pen­e­tra­tion of around 0.5%.

The non-life sec­tor has been

The non-life sec­tor has been chal­lenged by pric­ing com­pe­ti­tion, an un­fa­vor­able eco­nomic struc­ture, high taxes and the threat of nat­u­ral catas­tro­phes.

chal­lenged by pric­ing com­pe­ti­tion, an un­fa­vor­able eco­nomic struc­ture, high taxes and the threat of nat­u­ral catas­tro­phes. Pric­ing com­pe­ti­tion continues to drive pre­mium rates down in the Philip­pines. Mo­tor, fire and per­sonal ac­ci­dent prod­ucts are gen­er­ally of­fered by most com­pa­nies. How­ever, de­mand has been tepid. Eco­nomic pros­per­ity in the Philip­pines has not risen at the same rate as other ASEAN mar­kets, which have seen the mid­dle class grow sig­nif­i­cantly and fuel in­sur­ance de­mand. The Philip­pines has a very young pop­u­la­tion and a high con­cen­tra­tion of wealth among a rel­a­tively small part of the pop­u­la­tion. Many in­di­vid­u­als re­main fi­nan­cially chal­lenged and un­able to af­ford in­sur­ance. In­vest­ment ac­tiv­ity has also been weak in the Philip­pines due to un­der­in­vest­ment in the in­fra­struc­ture, power plants and util­i­ties. The Philip­pines In­sur­ers & Rein­sur­ers As­so­ci­a­tion (PIRA) has pushed for a lower tax struc­ture to im­prove non-life pen­e­tra­tion. Cur­rently, taxes amount to over 26% of pre­mi­ums, in­clud­ing a 12% value-added tax, a 12.5% doc­u­men­tary stamp tax, a 2% fire ser­vice tax and 0.15%-0.75% in var­i­ous forms of lo­cal govern­ment tax. The as­so­ci­a­tion has lob­bied to re­duce these var­i­ous taxes in or­der to make non-life prod­ucts more af­ford­able. The non-life sec­tor re­ported loss ra­tios rang­ing from 42% to 50% dur­ing a five-year pe­riod that ended in 2012. In­sur­ers have main­tained low re­ten­tion rates, par­tic­u­larly for higher risk busi­ness lines such as fire and al­lied prod­ucts, with a re­ten­tion rate at 22.3% in 2012. To­tal rein­sur­ance pre­mium ceded amounted PHP 32.3 bil­lion, rep­re­sent­ing 53% of gross pre­mi­ums in 2012. This high rein­sur­ance uti­liza­tion has con­trib­uted to most non-life in­sur­ers’ sta­ble un­der­writ­ing re­sults de­spite high nat­u­ral catas­tro­phes risks. In­vest­ment re­turns have also been a key in­come source. How­ever, most non-life com­pa­nies have high op­er­at­ing ex­penses com­pared to their coun­ter­parts in neigh­bor­ing coun­tries such as In­done­sia and Thai­land. As a re­sult, com­pa­nies need to re­duce

costs or in­crease rev­enue to cover ex­penses. In 2012, the in­dus­try saw a 16% drop in net in­come to PHP 2.4 bil­lion, ac­cord­ing to the IC.

THREAT OF NAT­U­RAL CATAS­TRO­PHES

The Philip­pines are prone to nat­u­ral catas­tro­phes in­clud­ing earthquakes, ty­phoons, floods and vol­canic erup­tions. The coun­try is hit by more than 20 ty­phoons ev­ery year on aver­age. The U.N. has iden­ti­fied the Philip­pines as the world’s third-most dis­as­ter prone coun­try af­ter Van­u­atu and the Repub­lic of Palau. In the aftermath of Typhoon Haiyan (known lo­cally as Yolanda), the govern­ment re­vealed plans to set up a manda­tory risk in­sur­ance pool to help lo­cal govern­ment units bet­ter re­spond to nat­u­ral catas­tro­phes. The dis­as­ter risk in­sur­ance pool is ex­pected to cover lo­cal govern­ment in­fra­struc­tures, such as mu­nic­i­pal build­ings, schools and mar­kets. In ad­di­tion, the U.N. Of­fice for Dis­as­ter Risk Re­duc­tion has worked with global in­sur­ance en­ti­ties on a new ap­proach for catas­tro­phe risk fi­nanc­ing in the Philip­pines. The pro­posed catas­tro­phe scheme, known as the Philip­pines Risk and In­sur­ance Scheme for Mu­nic­i­pal­i­ties (PRISM), is be­ing de­signed as a fast­track way of pro­vid­ing bud­getary sup­port af­ter a ma­jor nat­u­ral dis­as­ter. The pay­ment of claims is not based on ac­tual losses, but on a pre-agreed amount when a spe­cific trig­ger is met. For in­stance, in­sur­ance will be paid out in the event of rain­fall ex­ceed­ing a cer­tain num­ber of inches, or wind speed that ex­ceeds a cer­tain thresh­old.

In ad­di­tion, PIRA, the IC and the Asian De­vel­op­ment Bank have planned for a nat­u­ral catas­tro­phe pool to cover earthquake risks for house­holds and small and medium-sized en­ter­prises. An earthquake in­sur­ance com­pany funded by both the pri­vate sec­tor and the govern­ment has been sug­gested to cover the risk. The es­tab­lish­ment of Earthquake Pro­tec­tion In­sur­ance Corp. aims to de­velop the struc­ture for im­ple­ment­ing manda­tory earthquake in­sur­ance cov­er­age with do­mes­tic non-life in­sur­ers and rein­sur­ers. Cur­rently, only 12% of the coun­try’s build­ings are es­ti­mated to have a fire in­sur­ance pol­icy. A num­ber of in­sur­ance com­pa­nies of­fer earthquake in­sur­ance but the high cost is un­af­ford­able for most people. Typhoon Haiyan, which hit the cen­tral prov­inces in Novem­ber 2013, was recorded as the most pow­er­ful land­fall trop­i­cal cy­clone to af­fect the Philip­pines. Ex­treme winds and storm surges brought se­vere de­struc­tion with es­ti­mated eco­nomic loss of about USD 10 bil­lion, ac­cord­ing to fig­ures from Aon Benfield. In­sured losses are pro­jected at USD 1.5 bil­lion, rep­re­sent­ing just a small por­tion of eco­nomic loss due to low in­sur­ance pen­e­tra­tion in the ty­phoonhit area. The ma­te­rial im­pact of non-life in­sured losses is ex­pected to drag into the first and sec­ond quar­ters of 2014 as a ma­jor­ity of the claims have not been set­tled. Nat­u­ral catas­tro­phes such as wind­storms, earthquakes or other al­lied risks are cov­ered ei­ther by ex­ten­sions to fire in­sur­ance poli­cies or un­der sep­a­rate poli­cies. Non-life com­pa­nies of­fer catas­tro­phe cov­ers backed by rein­sur­ance. In­sur­ers writ­ing fire and al­lied per­ils cov­er­age have to se­cure 5% of their catas­tro­phe risks with rein­sur­ance. Na­tional Rein­sur­ance Corp.

The U.N. has iden­ti­fied the Philip­pines as the world’s third­most dis­as­ter prone coun­try af­ter Van­u­atu and the Repub­lic of Palau.

of the Philip­pines (PhilNaRe), the coun­try’s sole rein­surer, en­joys a com­pul­sory ces­sion from non-life in­sur­ers, which are re­quired to cede 10% of their for­eign out­ward rein­sur­ance to PhilNaRe. Rein­sur­ance ceded amounted PHP 32.3 bil­lion, rep­re­sent­ing 53% of to­tal GPW in 2012, ac­cord­ing to PIRA. Fire and al­lied per­ils busi­ness had 77.6% of GPW ceded to rein­sur­ance. For the Jan­uary 2014 re­newal, there was an over­all 20% in­crease in rein­sur­ance rates for catas­tro­phe loss hit property pro­grams due to the im­pact of Typhoon Haiyan.

THE AT­TRAC­TION OF MI­CROIN­SUR­ANCE

The Philip­pines has the high­est mi­croin­sur­ance cov­er­age ra­tio in Asia at 21.3%, com­pared with 14% in sec­ond placed Thai­land and 9.2% in In­dia in third, ac­cord­ing to a brief­ing note pub­lished by the Mu­nich Re Foun­da­tion ti­tled The Land­scape of Mi­croin­sur­ance in Asia and Ocea­nia 2013. There were 19.9 mil­lion Filipinos cov­ered by mi­croin­sur­ance in 2013, up from 3.1 mil­lion in 2008. This fa­vor­able trend is a bright spot in the Philip­pines in­sur­ance land­scape and stands out among emerg­ing Asian mar­kets at­tempt­ing to cap­ture this un­tapped mar­ket. The coun­try’s vast low-in­come pop­u­la­tion have un­met pro­tec­tion against nat­u­ral catas­tro­phe, agri­cul­ture, med­i­cal and life risk. In Asia, the Philip­pines has played a leading role in de­vel­op­ing mi­croin­sur­ance, sup­ported by the govern­ment along with in­ter­na­tional aid. The Depart­ment of Fi­nance launched the Na­tional Strat­egy and Reg­u­la­tory Frame­work for Mi­croin­sur­ance in 2010, out­lin­ing govern­ment pol­icy and per­for­mance stan­dards for this seg­ment. The key strate­gies are to pro­mote the par­tic­i­pa­tion of pri­vate sec­tor in the

de­liv­ery of mi­croin­sur­ance prod­ucts and ser­vices, and to en­hance in­sur­ance ac­ces­si­bil­ity to low in­come groups. Mi­croin­sur­ance is a key pri­or­ity of the IC, which tar­gets 27 mil­lion low in­come Filipinos for in­sur­ance cov­er­age by 2016. The coun­try’s amended In­sur­ance Code in­cludes a chap­ter on mi­croin­sur­ance as a fi­nan­cial prod­uct and ser­vice to meet the poor’s risk pro­tec­tion needs. The reg­u­la­tion out­lines mi­croin­sur­ance pro­vi­sions as well as con­ces­sions. Mi­croin­sur­ance prod­ucts are de­fined as those poli­cies with pre­mi­ums not ex­ceed­ing 5% of the cur­rent daily min­i­mum wage rate of nona­gri­cul­tural work­ers in metro Manila. Prior to 2010, only mu­tual ben­e­fit as­so­ci­a­tions sold low-cost in­for­mal in­sur­ance prod­ucts. Var­i­ous govern­ment pro­grams and re­forms have fu­eled mi­croin­sur­ance de­vel­op­ment. For in­sur­ance, Mu­nich Re rolled out its first mi­croin­sur­ance prod­uct in the Philip­pines to pro­vide pro­tec­tion for the lend­ing ca­pac­ity of co­op­er­a­tives to low-in­come groups against ex­treme weather events in 2010. About 19 in­sur­ance com­pa­nies and 17 mu­tual ben­e­fit as­so­ci­a­tions now of­fer mi­croin­sur­ance. The IC ap­proved 80 mi­croin­sur­ance prod­ucts in 2012, in­clud­ing 54 life and 26 non-life prod­ucts. Mi­croin­sur­ance has sub­stan­tial po­ten­tial in Philip­pines’ cur­rent mar­ket struc­ture. About 26.5% of the pop­u­la­tion lives be­low the poverty line while 51% of the pop­u­la­tion lives in ru­ral ar­eas. Ex­tend­ing pro­tec­tion to the ma­jor­ity of the pop­u­la­tion has not just been on the in­dus­try’s agenda in the Philip­pines, but also in many emerg­ing mar­kets. How­ever, pri­vate in­sur­ers are gen­er­ally re­luc­tant to write mi­croin­sur­ance due to fi­nan­cial con­sid­er­a­tions. Ac­tive par­tic­i­pa­tion of pri­vate in­sur­ers, rein­sur­ers, non-govern­ment or­ga­ni­za­tions and govern­ment is crit­i­cal to cre­ate a sus­tain­able pri­vate-pub­lic part­ner­ship. In Asia, the Philip­pines is tak­ing the lead in build­ing the struc­ture to fa­cil­i­tate mi­croin­sur­ance de­vel­op­ment with reg­u­la­tory frame­work in mi­cro­fi­nance, more ac­tive pri­vate par­tic­i­pa­tion, and through non­govern­ment or­ga­ni­za­tions such as the Asian De­vel­op­ment Bank. Go­ing for­ward, mi­croin­sur­ance of­fers a po­ten­tial mar­ket for the Philip­pines to demon­strate its strength in the ASEAN re­gion. Mi­croin­sur­ance must be com­mer­cially vi­able in or­der to flour­ish. Govern­ment sup­port as well as in­ter­na­tional aid are key driv­ers, but this may ul­ti­mately raise con­cerns over fi­nan­cial pres­sure on the coun­try’s fis­cal budget. There­fore, long-term de­vel­op­ment re­quires the par­tic­i­pa­tion of pri­vate play­ers to help drive the vi­a­bil­ity of mi­croin­sur­ance prod­ucts. Build­ing a cost-ef­fec­tive busi­ness model for dis­tri­bu­tion, oper­a­tion and ad­min­is­tra­tion is a key task for mi­croin­sur­ance providers. Rais­ing aware­ness on risks and pro­tec­tion needs among the low in­come seg­ment is es­sen­tial to cre­ate an in­sur­ance-buy­ing cul­ture. The re­al­iza­tion of mi­croin­sur­ance po­ten­tial de­pends on the suc­cess on push­ing for­ward these driv­ing fac­tors. Over­all, the Philip­pines has proven to of­fer a good en­vi­ron­ment to nour­ish such de­vel­op­ment.

Mi­croin­sur­ance must be com­mer­cially vi­able in or­der to flour­ish. Govern­ment sup­port as well as in­ter­na­tional aid are key driv­ers, but this may ul­ti­mately raise con­cerns over fi­nan­cial pres­sure on the coun­try’s fis­cal budget.

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