State of the General Insurance Market - Part II|
Roberto B. Crisol
The 7th Philippine Non-Life Insurance Summit
Hotel Intercontinental, Makati City
April 28, 2010
First of all, I would like to thank Mr. Ronnie de Dios, publisher of Insurance Philippines and organizer par excellence of this summit for his kind invitation to speak before you this morning on the state of the Philippine general insurance industry in relation to the theme “Risk Managing the Increasing Incidence of Natural Disasters – The Insurance/Reinsurance Challenge”.
Before I do so, the Insurance Commission has just come out with its 2008 Annual Report and I would like to give you some highlights of the Non-Life sector’s performance in that year.
- Gross Premiums Written reached P31.2 billion or a 7% increase over 2007.
- Major contributors to total GPW were Fire with a share of 33%; Motor Car with 32%; and Casualty with 20%.
- Showing improved incurred loss ratios were Motor Car at 53% from 50% in 2007 and Suretyship at 6% from 13%.
- Registering higher incurred loss ratios were Fire & AP at 53% from 41%; Marine at 55% from 44%; and Casualty at 41% from 39%.
- Over-all loss ratio rose to 47% from 45%.
- Total Non-Life net income after tax amounted to PHP1.93 billion which was 31% higher than that of the previous year.
- Total Non-Life GPW constituted a mere 0.38% of GNP (at current prices) compared to 0.40% in 2007 and 0.43% in 2006.
- Per capita expenditure for Non-Life insurance was around PHP342, up slightly from PHP328 in 2007. For Fire, it was PHP112 while for Earthquake, Typhoon and Flood, it was PHP24.
- A total of 7.5 million Non-Life insurance policies were issued which translates to insurance coverage of a mere 8% of the country’s total population of 91.1 million.
- Fire & AP policies numbered 1.05 million while those for Natural Perils totaled 249,000.
In the earlier presentation of my good friend Mitch Rellosa, Chairman of the PIRA, he asked the questions “What do We do About it?” and “Where do We Begin?” in relation to the catastrophe exposures of the Philippine market. Allow me to devote some time on this topic.
Typhoon Ondoy, or Ketsana as it is known internationally, was or should have been a wake-up call to the industry. Not since 1990, when a strong earthquake devastated Northern and Central Luzon, was the country affected by such a major catastrophe. And because the typhoon came at a time when a number of insurers were giving away free “Acts of God” cover on both property and motor policies, the amount of losses caused by the subsequent floods stunned the industry. While no definitive figure has been arrived at to-date, it is generally accepted that the total flood losses from the typhoon are in the vicinity of around PHP12 billion. (Kindly note that as 2009 statistics are not yet available from the IC, I will be using the 2008 figures as a basis for comparison.) Compare this amount of loss to the total gross Flood premiums for 2008 of just PHP308 million, total gross Natural Perils premiums of PHP2.16 billion, total gross Fire premiums of PHP9.55 billion and particularly to the industry’s net income of just PHP1.9 billion. Furthermore, the flood losses would eat up 41% of the total Non-Life gross premiums (direct business only) in 2008.
Assuming the same level of premiums, liabilities and average rate as that in 2008 but without factoring in the benefit of reinsurance, it would take roughly 38 years at the very least for the Flood class of business to recover. And this is assuming that there are no other large flood losses. On the other hand, with the same assumptions, if the industry wanted to recover the flood losses in just one year, it would have to charge an average premium rate of around 0.59% for the Flood class of business which is more than 10X the Typhoon/Flood tariff rate of 0.05%.
With the foregoing, one can readily appreciate the impact of the flood losses to the industry from this one typhoon. What more if the country is hit by several strong typhoons or a massive earthquake like those that happened in recent times in Haiti, Chile, Indonesia and China.
Yet, the industry should not really be surprised. One only has to review facts and figures from its past performance to realize that, as the saying goes, “we had it coming”.
While Typhoon and Flood liabilities grew by around 9,100% from 1988 to 2008, Typhoon/Flood premiums grew by only 1,700%. It is not difficult to conclude from this comparison alone that the premium base of the Typhoon/Flood class of business would not be able to absorb large losses. The industry’s net worth grew by an even lesser figure of 860%.
Annexes (5)-(7) show the growth in Gross Premiums Written, Gross Risks Written and Number of Policies for Fire, Earthquake and Typhoon/Flood. When one analyzes these figures, one finds that the average amount of premiums per policy is on the downward trend. For Earthquake, from a high of PHP2,042 in 2004, it dropped by 37% to PHP1,283 in 2008. For Typhoon/Flood, from a high of PHP927 in 2002, the amount went down to PHP570 in 2008 or a reduction of 38%. Hence, the industry has to issue more policies just to maintain its premium income for these classes, a case of running to just keep still.
Another factor that has to be given a serious look is the average premium rates the industry is charging. From the figures in Annex (8), which cover selected years during the period 1985-2008, one will note that such rates have been decreasing. For Fire, from a high of 0.475% in 1985, its average rate dropped to a low of 0.121% in 2008 which represents a reduction of around 75%. For Earthquake, it also recorded a high rate of 0.230% in 1985 but went down to its second lowest rate of 0.066% in 2008 which is a 71% decrease and is lower than the minimum/Tariff rate by 34%. The Typhoon/Flood classes of business reflected a combined high average rate of 0.143% in 1985 but a lower average rate of 0.021% in 2008, a dip of 85% and below the minimum/Tariff rate by 58%.
Looking at the average rates charged by individual companies writing Naturals Perils business in 2008, which I have categorized into Group A domestic companies, Group B domestic companies and Foreign companies, revealed some surprises. While the domestic companies under Group A collectively charged an average rate of around 0.06%, the domestic companies under Group B were charging more than twice the former’s rate. The average rates of foreign companies were also higher than those of the Group A domestic companies but lower than those of the Group B domestic companies. The market over-all average rate of 0.065% is lower than the minimum/Tariff rate of 0.10%. The picture is pretty much the same for Typhoon/Flood. Again while the Group B domestic companies charged an average rate of close to 0.08% or higher than the minimum/Tariff rate of 0.05%, the Group A domestic companies were charging 1/4 of that rate or around 0.02%. Foreign companies charged a slightly better average rate, of around 0.03%, than the Group A insurers but this was still below the minimum/Tariff rate. The combined Typhoon/Flood market over-all average rate works out at 0.02% which is 60% lower than the correct rate.
From the foregoing, it is clear that the ball is with both the domestic insurers as well as the foreign companies to set the right premium rates for Natural Perils. Mitch Rellosa mentioned earlier that with the initiative and support of the PIRA and the guidance and impetus of the Insurance Commission, the top 25 companies in the local market in terms of property portfolio have drafted a “Declaration of Mutual Covenant and Undertaking” (now being circulated in the industry for signature). Through this document, the companies concerned agree to “strictly adhere to and unwaveringly comply” with various circulars and issuances of the Insurance Commission with regards the writing of Natural Perils. Foremost among these is IC Circular 24-2006 stipulating the minimum premium for Natural Perils of 0.10% for Earthquake Fire and Shock and 0.05% for Typhoon & Flood and the corresponding penalties for breaches.
Although we are not a direct insurer, PhilNaRe gives its full and solid backing to this undertaking. On several occasions and during various industry gatherings, we have made very clear our belief that the market has to get its act together with regards natural catastrophes. It is pointless and even senseless to compete on rates on business that is sure to cause huge losses for everyone since the occurrence of natural disasters is not a matter of “if” but rather “when”. Already, the flood losses spawned by Typhoon Ondoy/Ketsana have given the market a glimpse of the magnitude of losses that natural catastrophes can and will bring. Even ahead of this undertaking, PhilNaRe decided to take the bold step of not accepting Fire business with Natural Perils if the premium rate is less than Natural Perils’ minimum/Tariff rate of 0.15%. We took this stance knowing full well that the company was bound to lose business considering the number of facultative risks being offered in the market with “all-in” or composite rates of 0.07% and below. But we felt that someone had to take the lead in stopping and even reversing the deterioration of premium rates in the market; otherwise, the situation which everybody was aware of and was worried about would not change. Besides, there was also an economic reason for our position. If we did not charge the proper rates for our Natural Perils business, such business would not generate sufficient premium income to pay for our Excess of Loss cover which was intended to protect us from the catastrophe exposures generated by our Natural Perils portfolio. It would have therefore been foolish for us to write business that would end up with a loss once the cost of Excess of Loss protection was factored in.
To our mind, the successful implementation of the undertaking will prove that the Non-Life insurance industry is made up of professional and responsible executives who honor their commitments. It will also prove that the industry can police itself and undertake the measures necessary for its long-term growth and profitabilty.
Once the undertaking is signed and, even more importantly, implemented, our suggestion is to take it one step further by extending the agreement to cover cessions to both treaty reinsurance and Excess of Loss covers. We do not want proportional treaties to become a dumping ground for underrated Fire policies covering Natural Perils. In our study of the Natural Perils aggregates reported under 70 Fire & AP proportional treaties in the Philippine market as at 30.09.09, we found that 67% of the treaties had average Earthquake rates that complied with or even exceeded the minimum/Tariff rate. On the other hand, 33% of the treaties recorded average rates of 0.09% and below, with 3 treaties showing average rates of less than 0.05%. For Typhoon/Flood, 66% of the treaties complied with or even exceeded the minimum/Tariff rate while 34% had average rates below the minimum/Tariff rate. Unfortunately, we were not able to gather the same data from non-proportional covers. Hopefully, we can strengthen and re-enforce the industry’s undertaking by plugging all loopholes including 100% compliance with the Natural Perils minimum/Tariff rates for all Fire proportional treaties and even Excess of Loss covers in the Philippine market.
What adds to the concern about the downtrend in average premium rates is that the Typhoon and Flood classes of business have been registering high incurred loss ratios. While the Earthquake class of business has, understandably, recorded very low loss ratios, one must remember the potential it has for massive losses arising from a Magnitude 7 or 8 event in exposed areas such as Metro Manila. The North and Central Luzon earthquake in 1990 produced an incurred loss ratio of 227% for the industry. With the losses from Typhoon Ondoy/Ketsana, it is to be expected that the incurred loss ratio for the Flood class of business will shoot up to triple digits in 2009 compared to that in 2008.
While the Insurance Commission mandates insurers to set up Catastrophe Loss reserves in their balance sheets, such reserves seem miniscule compared to the magnitude of potential losses that insurers face when writing Natural Perils. In 2008, the Non-Life industry’s total catastrophe loss reserves reached its highest level of PHP290 million. Compare that to the PHP70.8 billion in estimated losses which insurance firms may have to pay if we apply a PML of just 5% on the estimated 2008 Earthquake exposures of the industry in Zone A (calculated at 70% of the total, based on PhilNaRe’s own portfolio). Such amount of potential losses is also twice the direct companies’ total net worth of PHP35.7 billion in 2008. Hence, it is good that the Insurance Commission has also required companies writing Natural Perils to obtain a Catastrophe Excess of Loss cover protecting their exposures up to a specified level.
Needless to say, if the industry does not take its mutual covenant and undertaking seriously by complying with the relevant IC circulars, it just may need an undertaker as it will have to face the devastating or crippling consequences of a major earthquake or an even more powerful typhoon as predicted by experts. A joint study of the JICA and the government several years ago projected that if an earthquake of Magnitude 7 hits Metro Manila, there will be millions of persons dead, injured and need to be evacuated. 175,000 buildings would also be moderately-to-severely damaged. Using certain assumptions, we can estimate a possible loss to the market of around PHP44 billion for an earthquake of this magnitude occurring in the most exposed area in the country – Metro Manila. This should sound off alarm bells for the industry considering that its total net worth in 2008 was only around PHP36 billion. A failure of several insurance companies due to catastrophe losses would adversely affect the insuring public who placed their trust and their funds in these insurance firms.
Aside from issues related to natural catastrophes, allow me to dwell even briefly on another initiative taken by PhilNaRe. As part of an effort to stem the further rise in unpaid reinsurance balances, PhilNaRe earlier this year, undertook, admittedly not without controversy, a strict implementation of a 45-day Binder Warranty and a 120-day Premium Payment Warranty on all its facultative acceptances. We believe that this measure is necessary to maintain good order in facultative reinsurance transactions and ensure that any resulting claims will be settled fully and expeditiously. This is especially important during calamities like Typhoon Ondoy/Ketsana so direct insurers can rely on the support and assistance of their reinsurers to carry out their obligation to the insuring public. We believe that this “return to basics” policy corrects certain market practices that have actually led to problems for all parties concerned, whether they be cedants, reinsurers or brokers. It will also prevent an awkward situation between reinsurers and cedants where reinsurance transactions become cashless due to constant offsetting of premiums and cash calls. We are sure we all agree that this is not in the definition nor is it the intention of a “cashless” regime.
We realize that the issue of unpaid or unreconciled reinsurance balances may have some roots in the direct insurers’ problem of premium receivables from their assureds and intermediaries. Looking at the balance sheet of the industry from the IC annual reports, one will note that the amount of premium receivables of the Non-Life industry has steadily grown from PHP6.5 billion in 2004 to PHP8.9 billion in 2008, an increase of 36% over a 5-year period. It has also grown as a percentage of the industry’s total assets from 9.8% in 2004 to 12% in 2008 and as a percentage of Gross Written Premiums from 26% to 30%. The problem of receivables cannot be allowed to fester and become bigger because ultimately it will undermine and sap the financial stability of insurance companies.
While it is heartening to note that another concern – premiums due to reinsurers – has shown improvement over the last 5 years, it nonetheless remains at a significant level. In absolute amounts, premiums due to reinsurers declined from PHP6.8 billion in 2004 to PHP6.6 billion in 2008. As a percentage of the industry’s total liabilities, it has also decreased from 22% to 16% over the same period. Looking however at the percentage of premiums ceded that it represents, there is reason for discomfort as the percentages range from a low of 46% to a high of 54% over the period. Lowering these percentages would ensure that the industry can enjoy the continued support of domestic and international reinsurers.
We believe that the issue of unpaid or unreconciled reinsurance balances and the corollary concerns of premium receivables and premiums due to reinsurers require the attention and cooperation of all parties in the insurance community as well as the insurance regulatory authority. At a time when the Philippine market needs the sustained support and capacity of reinsurers due to the potentially huge losses that natural catastrophes, to which it is heavily exposed, can cause, it is imperative for the industry to ensure that relations with reinsurers are not strained by premium settlement problems.
In summary, the Philippine Non-Life insurance industry is at a crossroads. It has to prepare itself for natural catastrophes that are a matter of time rather than possibility. It must also be able to deal with internal problems that can gnaw at and erode the support of reinsurers who, after all, provide the wind beneath its wings.
Philippine Non-Life Market:
A Look at Current Issues and Concerns