A proposal to institute mandatory household and business insurance cover against natural disasters is set to go before the Philippine government. If passed, the measure could not only help mitigate risk stemming from catastrophic events, but also broaden the base of the underwriting sector.
With the country seen as vulnerable to climate change, it is likely that the threats posed by environmental disaster will only increase in the coming decades, serving as a spur for greater insurance coverage.
Although there has been some increase in the number of Filipinos taking out policies against natural threats, the Philippine Insurers and Reinsurers Association (PIRA), which helped draft the proposed regulations, believes a compulsory scheme is the only way to develop a pool of funds deep enough to meet the claims likely to be made.
The coverage debate
In late October the head of the Insurance Commission (IC) announced that the industry regulator would resubmit a proposal to introduce compulsory catastrophe insurance to ensure basic coverage for homeowners and small and medium-sized enterprises (SMEs).
The bill calls for all households and SMEs to take out policies covering natural disasters, including storm, flood and quake damage. Under the proposal, a pool of private insurers will underwrite the policies according to their corresponding subscriptions to the pool, which are based on their respective risk exposures.
According to Emmanuel Dooc, insurance commissioner, the government is already considering options for disaster coverage, though has not indicated whether it favours the IC’s proposal of mandatory catastrophe insurance.
“We know that the plate is full and that there are many ongoing initiatives, but we hope that this matter [will] also be addressed,” Dooc told local media.
The debate over whether to make catastrophe cover mandatory has been ongoing for some time. Earlier this year the draft proposal, which had the backing of the Department of Finance, lapsed after outgoing president Benigno Aquino III did not sign off on an executive order allowing for the launch of the scheme ahead of formal legislation.
The Philippines has an established track record of exposure to natural disasters, in particular extreme weather events such as typhoons and flooding. Three years ago, for example, Super Typhoon Haiyan cost the economy approximately $14bn, only $2bn of which was covered by insurance.
The country’s capital also has a significant level of vulnerability. According to international insurer Lloyd’s City Risk Index 2015-25, more than half of Manila’s average annual GDP of $201.1bn is at risk of being lost in the event of a natural catastrophe without any form of insurance cover.
While agriculture is one industry with a mandatory insurance scheme already in place, it only provides coverage for a limited range of crops. According to the Philippine Crop Insurance Corporation (PCIC), the programme’s operator, only 3% of the country’s agricultural production is currently covered.
A proposal to widen mandatory crop insurance to include certain classes of rice producers, as well as growers of other staples, was tabled with the Senate at the end of September.
The PCIC recently set aside P622m ($12.8m) to cover losses suffered by insured primary producers as a result of Typhoon Karen, which hit the country in mid-October, and Super Typhoon Lawin, which struck on October 19. The two storms caused damage estimated at P20.2bn ($418.5m), more than half of which was from crop losses.
In addition to the PIRA, which represents the interests of non-life insurance firms in the country to the IC, the planned mandatory disaster coverage programme has the support of private sector insurers, and is backed by the World Bank.
If instituted, the scheme could give a lift to the industry, which is struggling to boost premium earnings. According to data issued by the IC, while local insurers saw total net income jump by 76.5% year-on-year (y-o-y) in the first half of the year to reach P19.2bn ($397.3m), this growth largely stemmed from a solid performance in non-premium revenue.
In contrast to the strong showing from investments and other revenue sources, the combined life and non-life components of the industry recorded a 9% y-o-y fall in premium income over the same period to P105.5bn ($2.2bn).
Despite weaker premium earnings, the industry posted asset growth of 20.5% y-o-y in the first six months of 2016, mainly based on increased investments, with the Philippines’ insurance sector’s combined net worth up 40% at P262.5bn ($5.4bn).
Mandatory disaster coverage could also boost the Philippines’ overall penetration rate, which over the past five years has averaged around 1% of GDP, well below the ASEAN average of 3.4% and the IC’s target of 3% by 2019.
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