The Philippine insurance industry expands despite the effects of natural disasters

With development dating back nearly 200 years, the Philippine insurance sector is among the region’s most mature and competitive, expanding steadily in recent years despite serious challenges in 2014. The nation remains prone to natural disasters, as evidenced by Typhoon Haiyan, a category-five storm that caused billions in damage when it struck in November 2013. It cost the sector millions and dampened industry growth the following year. The industry stayed resilient, however, with continuing growth in investment and assets in 2014. While the life segment remains the driver, the non-life segment holds considerable potential. State investment in crop and health schemes underpins efforts to expand critical coverage nationwide.

Meanwhile, the burgeoning micro-insurance segment has helped turn the Philippines into Asia’s leading market for microfinance. Although the industry remains somewhat crowded and highly competitive, a recent push for consolidation, including ongoing hikes in capital requirements, should keep the sector on a strong upwards trajectory in 2015 and beyond.

STRUCTURE: The Philippine insurance sector is supervised by the Insurance Commission (IC), which falls under the Department of Finance (DoF). Established in 1949, the IC supervises and regulates operations at insurance and reinsurance companies, as well as “preneed” firms that provide contracts for the provision of future payments to services including life, pension, education and interment. All agents, underwriters, brokers, adjusters and actuaries must be licensed, and all licences must be renewed every three years.

The Philippines was an early adopter of social insurance schemes, beginning in 1937 with the Government Service Insurance System. In 1969 the Philippine Medical Care Commission was created to oversee implementation of universal health insurance, and in 1995 the government passed reforms under the National Health Insurance Act, which led to the creation of the Philippine Health Insurance Corporation (PhilHealth). PhilHealth was mandated with providing social health insurance coverage to all Filipinos within 15 years, and it has seen membership rise steadily since its inception, reaching 65.44m in 2013, or nearly 70% of the population. This growth has been supported by recent legislation, including the passage of the National Health Insurance Act in June 2013, which promises coverage for all Filipinos, including indigents and the disabled, and the introduction of expanded, lifelong health coverage for senior citizens in November 2014.

As of December 2013, the country’s insurance sector was composed of 63 brokers, 31 life insurers, 71 non-life insurers and one reinsurance firm, compared to 29 life, 79 non-life and one reinsurer in December 2012. The life segment is dominated by foreign firms, including Sun Life, American Life & General Insurance and France’s AXA, and private firms have been in the market since Lloyd’s set up operations in 1829. Local insurers make up most of the non-life market, led in gross written premiums (GWPs) by Malayan Insurance. The non-life market is quite concentrated, with the top-15 insurers holding nearly 70% of segment GWPs.

At present there are no restrictions on foreign direct investment in the sector, though overseas firms must meet higher capital requirements than locals. According to Swiss Re, insurance penetration to GDP stood at around 2% in 2013, after the industry expanded by a region-leading 38% in 2012, driven by sales of equity-linked variable insurance products, which offer above-average yields amidst a low-interest-rate environment.

GROWTH: According to Fitch Ratings, the increase in total premiums in 2013 was driven by strong growth in the life sector, where variable-unit policies have become increasingly popular. Meanwhile, the non-life sector grew more slowly, due primarily to higher claims from catastrophes, but also to the heavy tax burden on insurers, which amounted to nearly 27% of premiums. Indeed, the Philippine tax rates on insurance, which are among ASEAN’s highest, remain a major industry concern: insurers pay 12.5% for documentary stamps, a 12% value-added (or premium) tax, a 2% fire services tax, local government taxes, a 30% corporate income tax and a 20% tax on interest.

Data from the IC shows the industry’s total assets grew by 18.8% in 2013 to reach P891.8bn ($20.1bn), rising by a further 17% by the third quarter of 2014 to P1.04trn ($23.4bn), with the life segment accounting for nearly 85% of the total. Although premiums increased by 37.3% in 2013, to P198.13bn ($4.5bn), they declined by 15.3% year-on-year (y-o-y) in the third quarter of 2014 to P132.87bn ($3bn). Losses incurred rose by 16.9% in 2013, to P63.65bn ($1.4bn), and were up 12.24% y-o-y in the third quarter of 2014, at P52.28bn ($1.2bn). Following 11.65% growth in 2013, to P14.65bn ($329.6m), net income shrunk by 15.6% y-o-y in the third quarter of 2014 to P12.31bn ($277m).

LIFE & NON-LIFE: In the life segment, total assets grew by 18.89% in 2013 to reach P738.52bn ($16.6bn), increasing by a further 19% year to date in September 2014, to P878.85bn ($19.8bn). Premiums hit P171.21bn ($3.9bn) in 2013, a 42.27% y-o-y increase, but fell 19.4% y-o-y in September 2014 to P109.25bn ($2.5bn), representing some 82% of industry premiums. Losses incurred were up 13.9% in 2013, at P49.9bn ($1.12bn), and up 12.1% y-o-y in the third quarter of 2014, at P42.56bn ($957.6m). Net income in the segment rose by 31.63% to P13.83bn ($311.2m) in 2013, but was down 10.5% y-o-y in September 2014, at P10.68bn ($244.4m) For the non-life segment, assets were up 18.6% in 2013 at P153.28bn ($3.5bn), and increased by another 7.1% by September 2014, to P164.2bn ($3.69bn). Meanwhile, GWPs grew by 4.4% y-o-y in 2013 to P54.57bn ($1.2bn), and kept pace in the first nine months of 2014, up 0.23% y-o-y at P41.77bn ($939.8m). Losses incurred increased by 29% in 2013 to P13.8bn ($310.5m), and were up 12.85% y-o-y in the first nine months of 2014, to P9.72bn ($218.7m). Net income fell by 68.6% to P822.2m ($18.5m) in 2013 and was down 38.9% y-o-y in September 2014, at P1.63bn ($36.7m).

FUTURE PLANS: The IC hopes to see insurance penetration rise to 3% of GDP in the coming years, according to its commissioner, Emmanuel Dooc. Premiums are expected to rise by 15-20% in 2014, Dooc told local media, driven by new products and distribution channels, as well as micro-insurance growth. For its part, the IC plans to introduce reforms, including new oversight of health maintenance organisations – previously the task of the Department of Health – and the establishment of the Earthquake Protection Insurance Corporation, set to provide mandatory earthquake coverage.

With ASEAN integration ahead and continued growth in business process outsourcing, emerging risks such as cyber crime, fraud or corporate liability are also likely to be on the horizon for the Philippine industry.

NEW CODE: Senate Bill 3280, approved in August 2013 and known as the New Insurance Code, is expected to have a significant impact on revenues, penetration, quality, stability and competitiveness. One notable change is a measure to boost capitalisation and encourage consolidation. It also strengthens the IC’s regulatory powers; broadens the “self-insured” definition to protection of depositors, third parties and clients; and permits new payment channels, like salary deductions. Under the new law, the list of declarable assets has been expanded to include mutual funds, real estate investment trusts, salary loans and special deposit accounts, while the investment areas of insurance firms have widened to include investments of up to 25% of declared assets in obligations issued or guaranteed by local or foreign banks. These changes are reflected in rising industry investments, up 7.69% in 2013 and 8.87% yo-y in the third quarter of 2014 at P799.44bn ($18bn).

CAPITAL REQUIREMENTS: With the market at risk of oversaturation and competition increasingly strong, the government has supported industry consolidation, most notably through new capital rules. In June 2012 the DoF enacted regulations raising capital requirements for both life and non-life insurers, using a staggered timeline later adopted in the New Insurance Code. According to Fitch, these measures have made it difficult for small players, with 32 firms placed under conservatorship and liquidation processes at end-2012. As such, consolidation will likely take the shape of some small players ceasing to operate altogether, with merger and acquisition activity restricted to the top-20 firms.

Under the new rules, any company more than 60% foreign-owned must have at least P500m ($11.3m) in paid-up capital; those that are 40-60% foreign-owned needed P400m ($9m) by the end of 2014. All firms with over 40% foreign equity will need P600m ($13.5m) by end-2016, P800m ($18m) by end-2018 and P1bn ($22.5m) by end-2020. In contrast, capital requirements for locally owned firms stood at P250m ($5.6m), although this rose to P400m ($9m) on December 31, 2014, and will follow the same increases, on the same timeline as foreign companies, to reach the same minimum capital requirement of P1bn ($22.5m) by 2020. All new insurers are required to have P1bn ($22.5m) in capital, while existing micro-insurers are subject to 50% of the rates of applicable minimum requirements.

NATURAL DISASTERS: According to Fitch, the non-life sector is expected to report a net loss in the fourth quarter of 2014 due to claims from Typhoon Haiyan. Catastrophe risk modelling firm AIR Worldwide estimated that insurers paid just a fraction of the $14.5bn-odd in damage caused by the storm, with the agency reporting in 2013 that Haiyan could cost the industry as much as $700m, with insured losses of at least $300m. This was largely mitigated by low insurance penetration.

Indeed, natural disasters represent a significant hazard for Philippine insurers. According to the Office of Foreign Disaster Assistance and the Centre for Research on the Epidemiology of Disasters, the country ranks third globally in terms of the number of natural disasters it experiences each year, and is under almost constant threat of major disasters, with an average of 20 major weather events annually. Its geographic location on the Pacific Rim of Fire also leaves it vulnerable to earthquakes and volcanic eruptions (see Economy chapter).

The frequency of natural disasters, combined with rising capital requirements, should cause a wave of mergers and acquisitions in the industry, according to Fitch. Some consolidation has already occurred in recent years, with the number of active non-life companies in the country falling from 79 to 71 y-o-y as of December 2013. In line with the IC, Fitch welcomes industry consolidation, saying it views tightened regulation in a positive light, as it “weeds out under-capitalised players and should reduce industry overcrowding while the Philippines prepares for the ASEAN Economic Community framework in 2015”.

HEALTH COVERAGE: As the government remains dedicated to extending health coverage to every citizen by 2016, PhilHealth has become the largest recipient of state subsidies – more than half of the 2014 total at P35.31bn ($794.5m), according to the DoF. Now in its 20th year of operation, PhilHealth has seen a sharp rise in the number of citizens covered in recent years: membership grew more than sevenfold in the 10 years to 2013, reaching 65.44m from 8.8m in 2003. Such growth has been driven in part by state subsidisation of premiums for indigent Filipinos under the Department of Social Welfare and Development’s National Household Targeting System for Poverty Reduction, which provides coverage for an estimated 14.7m people.

Enrolment is set to grow further in 2015 following a number of reforms announced in November 2014. These include plans to expand coverage for senior citizens, establish new health care providers and introduce new benefits for members. According to Owen Magalona, chief social insurance officer of PhilHealth Bacolod, seniors who have been PhilHealth members for at least 10 years will become lifetime members, while member benefits will expand to include a P600,000 ($13,500) package for catastrophe coverage.

To reduce the burden on hospitals, PhilHealth plans to accredit several local-level health centres, birthing clinics and dialysis clinics. It also relaunched its Primary Care Benefit package under a new brand, TSeKap, which covers indigent and sponsored members, members of organised groups, non-maritime overseas Filipino workers and employees of the Department of Education. Focusing on outpatient coverage, TSeKap aims to increase the role of health centres, which will offer hospital referrals if needed. PhilHealth has also pledged to reduce average claim processing time from 60 to 18 days, while a new case rate system will offer fixed benefits for specific conditions.

MICROINSURANCE: Although overall penetration remains low in the Philippines – comprehensive policies are still viewed as more of a luxury than a necessity – the microinsurance segment holds considerable potential for low-income Filipinos. In December 2014, the Economist Intelligence Unit reported that the central bank’s move to establish a financial inclusiveness body has helped the Philippines become Asia’s leading market for microfinance products, including microinsurance. The National Strategy for Microfinance, formed in 1997, kick-started efforts to promote microinsurance, which were formalised by an insurance circular in 2006 and amended by a second one in 2010.

The first of these set initial microinsurance parameters, such as caps on daily premiums and guaranteed benefits – which were amended by the New Insurance Code in August 2013. Today, premiums are limited to 7.5% of the daily minimum wage for non-agricultural workers. Benefits are capped at 1000 times this figure.

The second circular made the insurance market more accessible to the public, offering accreditation for life and non-life microinsurers, cooperative insurance societies and mutual benefit associations to sell microinsurance products. New distribution channels were also approved, including microinsurance agents and brokers, rural banks, microfinance institutions, non-governmental organisations and cooperatives. Capital requirements for microinsurance providers were lowered.

Microinsurance has grown rapidly as a result of public and private sector efforts. According to a 2013 report by the Registered Financial Planners Institute and German development firm GIZ, which partnered with the government and the Asian Development Bank to develop the nation’s microinsurance industry, there were 35 commercial firms selling microinsurance products as of end-2012, including 17 life and 18 non-life, while the IC had approved 80 new microinsurance products, including 54 life and 26 non-life products. Another 17 mutual benefit associations had been licensed to sell microinsurance products, the report said.

The IC reported in November 2014 that 27.96m Filipinos had microinsurance coverage in 2013, with penetration rising from 7.22% in 2009 to 28.62% in 2013. According to a separate 2013 report by Munich Re, the Philippines has the highest microinsurance penetration ratio in the Asia and Oceania region, at 21.35% of the population, well above Thailand (14.02%), India (9.22%), Bangladesh (6.2%) and Malaysia (3.84%.) In a February 2014 report, Fitch lauded the administration of President Benigno Aquino III for its progress in promoting microinsurance schemes, forecasting that strong growth for the segment would continue in the coming years.

CROP INSURANCE: Though agriculture and fishing account for 15% of GDP and one-third of the workforce, Filipino farmers remain vulnerable to crop damage caused by natural disasters. In November 2013, the UN Food and Agriculture Organisation reported that crop losses caused by Typhoon Haiyan reached $110m. Total damage to the agriculture sector was more than twice that, while the typhoon destroyed an estimated 153,495 ha of rice paddy, maize and high-value crops including coconut, banana, cassava, mango and vegetables. In December 2014, tropical storm Hagupit – Filipino for “whip” – made landfall four times in the Philippines. Crop damage in the eastern Visayas region alone was estimated at P385m ($8.7m) by the while total economic damages stood at around 0.5% of GDP, spurring the government and private sector to ramp up offerings in disaster crop insurance. One of these is a data-based scheme called weather index insurance (WII). In January 2014, the UN Office for Disaster Risk Reduction partnered with multinationals Willis Group and Munich Re to develop a WII scheme for the Philippines as way to deal with crop damage. Under this plan, payments will be set at a predetermined amount when a specific calamity threshold, such as rainfall or wind strength, is crossed (see analysis).

OUTLOOK: Despite a challenging year, the sector remained healthy in 2014, with solid growth in the life, health and micro-insurance segments underpinning state efforts to expand coverage for low-income people through targeted investment. Although natural disasters remain a serious threat to the industry, new crop insurance prototypes could see weather-index-based offerings gain commercial traction in the coming years. Meanwhile, the industry remains open to foreign investment, despite a high tax burden and rising capital requirements. Indeed, recently enacted legislation, though painful for some smaller players, should improve industry stability and spur consolidation in 2015, keeping the industry on a steady long-term growth path.