Financial technology widens insurance distribution channels in the Philippines

Buoyed by recent rapid macroeconomic growth, the Philippines’ insurance industry has seen marked improvements in assets, density and penetration, with the life segment as its main engine. Foreign participation in the sector remains strong and companies are profitable, despite high competition.

Ongoing reforms are expected to encourage consolidation and improve consumer protection in 2018, with stiffer capitalisation requirements likely to push smaller players out of the market or into mergers. Other reforms, including changes to the industry’s risk-based capital (RBC) framework, may be rolled out in phases, owing to the market’s unique risk profile, while a new partnership with the World Bank should see disaster insurance coverage improve significantly in the coming years. The motor and micro-insurance lines, meanwhile, also hold the potential to support growth in the non-life segment.

As reforms progress, the market is expected to maintain a steady growth trajectory in 2018, upheld by strong projected life insurance sales, sustained macroeconomic expansion, and new fintech regulations that should broaden the base of distribution channels and support micro-insurance uptake.

Sector Make-Up

Insurance activities in the Philippines date back to the 1880s, and the sector is characterised by a long history of foreign participation. Of the 60 companies that were operating in the country in 1918, only nine were local insurers and 12 were from the US. Today, there are no limits on foreign equity ownership in a domestic insurer, insurance agent, broker or adjustment company.

Established in 1974, the Insurance Commission (IC) is the industry regulator, operating under the Department of Finance (DoF). The IC supervises and regulates all insurance and reinsurance corporations, mutual benefit associations, micro-insurance providers, health insurance providers and ratings organisations. Every insurance company needs IC authorisation to operate in the country, including agents, underwriters, brokers, adjusters, actuaries and trustees. Authorisations and licences are renewed every three years. The regulator permits risks to be ceded offshore to a non-resident foreign insurer or reinsurance broker, provided the company has an IC-licensed resident agent.

In 1995 the Philippine Health Insurance Corporation (PhilHealth) was established to provide universal health coverage to citizens, and as of February 2018, 93.4m people – nearly 90% of the population – were covered by PhilHealth. That same month the Senate Committee on Finance announced plans to augment the budget and extend public health coverage to 100% of the population after the Department of Health reported that 8m Filipinos were still lacking coverage (see Health chapter). PhilHealth premium are based on income, and the cost is shared equally between employers and employees. For instance, people earning less than P10,000 ($198) per month must pay monthly premium of P275 ($5.43), while premium for those having monthly wages of between P10,000 ($198) and P40,000 ($790) are calculated at a rate of 2.75% of their earnings.

Companies

There is still much congestion in the sector, despite the total number of active insurance companies having declined in recent years, as IC reforms have encouraged industry consolidation. According to the “Key Statistical Data 2012-16” report by the IC, the number of licensed insurance companies in the Philippines fell from 110 in 2012 to 98 in 2016, with numbers expected to drop further following the implementation of new capitalisation requirements. By March 2018 this had fallen slightly to 97 companies, of which 29 were life insurers, 55 non-life, eight servicing insurance companies, four composite providers and one domestic reinsurer.

Foreign participation in the insurance sector remains robust; the IC reports that there are nine foreign life insurance companies, eight foreign nonlife companies and one foreign composite insurer. In 2017 the top insurance companies by premium income were Sun Life, with P32.1bn ($634.2m), followed by AXA Philippines at P26.2bn ($517.6m), BPI-Philam Life Assurance at P20.3bn ($401.0m), the Philippine American Life and General Insurance Company at P19.9bn ($393.1m), and Pru Life Insurance, with P19.2bn ($379.3m).

Industry Performance

While the Philippine insurance sector has maintained a positive growth trajectory in recent years, insurance density and penetration rates remain relatively low, and activities are heavily concentrated in the life segment. According to the IC, insurance density, or the insurance spend per capita, rose by 30.9% from P1592 ($34.45) in 2012 to P2084 ($41.17) in 2013, then climbed to a five-year high of P2286 ($45.16) in 2015, before moderating to P2254 ($44.53) in 2016.

Meanwhile, the insurance penetration rate has fluctuated from 1.45% in 2012 to 1.83% in 2013, before shrinking to 1.56% in 2014. In 2015 the penetration rate shot up again to 1.75%, but subsequently dropped to 1.61% the following year.

Conversely, the insurance sector’s net worth has risen consistently since 2012, growing by 1.5% to hit P166.4bn ($3.3bn) in 2013 before increasing significantly by 9.0% to reach P181.4bn ($3.6bn) in 2014. This upward trajectory followed into 2015, with growth of 11.7% bringing the net worth to P202.7bn ($4.0bn), and by the end of 2016, the figure stood at P243.0bn ($4.8bn), up 19.9%. Growth continued to accelerate in 2017, with IC data showing that total industry assets rose by 19.0% that year, increasing from P1.3trn ($25.7bn) at end-2016 to reach P1.6trn ($31.6bn) twelve months later. Over the same period, total liabilities climbed 19.2% to hit P1.2trn ($23.7bn), giving the industry a net worth of P320.3bn ($6.3bn) in 2017. Although it did not keep pace with asset and liability growth, capitalisation rose by 15.2% to reach P52.9bn ($1.0bn) of paid-up capital and guarantee funds in 2017. Total industry investment hit P1.3trn ($25.7bn), up 16.6%, and premium grew by 12.1% to reach P259.8bn ($5.1bn). Incurred losses, meanwhile, rose by 15.1% to P96.8bn ($1.9bn). Profitability outpaced broader industry expansion, with the IC reporting that the industry’s net income was up 50.4% from P21.2bn ($418.8bn) in 2016 to P36.4bn ($719.1bn) in 2017. Overall, the industry reached new heights that year, breaking records in assets, investments, net worth, net income and premium.

Life Insurance

Life insurance business dominates the sector, with 80.7% of total industry assets, worth P1.3trn ($25.7bn) as of December 2017. The segment’s net worth rose by 19.5% in 2017 to P2trn ($39.5bn), and capitalisation jumped by 26.1% to reach P20.6bn ($407m), including available cash assets. According to an IC report published in March 2018, the growth in life insurance assets was due to the substantial uptick in the amount collected from reinsurance transactions, which rose by 78.2% from P2.6bn ($51.4m) in 2016 to P4.7bn ($92.9m) in 2017, along with an increase in segregated fund assets over the same period. Life insurance investments rose by 17.5% to P1.2trn ($23.7m) and premium grew by 10.8% to reach P202.5bn ($4bn) at the end of December 2017, with incurred losses rising by 14.9% to P71bn ($1.4bn). Net income soared over the same period, increasing by 55.9% to hit P27.3bn ($539.3m). The life segment’s dominance of the industry has created a highly competitive field with little room for new entrants. “The life insurance market in the Philippines is congested, which leaves many players competing for a small market share,” Peter Grimes, CEO of FWD Philippines, told OBG. “There has been talk of new market entrants in recent years, but we have not seen any real movement since 2015.”

According to the IC, the top-five life insurance companies by paid-up capital in 2017 were FWD Philippines, at P2.3bn ($45.4m), BDO Life Assurance Company, at P1.593bn ($31.47m), Generali Life Assurance Philippines with P1.591bn ($31.43m), Philippine American Life and General Insurance Company with P1.4bn ($27.7m) and EastWest Ageas Life Insurance Corporation with P1.3bn ($25.7m).

Non-Life Segment

Although far smaller than the life segment, non-life insurance lines continue to offer considerable growth opportunities owing to the low levels of penetration and the potential for financial technology (fintech) to boost growth in several key categories. The IC reported that the total value of non-life risks underwritten in the Philippines has maintained double-digit growth in recent years, with the total value of underwritten risks more than doubling to P207.4trn ($4.1trn) in 2016 from P57.8trn ($1.1trn) in 2013. The amount of risk ceded to reinsurers has simultaneously declined, indicating improved technical underwriting, with 37.3% of non-life risk ceded to reinsurers in 2016, compared to 66.5% in 2012. Non-life premium have grown at a more moderate pace, rising by 6.3% to reach P49.4bn ($975.9m) of direct business in 2013, with growth of 10.2% and 15.3% in 2014 and 2015, respectively, and ending 2016 at P62.7bn ($1.2bn). Total net non-life premium underwritings were up 16.7% in 2017 to stand at P48.6bn ($960.1m). According to the IC, 46.9% of non-life premium were ceded to reinsurers in 2016, compared to 49.5% in 2012.

Fire & Motor

The largest lines of non-life insurance in the Philippines are fire and motor vehicle, according to the IC. The commission reported that gross fire insurance premium rose by 15.8% to reach P22bn ($434.6m) in 2015, before increasing by 5.6% to stand at P23.2bn ($458.3m) in 2016.

Motor vehicle insurance has also shown strong growth; the IC reports that gross premium in the segment rose by 9.7% in 2013 to hit P16bn ($316.1m), by 9.6% in 2014 to P17.6bn ($347.7m), 11.9% in 2015 to P19.7bn ($389.2m) and by a substantial 17.3% in 2016 to reach P23.1bn ($456.4m). Both lines offer considerable potential for further expansion. In the motor vehicle line, rising macroeconomic growth has translated into improved purchasing power. In January 2018 the Chamber of Automotive Manufacturers of the Philippines and the Truck Manufacturers Association reported that new vehicle sales totalled 425,00 in 2017, up 18.4% on the previous year, and surpassing the target of 400,500 units. Combined with vehicle imports, total unit sales are estimated to have hit 450,000 units that year. As with the broader disaster insurance category, fire insurance coverage was also expected to expand rapidly, particularly as the government intensifies efforts to roll out micro-insurance products.

Disaster Insurance

Beyond traditional insurance products, the Philippines also offers disaster cover given its proneness to natural catastrophes. In February 2018 Dennis Funa, commissioner of the IC, told local media that typhoons and earthquakes cost the country roughly $3.5bn in damages annually. In 2016 the UN ranked the Philippines fourth globally in terms of the frequency of natural disasters.

Casualty insurance is the third-largest non-life segment, with the IC reporting that gross casualty premium rose by 14% in 2016, ending the year at P15.3bn ($302.3m), of which P631.6m ($12.5m) was derived from micro-insurance policies. This is a significant increase from 2012, when gross casualty premium stood at P10.9bn ($215.3m). Disaster insurance penetration could rise further in 2018, following the launch of a parametric catastrophe risk insurance programme, or climate insurance, for government properties in June 2017. The P1bn ($19.8m) programme is the combined effort of the DoF, the Government Service Insurance System (GSIS), the World Bank and the UK Department for International Development. According to Funa, the GSIS will act as the insurer, providing catastrophe risk insurance coverage for the national government in 25 disaster-prone provinces, and premium will be categorised by disaster and province, with 79.2% of the P500m ($9.9m) disaster-specific premiums allocated to typhoon coverage and the remaining $9.9m split equally among the selected provinces.

Through the International Bank for Reconstruction and Development, the World Bank will act as an intermediary to cede the GSIS’ risks to international reinsurers, marking the first time the bank has acted as an intermediary for a reinsurance contract. The Bureau of the Treasury will be the designated policyholder, representing both the national government and local government units (LGUs), with the programme offering total coverage of $206m for national government assets and select LGU assets.

Micro-Impact

Micro-insurance could offer a solution to some of the worst disaster risks. A local media report published in January 2017 found that micro-insurance products had become increasingly popular in the years following Typhoon Haiyan in 2013, which was one of the most powerful storms ever recorded globally. While individual insurance payments were low in the aftermath of the storm, averaging just $100 per policyholder, these payments still benefitted 111,461 claimants within six months of the disaster strike, and were the sole form of financial support for many victims.

The segment has performed well in recent years, with the IC reporting that micro-insurance premium payments and contributions increased by 30% during the first nine months of 2017, to reach P5.2bn ($102.7m), with mutual benefit associations continuing to account for more than half of total premium. In 2017 mutual benefits association premium grew by 16.9% to end the year at P8.7bn ($171.9m).

Over the first nine months of 2017 life micro-insurance premium rose by 28% to P1.7bn ($33.6m), while non-life micro-insurance premiums grew by 26% to P520m ($10.3m). The total number of micro-insurance policies stood at 32m at the end of September 2017, up by 22% over the same period in 2016. Meanwhile, non-life micro-insurance policies rose by a substantial 67% over the same period.

Regulatory Reforms

Despite the IC’s efforts to improve sector stability, the insurance industry’s capitalisation requirements in the Philippines were the highest among ASEAN nations in 2018, leading to industry pushback. Republic Act 10607, also known as the Amended Insurance Code, came into effect in August 2013, introducing a progressive increase in capital requirements for the sector. The code requires industry players to hold at least P1bn ($19.8m) in paid-up capital upon launching operations in the Philippines. Local insurance companies must hold P1.3bn ($25.7m) of paid-up capital by December 2022 under the amended Insurance Code.

The code further stipulates that insurers must attain a net worth of at least P900m ($17.8m) by December 2019, up from the current minimum of P550m ($10.9m), effective since December 2016.

In January 2018 the IC announced plans to review net worth requirements for insurers, after concluding a study on the regulatory frameworks of other ASEAN members. The study found that the country has one of the highest capitalisation requirements in the region, with the additional hurdle of an RBC system forcing many companies out of the market. As a result, the 11 insurance companies operating in the Philippines represent less than 5% of the market by gross written premiums, according to the IC.

Consolidation

Prior to December 2016 capitalisation requirements for local insurers had been set at P250m ($4.9m). Regulatory reforms have kick-started non-life consolidation. From December 2016, when requirements rose to P550m ($10.9m), to January 2018, six non-life insurance companies voluntarily exited the market, with local media reporting that the companies attributed their decision to the increased capital requirements. Over the same period, the IC issued a cease-and-desist order against an additional five companies – including First Integrated Bonding and Insurance, Investors Assurance, Metropolitan Insurance, Plaridel Surety and Insurance, and Premier Insurance & Surety – placing them under conservatorship due to their inability to meet the new capital requirements.

Other companies opted to take the consolidation route. In June 2016 five non-life insurance companies announced plans to merge before the end of the year, as four out of the five were unable to meet the new requirements. Stronghold Insurance Company initiated a merger with Milestone Guaranty and Assurance, and was reportedly negotiating with BF General Insurance, Premier Insurance and Surety, and Country Bankers Insurance, although no deal had been made public as of early May 2018.

Despite the IC’s announcement in late January 2018 that it planned to re-examine capital requirements, the DoF stated in the following month that the code should be implemented as it is written, indicating that the industry could be subject to further consolidation. While these moves were met with opposition from smaller players in the market, they were greeted more positively by larger well-capitalised firms and multinationals. Carlos G Dominguez III, secretary of finance, told media that the capital amendments would be necessary in the wake of ongoing ASEAN Economic Community integration, which is expected to increase competition across the Philippines’ financial services sector. Rather than delaying the implementation of higher capital requirements, Dominguez argued that insurance companies should consolidate or merge.

RBC Implementation

The industry is also feeling pressure from ongoing reforms to the IC’s RBC framework. In December 2016 the regulator began efforts to revise the framework, under which insurers’ minimum capital requirements are determined by their operational size and risk profile. According to a January 2018 legal analysis by international law firm Norton Rose Fulbright, the Philippines’ RBC framework considers credit, insurance, market, operational and catastrophe risks, while life insurers must also assess their surrender risk. Each company must maintain a minimum RBC ratio of 100%.

In March 2017 Ferdinand George Florendo, deputy commissioner of the IC, told audience members at the 3rd Asia Conference on RBC in Manila that the commission was working to implement the first pillar of the amended RBC Framework. This first phase would set quantitative requirements, while the second and third would address governance and risk management requirements, and disclosure requirements, respectively. Noting industry concerns over the limited availability of data demonstrating the potential quantitative impacts, Florendo reported that the IC had modified its RBC framework to include a transitional period to allow for public and private sector consultation. The deputy commissioner also said that the IC was considering adjusting its solvency framework to account for the high incidence of domestic natural disasters, noting that while internationally accepted standards for solvency frameworks should be within the 99.5th percentile level of confidence, the IC could stagger the transition to full compliance by imposing interim targets of 95.5% in 2017, 97.5% in 2018 and 99.5% in 2019.

Fintech Regulation

In January 2018 Funa signed a directive allowing for an enhanced framework for permitted distribution channels, enabling companies to deploy mobile applications to distribute insurance products, provided the app has received IC approval.

The new regulations build upon previous e-commerce regulations issued in 2014 to provide for a wider range of payment platforms for policyholders and formally define mobile apps as those that are pre-installed in a mobile device or SIM card, or are downloaded from any major digital platform. According to Funa, the new regulations will encourage collaboration between the country’s insurance providers and mobile operators, with the goal of developing new distribution channels that will boost broader insurance penetration.

Outlook

Although non-life business lines will likely continue to grapple with stringent regulatory reforms encouraging market consolidation, the insurance industry is nonetheless expected to grow steadily. The Tax Reform for Acceleration and Inclusion Act, which was implemented in December 2017 and forms part of the broader Comprehensive Tax Reform Programme, may boost expendable income and could potentially increase spending on insurance products. Meanwhile, the non-life segment continues to exhibit signs of improved technical underwriting, with the proportion of premium ceded to reinsurers expected to continue its downward trend. Despite regulatory reforms entailing nearterm growing pains, the outlook for the sector’s stability and development remains relatively positive.