The Philippines revises insurance sector regulations

While still relatively small in comparison to many of its ASEAN peers, the Philippine insurance sector has shown strong growth in recent years, averaging 10% expansion between 2008 and 2014. The signs are that with the country’s continued economic growth and a burgeoning middle class, the sector’s expansion will continue to be impressive, while moves on the legislative side, partly aimed at bringing the country into line with other ASEAN markets, are also facilitating wider take-up and awareness.

The year ahead also poses challenges, particularly in the non-life insurance sector, where smaller companies are likely to find new capital requirements onerous, with many predicting a wave of consolidation. Yet this shake-up will likely leave the market stronger and more able to cope with future obstacles. This includes the challenge posed by nature, as the country is highly prone to catastrophic natural disasters such as typhoons. However, both 2014 and 2015 were relatively good years, with few major events impacting the country – much to the benefit of insurers and the relief of inhabitants.

Market Structures

The main regulatory body is the Insurance Commission (IC), which comes under the Department of Finance (DoF) and is headed by the insurance commissioner. Currently, this post is occupied by Emmanuel F Dooc. The IC supervises and regulates both life and non-life insurers, as well as mutual benefit associations, health maintenance organisations, pre-need lines and charitable trusts. The IC also has the task of issuing licenses to agents, underwriters, brokers, actuaries and adjusters. Also key to the sector is the Philippine Insurers and Reinsurers Association (PIRA), which dates back to 1954 and was expanded in the 1990s via a merger with the Insurance and Surety Association of the Philippines. PIRA today encompasses all the non-life insurance firms in the country and represents their collective interests to the IC and other market stakeholders.

The legal framework for the IC and for the sector is provided by the Insurance Code, first issued in 1974 and amended several times. The most recent of these updates was in 2013, when Republic Act (RA) 10607 was introduced. This has had a major impact on the sector, for several reasons. First, it includes the legal recognition of bancassurance, allowing banks to cross-sell products over the counter. While previously, banking sector regulations had allowed banks only to sell insurance products sold by companies in which the bank itself had at least 5% equity, the new regulations allow banks to sell products from any insurance firm, provided that the company fulfils all of the requirements set forth by the IC and the country’s central bank, Bangko Sentral ng Pilipinas. Persons engaged in selling these products must also be licensed by the IC.

Capitalisation Hikes

Another key change in the code is a hike in minimum capitalisation requirements. Under the original 1974 Code, the minimum paid-up capital was set at P5m ($111,000), with the secretary of finance reserving the right to increase this. In 2013 this was done, and RA 10607 set lower limits. The new limits required existing domestic insurance firms to reach at least P250m ($5.6m) in paid-up capital by the end of June 2013, then P550m ($12.2m) by the end of 2016, then P900m ($20m) by the end of 2019 and finally P1.3bn ($28.9m) by the end of 2022; of the 61 non-life insurers in the market in 2016, only four meet this 2022 figure. New insurers, as well as local branches of foreign firms, must start with at least P1bn ($22.2m) in paid-up capital to register for a licence. The insurance commissioner may also require stockholders to put together a surplus fund of at least P100m ($2.2m) prior to granting a licence. The minimum capital requirement for reinsurers is now P3bn ($66.6m). This must be held in cash, with at least 50% of it paid up and at least P400m ($8.9m) held as a contributed surplus.

Higher Standards

The regulation also provides new and stricter reporting standards for insurance companies, along with definitions of micro-insurance and variable contracts, illustrating the growing diversity of the Philippines market. Insurers are also allowed to invest more in financial instruments – these may reach up to 25% of their admitted assets in obligations issued or guaranteed by banks, local or foreign. Modifications were also made in the methods of reserve valuation. The insurance commissioner’s term of office was also extended to six years, without re-appointment. The new regulations are aimed at securing a more stable and robust sector, with greater security for the insured as well. This will likely mean a visible reduction in the number of smaller players through consolidation, as the capital requirements become increasingly difficult for small firms to meet. “There are around 70 non-life companies at the moment,” Victorio Valledor, CEO of Lockton Philippines Insurance and Reinsurance, told OBG. “But with these new capital requirements, that number might fall by half.” Currently, there are no restrictions on foreign ownership, with full and branch licences available. To set up, a foreign insurer must, in addition to meeting the capital requirements, also leave a statutory deposit of P1bn ($22.2m) with the IC, appoint a general agent who is a resident of the Philippines, and possess additional funds of at least P100m ($2.2m) before being licensed to open a branch office. A Code of Ethics and Bill of Rights for customers is also in the works.

Market Numbers

According to the most recent IC figures, in the first three quarters of 2015, combined net income in the non-life and life segments grew 65.8% year-on-year (y-o-y) to reach P20.4bn ($452.9m), up from P12.3bn ($273.1m) in the same period of 2014. Meanwhile, combined premium revenues of the two sectors was up 29.75% y-o-y, from P132.9bn ($2.95bn) to P172.4bn ($3.83bn), while the industry’s total investments stood at P952.13bn ($21.14bn), up 19.1% on the P799.44bn ($17.74bn) recorded in the same period of the previous year.

The industry saw growth of 10.1% y-o-y, from P0.99trn ($22bn) to P1.09trn ($24.2bn), while net worth of the combined life and non-life sectors in that period reached P195.4bn ($4.3bn), up 6.05% on P184.25bn ($4.1bn) in the first three quarters of 2014. In 2012 total assets had stood at just P125.5bn ($2.8bn), illustrating robust growth in recent years.

The third-quarter figures made 2015 into a banner year. Indeed, IC Commissioner Dooc described it as likely “to be the best ever” on announcing the above results in an October 2015 press release. Those figures far outstripped those of 2013, when total premium production reached P198.1bn ($4.4bn) for the full 12-month period. The third-quarter 2015 figures also demonstrated that life continues to outstrip non-life in terms of net worth, total assets and net premiums. During the period in question, non-life represented 36.8% of the total net worth, 15.1% of total assets and about 15.6% of net premiums.

Such figures have gone hand-in-hand with a strong performance in the overall economy. GDP at current prices has risen steadily, with 6.8% growth in 2012, 7.2% in 2013 and 6.1% in 2014. The World Bank estimated growth in 2015 at 5.8%, and forecast this to pick up to 6.4% in 2016 and 6.2% in 2017. The population has meanwhile also grown, if not as rapidly. In 2012 this hit around 96.4m, rising to 98.8m in 2013, and was estimated at 102m in early 2016, according to the Philippines Statistical Authority (PSA) and the UN. This yields an annual growth rate of 1.82% for 2010-15, with 1.64% forecast for 2015-20.

Putting these two statistical sets together, per capita income has been rising, from $2372 at current prices in 2011 to $2606 in 2012, $2788 in 2013 and $2871 in 2014. The Philippines also possesses a high degree of income inequality, however; the above per capita figures mask a major disparity between the rich, poor and middle classes. The most recent PSA figures, which compare the years 2006, 2009 and 2012, show that the portion of Filipinos earning P100,000-P249,999 ($2220-$5550) per year rose from 36% in 2006 to 42.3% in 2012, while the portion earning over P250,000 ($5550) climbed from 18.8% to 29.1%. The wealth of these classes has also benefitted from low levels of inflation for emerging markets. In 2012 the consumer price index registered a 3.25% rise, then 3% in 2013 and 4.1% in 2014. This makes investment more attractive, as well as more affordable to more Filipinos with surplus earnings, and is good news for life and non-life insurers.

On The Rise

There is also plenty of room for growth, especially from the younger generation. “The millennial market in the Philippines is huge due to the country’s demographics,” Peter Grimes, president and CEO of FWD Life, told OBG. “They are more financially responsible and aware than previous generations. However, barriers still exist to successfully resonating with millennials, ranging from affordability to lack of trust.” According to the IC, overall penetration rates for insurance are low, though steadily increasing. In 2010 the overall penetration rate stood at 1.09%, rising to 1.2% in 2011, 1.45% in 2012 and 1.78% in 2013. Commissioner Dooc announced in September 2015 that the rate stood at 1.84% at the end of the first half of 2015, and predicted that it would reach 3% by 2019. This would bring it in line with existing ASEAN averages. The sector consisted of some 101 firms in 2013: 70 in the non-life segment, 26 in life, four composite companies and one reinsurer. In November 2015, however, the Philippines Life Insurance Association – which represents all life insurers in the country – had 30 members, suggesting a growing life segment.

The National Reinsurance Corporation of the Philippines (PhilNaRe) is the sole reinsurer, and is listed on the Philippines Stock Exchange. As of year-end 2014, PhilNaRe’s portfolio consisted of 50% fire insurance, 23% life, 21% casualty and others, 6% marine and aviation, and 2% overseas business. Several other firms also possess reinsurance licences, such as Lockton Philippines Insurance, and Jardine Lloyd Thompson. Many big-ticket infrastructure projects, however, by law must be reinsured through the state insurance system, though private reinsurers can still bid for non-mandated projects.

Non-Life Players

In the non-life sector, figures for the third quarter of 2015 showed a 122.1% rise in total net income y-o-y, with the number jumping from P1.63bn ($36.2m) to P3.6bn ($79.9m). Total net premiums written (NPWs) were also up, by 13.97%, from P23.6bn ($523.9m) to P26.9bn ($597.2m), while total investments rose 7.66%, from P60.8bn ($1.35bn) to P65.5bn ($1.45bn). Total assets in the sector stood at P167.9bn ($3.73bn) in September 2015, up 2.26% on September 2014. The net worth of the non-life sector also rose, by 13.33%, from P63.4bn ($1.4bn) to P71.8bn ($1.6bn).

According to the most recent statistics compiled by the IC on the premiums earned by non-life insurance firms active in the Philippines, at the end of 2014 the largest was Prudential Guarantee, which had earned total premiums of P3.33bn ($73.9m) that year. In terms of NPWs, Prudential also came on top, with P3.46bn ($76.8m), a figure up 11.4% y-o-y. The second spot went to Malayan Insurance, with P2.6bn ($57.7m) in premiums earned and P2.67bn ($59.27m) in NPW. Third was BPI/MS Insurance, with P2.07bn ($45.95m) in premiums earned and P2.15bn ($47.73m) in NPW. Six other companies had premiums earned and NPWs of over P1bn ($22.2m), with these being – in descending order – Charter Ping An, Federal Phoenix Assurance, MAPFRE Insular Insurance, UCPB General Insurance, Pioneer Insurance and Surety, and the Standard Insurance Company.

A total of 69 non-life insurers were registered with the IC in 2014, a group whose number has declined in recent years from some 84 in 2009 to 76 in 2012 and then 70 in 2013. Meanwhile, the total industry-wide NPW for 2014 stood at P31.1bn ($690.4m), up 15.64% on 2013. Of this figure, the top three insurers accounted for around a quarter (26.6%).

Lines Of Business

In terms of non-life segments, car and vehicle insurance and fire are the largest product lines. The most recent IC statistics, for 2013, show fire with some 32% of all gross written premiums (GWPs), with motor taking 31.4%. Casualty is the third-largest segment, with 22.4% that year. Other key lines are marine, which took 10.11% that year, followed by suretyship – a specialised line in which one party guarantees to fulfil an obligation by another party via a surety bond, which garnered 4.05% of total GWPs in 2013. The final line of business was life for professional reinsurers, which took 0.05%. These proportions have stayed relatively constant over the years, although fire only overtook motor in 2012. In terms of net premiums, however, motor was by far the largest segment, with 53.16% of the total, followed by casualty (18.5%), fire (14.2%), marine (6.6%), suretyship (6.64%) and life for professional reinsurers (0.9%).

Auto Segment

A current issue in motor is that of compulsory third-party liability (CTPL) insurance. The government Land Transportation Office (LTO) issued a circular in 2015 envisaging the creation of a cartel to administer the issuance of CTPL. This would have a single administrator and is aimed at countering problems in the sector such as fake CTPL issuers, the undercutting of tariffs and tax leaks. Yet sector bodies such as PIRA disagree with this proposal, arguing it will lead to the creation of an effective monopoly in CTPL, depriving non-life insurers of a major income stream, while also making many of those working in this line of business redundant. The IC cautioned against the idea in late 2015, with the possibility that legal challenges would be made against it during 2016.

The LTO move comes after an earlier attempt to set up a CTPL pool, an idea tried in other markets as a way of dealing with a chronic issue in motor insurance, whose low margins and reputation for false claims make it unattractive to many. The pool was unsuccessful, as was an attempt by the Government Security Insurance System to take on the role of central administrator. The issue thus looks likely to remain a key topic in the non-life segment.

The fire segment includes a number of “allied perils” – earthquakes, typhoons, floods and other extended coverage. Thus, 2013 was a particularly bad year for loss ratios in this area, as the Philippines was hit by Super Typhoon Haiyan, which killed around 10,000 people. Yet the impact on the insurance sector was not as massive as it might have been in a more developed market, as most of the areas impacted were low-income and very under-insured. Of an estimated $14bn cost to the economy, only around $2bn was likely covered by insurance. For 2014, non-life, personal accident and health care GWPs were only around 0.5% of GDP, against an average of 1.5% for the Asia-Pacific Economic Cooperation (APEC), whose members experience over 70% of the world’s natural disasters. Nonetheless, loss ratios in the Philippines for flood and extended coverage hit 194.4% and 371.4%, respectively, in 2013, with the overall loss ratio for the fire segment rising to 101.69%, from 72.90% in 2012. Given these major and unpredictable swings in losses, non-life firms underwriting fire and allied perils are required to secure catastrophe reinsurance cover of at least 5% of their aggregate net retained insured values in this segment – although given the frequency of such events, catastrophic risk management is generally integrated into a firm’s entire risk structure. Undercapitalised firms are themselves a risk in this area, with the recent moves to strengthen capital requirements aimed at weeding out insurers who may not be able to cope with catastrophic events.

Debate is ongoing over creation of a Philippines Catastrophe Insurance Pool, which would be a mandatory system for homeowners and owners of small and medium-sized enterprises. This initiative is backed by PIRA, the IC, the World Bank and International Finance Corporation, which hope it may come into being following the 2016 presidential elections.

Another area where micro-insurance initiatives have recently had a big impact is catastrophe insurance. Such schemes target low-income earners and keep premiums and fees low – the average payment does not exceed 7.5% of the daily minimum wage of a non-agricultural worker in Metro Manila. Figures from the Micro-insurance Network suggest coverage of this product reached 28.1% in 2015, up from 20% in 2014 and accounting for some 28m people.

Pre-Need

In addition to non-life and life, a further segment is pre-need. This is a product line different from life insurance in that pre-need policies are open-ended, with the insurer guaranteeing payment of a future need, regardless of its future cost. Such needs can include funerals, educational fees, illness and/or disability coverage, and even retirement. Several company collapses prior to the IC assuming regulatory oversight of the pre-need segment in 2009 damaged the industry’s reputation in the 2000s, with the growth of life insurance also affecting the market. In October 2015 the IC issued a micro-pre-need regulatory framework, aiming to channel such schemes into the micro-market. The framework limits micro-pre-need payments to 7.5% of the wage of a non-agricultural worker in Metro Manila, adding that the maximum sum of guaranteed benefits cannot be more than 1000 times the daily minimum wage for such a worker.

Outlook

Both life and non-life are likely to see continued growth, with the penetration rate advancing towards its goal of 3% by 2019. The stronger regulatory framework should ensure firms are better able to respond to market events. A period of consolidation lies ahead, particularly in the non-life segment. With 2016 an election year, much of the new regulatory activity is likely to see a hiatus. While growth may not be at the best-ever levels of 2015, it will likely continue to impress regional investors. The continued state spending on infrastructure will involve major requirements for coverage of all kinds, particularly in property and project reinsurance.