The Philippines counts cost of low insurance take-up

While the final cost of Typhoon Yolanda is still being calculated in the Philippines, the impact that the country’s low insurance take-up could have on the national economy is fast becoming apparent.

Initial estimates suggested that Typhoon Yolanda, or Haiyan as it was known outside of the Philippines, wreaked around $15bn of damage, equivalent to around 5% of the national economic output, when it tore through a large swathe of the country’s central regions on November 8.

Yet, despite enduring a spate of natural disasters in recent years, including a 7.2 magnitude earthquake which struck Bohol, Cebu, in mid-October, the Philippines has one of the lowest non-life insurance penetration rates in the region, equivalent to less than 1% of GDP. The close succession of disasters, combined with an all-too-clear lack of coverage, has prompted some experts to suggest all residential and commercial buildings should have to be insured against major events, such as earthquakes.

Modest payouts

Estimates on the expected insurance payout for losses accrued though Yolanda have ranged from a minimum of $100m to the much higher $700m put forward by several brokers. With assessments now well under way, the higher figures appear to be more accurate, although even then, less than 5% of the $15bn damage is expected to be covered by insurance.

Richard Sanders, the executive director at Willis Re, Singapore, said on November 19 that the Philippines’ low insurance levels were out of step with trends evident across much of South-east Asia, where premium volume was on the rise. This would be reflected in pay-outs, he added.

“As many of the exposures in the affected regions are uninsured or underinsured, potential post-catastrophe insurance recoveries are likely to be a relatively small proportion of economic losses,” he commented.

Insurance industry unscathed

Consequently, while Yolanda was a disaster on a vast scale in humanitarian and economic terms, its knock-on effect on the insurance industry looks set to be modest.

Charles Franks, the CEO of Kiln, an international insurer and reinsurer, described losses to the industry as likely to be limited. The insurance sector ratings agency, AM Best, meanwhile, said in a statement issued mid-November that it expected Yolanda “to be an earnings event for reinsurers – minor for the large, global companies but more substantial for smaller, regional players”.

The Philippines Insurance and Reassurance Association (PIRA) chairman, Emmanuel Que, believes Yolanda and other recent disasters could prompt more nationals, especially business operators, to finally take out insurance or extend their coverage. “If you really think about it, in a disaster-prone country such as ours, you can’t afford not to be insured,” Que said on November 12.

According to data from the PIRA, which represents policy writers in the non-life component of the market, only 20% of Filipinos have any form of insurance. Figures are far lower for property cover, with just 12% of buildings covered by fire insurance. A mere fifth of that 12% has additional earthquake coverage.

Calls for expanded insurance coverage, especially for catastrophic risk categories, have grown stronger on the back of recent events. PIRA has suggested making earthquake insurance compulsory for all residential and commercial buildings in a proposal that could be extended to cover all catastrophic perils, including typhoons and flooding.

At what cost

The Asian Development Bank (ADB) is playing a key part in promoting the concept of low-cost disaster insurance for the Philippines.

Ramesh Subramaniam, the ADB’s deputy director for South-east Asia, said on November 19 that the bank was liaising with both government agencies and the private sector to develop a system of insurance for poorer communities. Such a system, which the ADB has mooted for both the Philippines and other countries in the region, would provide coverage for industries deemed crucial for the livelihood of local communities, such as fishing, he said.

Subramaniam said group insurance schemes, along the lines of those proposed by the ADB, were much needed for communities like those in the area hit by Typhoon Yolanda. “Whether we are talking about small businesses or households, we suspect they had very little insurance coverage prior to the disaster,” he said.

This is not the first time that proposals for compulsory disaster coverage have been put forward in the Philippines, although progress could, at best, be described as slow moving. The impact of Yolanda and the Bohol quake, just weeks apart, could give such proposals new momentum, while encouraging more Filipinos to take out private catastrophic risk coverage. If take-up improves, the country’s insurers stand to see business increase, although the move would also heighten their exposure to such risks.

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