The Philippines: Raising capital in insurance

A recent announcement that plans to raise the capital requirement for insurance companies could be delayed beyond 2016 could give local and international insurers more time to focus on growth areas such as microinsurance and bancassurance.

In May, officials from the Insurance Commission (IC), the industry regulator, told local media that the increase in capital required from P175m ($3.99m) to P1bn ($22.79m) could be deferred. It added, however, that the move will ultimately prove crucial in increasing the insurance industry’s competitiveness as the country prepares for ASEAN integration into an “economic community” by 2015.

In early 2012, the Philippine Life Insurance Association (PLIA) stated that the proposed hike could lead to the closure of “about half” of the 84 non-life insurance firms currently operating in the country, prompting the PLIA to urge the government to seek a compromise that was in the industry’s best interests.

While speaking with BusinessWorld Online on May 16, Emmanuel Dooc, the IC commissioner, said that the IC will offer a number of incentives for insurance firms that comply with the higher standard.

Although the level was to be raised gradually, critics have said the industry is not stable enough to manage such a significant increase and that only multinationals will benefit from the increase in capital. Indeed, international insurers are benefitting from growth in the country, with UK-based Prudential’s Philippine unit reporting a 33% increase in gross premium income in 2011 to P10.4bn ($236.98m) from P7.8bn (177.74m) in 2010.

Data from the PLIA showed that the life insurance industry as a whole grew by 21% in 2011 in terms of premiums, which reached P85.8bn ($1.96bn) from P70.7bn ($1.61bn) in 2010. The life insurance segment is expected to grow at least 16% in 2012, breaking the P100bn ($2.28bn) threshold in new premium income by the end of 2012.

One area seeing particular expansion is microinsurance, with 3.5m policies sold in 2011 and 5m expected to be sold this year. In the Philippines, microinsurance products involve premium payments as low as P1 ($0.02) to P19 ($0.43) per day, with benefits as high as P190,000 ($4329) per policy. In May, Philippine Prudential revealed it had sold a total of P26.73m ($609,088) in microinsurance premiums in 2011, an increase of 186.16% over 2010.

The microinsurance segment is growing in importance as a contributor to the industry’s penetration rates, which in 2011 hit just 16%, far behind regional rivals Indonesia, Thailand, Malaysia and Singapore. Indeed, critics have called for Manila to do more to encourage the sector, such as linking the provision of micro-policies to corporate social responsibility initiatives, tax breaks and other fiscal incentives.

Meanwhile, domestic firms are seeing growth in other policy areas, with PhilPlans First (PPF) reporting a 27%% increase in first payments (FPs) – the initial payments for the five-year payment period for pre-need products, which include pension, memorial/life and education products – in the first four months of 2012. PPF said its FPs grew to P257m ($5.86m), some 37.5% higher than the P186.9m ($4.26m) it saw in 2010.

Prospects for growth are also boosted by remittance payments from the estimated 12m Filipino overseas workers and high liquidity in the country’s financial system boosted by its surging business process outsourcing industry.

A key sector that is expected to emerge is bancassurance, or the sale of insurance products through bank branches. A number of banks reported bancassurance-related growth in 2011, with Philam Life reporting that its partnership with the Bank of the Philippine Islands (BPI), jointly known as BPI-PhilAm, posted growth of 13%. Some two-thirds of first-year premiums were sold through bancassurance in 2010, according to the PLIA.

However, officials from Philippine Prudential have said that lifting a rule where banks must hold 5% equity in an insurance firm and relaxing other bancassurance requirements will make insurance products more accessible to the public, a move that would likely be welcomed by Filipinos at home and abroad.

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