The Philippines’ insurance sector has been exhibiting strong growth in recent years. While it did experience a slowdown in 2014, and then again in early 2016 ahead of the election, the trend overall has been positive, and its strong performance looks likely to continue. Although premium growth remained flat in 2016, insurers are forecast to collect a combined P500bn ($10.6bn) in premiums by 2019, double the amount in 2015. By then, around half the country’s population will be insured, more than triple the percentage in 2009. However, industry analysts note that much of this growth is being driven by micro-insurance, and that there still substantial protection gaps.
A number of factors are at work. In addition to having a strong economy and a growing middle class, the country has a large number of people who have historically been underinsured. The push for inclusiveness is adding to new business coming from individuals seeking to build wealth and protect their assets. The sector is also well regulated, open to foreign investment and underpinned by a long history. “Growth from 2009 to 2014 was phenomenal. This was partly the result of recovery, and partly the result of growing interest in insurance,” Rizalina Mantaring, CEO of Sun Life, told OBG. “Insurance has been here for 120 years, and so in part it is pent-up demand,” she added.
Strengthening Over Time
Insurance as a product was introduced to the country in 1829 when Strachman, Murray & Co became an agent for Lloyd’s. The Fire Insurance Association was formed in 1896, and Sun Life Assurance of Canada established itself in the Philippines in 1898. The country’s first domestic non-life company, Yek Tong Lin Fire and Marine Company, was formed in 1906. It now operates as Philippines First Insurance Company. Insular Life Assurance Company, the country’s first domestic life firm, was established in 1910. The Insurance Act became effective in 1915, while the Office of the Insurance Commissioner was formed in 1949. An Insurance Code was written in 1974, replacing the Insurance Act, and the regulator was renamed the Insurance Commission (IC). The relevant laws were consolidated in 1978 as the Insurance Code of 1978.
Reforms have continued, and the recent changes have had a significant and positive impact on the sector. The Amended Insurance Code, also known as Republic Act 10607, was passed in 2013. Under the code, net worth – defined as capital plus retained earnings plus unimpaired surplus plus the revaluation of assets – for insurers was set at P250m ($5.3m) at the end of 2013, and was increased to P550m ($11.6m) with an end-2016 deadline. The figure is to rise to P900m ($19m) by the end of 2019 and P1.3bn ($27.5m) by the end of 2022. Before this round of reforms, the capital level had been set at P50m ($1.1m), though attempts had been made since 2006 to increase it to the P250m ($5.3m) mark.
New insurance companies are required to have at least P1bn ($21.2m) in paid-up capital. They will also have to have P100m ($2.1m) of surplus funds. Under the new law, reinsurance companies need to have a minimum paid-up capital of P3bn ($63.5m). Pre-need companies, meanwhile, have a separate schedule: they must have P50m ($1.2m) of capital if they sell a single plan, P75m ($1.6m) if selling two types of plans and P100m ($2.1m) if selling multiple plans.
Under Executive Order 192 issued in 2015, the jurisdiction for health maintenance organisations (HMOs) was moved from the Department of Health (DoH) to the IC. Existing HMOs will have to maintain capital of P10m ($200,000), while new HMOs will have to meet the minimum capital requirement of P100m ($2m). As of August 2016 the country had 29 HMOs in operation. Of these, 14 had clearances to operate issued by the DoH, and 15 had certificates of authority from the IC. Companies failing to renew their licences in a timely manner will be treated as new applicants.
In part as a result of the push towards higher capital, the sector has been consolidating. In 2010 the non-life segment had 87 companies, according to the IC. By the end of 2015 it had a total of 67, and as of the middle of 2016 the count was 65. The sector also has 27 life companies, four composite firms, one reinsurer, 18 pre-need companies and 33 mutual benefit firms.
The numbers have been reduced in part through mergers. Manila Insurance was taken over by Premier Insurance and Surety, and in 2012 Stronghold Insurance acquired Utility Assurance. After the transaction, the combined entity had total capital of P300m ($6.3m). In mid-2016 there was media speculation about a merger between five insurers – Stronghold, Milestone Guaranty and Insurance, BF General Insurance, Premier Insurance & Surety and Country Bankers Insurance – and while the transaction ultimately did not place, other companies are making themselves available for mergers.
The IC has been actively engaging with the sector. It wants mergers, or other solutions to the capital shortfalls, and it is ensuring the sector is aware of that fact. At the end of 2015 the regulator issued a directive calling for insurance companies to submit their plans for capital raising. The commissioner noted in August 2016 that some companies were seeking fresh investment, while others were choosing consolidation. The IC reminded them again at the end of 2016 that they need to meet the new capital requirements.
Despite years of efforts to boost capital, the sector remains short of the targets being set. Many companies are under the prescribed levels, and it is not clear how they will reach them in time. At the end of 2015, 26 non-life insurers were at P250m ($5.3m) in capital, and one was below. Only five companies were above the P550m ($11.6m) required one year later.
Out Of The Business
While mergers are preferred, many companies are exiting the sector another way: they are simply going out of business. In 2012, as the capital levels started to increase, a total of 32 companies were in some form of remedial control. In conservatorship, a company is still in business but not meeting some regulatory thresholds. It is managed by the regulator to protect the assets. Under receivership, a company has ceased operations and is just meeting claims. Under liquidation, it is being wound down. As of November 2016 a total of 44 companies were in one of these three categories. The regulator works with each entity to ensure that the process is as smooth as possible. BF General, one of the smaller companies (63rd out of 69 in 2015), was closed in 2016 for failure to meet minimum capital requirements. Far Eastern Surety and Insurance also shut in 2016. BF Life and Philippine Fire and Marine Insurance, meanwhile, were closed the previous year. Other companies that shut their doors in the past few years include Cap General, Great Domestic Insurance, Security Pacific Assurance and R&B Insurance, which were all shuttered in 2014.
However, some companies have been effectively shepherded so they do not go under. National Life Insurance Corporation, for example, has been the subject of significant regulatory attention for more than a decade. The company was placed in conservatorship on two occasions, in 2006 and again in 2010, and then into receivership in 2011. In 2016 it was sold to private investors for P1.05bn ($21.1m). The new owners will rehabilitate the assets, possibly with other investors.
In order to ensure the smooth transition of troubled companies, the IC sometimes takes a very hands-on approach to guiding them through the process. For example, after receiving dozens of complaints about Loyola Plans not honouring claims, the IC implemented a programme in 2016 to manage the pre-need company with the least possible disruption. While it does have a deficit, its assets should cover the claims. Rather than place the company in receivership, the IC chose to utilise the assets, mainly in the form of illiquid property, in order to cover the obligations. An IC crisis management team will oversee the payouts.
The insurance market is almost completely open, with no limits set on foreign shareholding. The insurance commissioner, however, must receive notification if any person takes control of a domestic insurer, with control defined as 40%. A 40% cap had been placed on foreign ownership in domestic loss adjusters; however, Republic Act 10881, which became law in 2016 and effective in August, lifted the limit. It was felt that increased competition and the introduction of international best practices would help the segment improve.
International companies have been active in the sector in recent years. In June 2016 Germany’s Allianz purchased 51% of PNB Life. In the transaction, the insurer reached a 15-year bancassurance agreement with PNB for exclusive distribution through the bank’s 669 branches. The new entity will be a joint venture (JV) operating as Allianz PNB Life Insurance. As of 2016 PNB Life was the 10th largest life insurer in the country.
In January 2016 a certificate of authority was issued for a new joint life insurance venture between East-West Bank, a local institution, and Ageas Insurance International from Belgium. The foreign investor has 50% plus one share of equity in the venture, which is capitalised at P2bn ($40.4m). A 20-year bancassurance agreement was signed with EastWest Bank, which has 433 branches in the country, and the venture will trade under the brand name of Troo.
In 2016 BDO Unibank took control of Generali Pilipinas Holdings Company (GHPC), co-owned as a JV with Italy’s Generali Group. GHPC was formed in 1989 and had both life and non-life subsidiaries. As a result of the transaction, BDO took over the life company Generali Pilipinas Life Assurance and renamed it BDO Life Assurance Company, while Generali took over the non-life business and re-established it as a life company called Generali Life Assurance Philippines.
“In the life insurance sector, international new entrants have been largely driven to participate in the local market through bancassurance partnerships with local banks,” John D Casey, president and CEO of Pacific Cross Philippines, told OBG. “In the non-life industry, given the propensity for natural disasters of the Philippines and low margins, international insurance companies have not been as keen on taking risks”
The sector has been growing rapidly in recent years. In 2015 premiums overall rose by 18% on a nominal basis and 16% in real terms. In the first quarter of 2016 business did slow. In the three months ended March total premiums were down 15.2% year-on-year, with life dropping by 19.7%, while non-life was up 11.3%. Profits for the entire sector in that quarter were down 3.7%. Industry observers said that the slowdown came ahead of the elections in May 2016.
Later in the year the sector rebounded. In the third quarter of 2016 total sector assets climbed by 21% year-on-year, while net worth increased by some 38%. Assets for the life insurance sector expanded by 16%, while life premiums fell by 8%. On the non-life side of the business, meanwhile, assets were up 8% and total gross premiums written increased by 9%. Premiums, however, eased by almost 2%. Despite the rebound in the third quarter of 2016, growth was flat in full-year 2016, with the sector’s premiums up by a marginal 0.3% at P232bn ($4.9bn). A 3% fall in life premiums to P182.8bn ($3.9bn) was slightly offset by the increase in premiums in the non-life segment, which saw growth of 16% to P41.6bn ($880m), according to the IC.
The steady rise in premiums is expected to continue going forward, with a total of P500bn ($10.6bn) expected by 2019. Much of the growth will come from insurers reaching an increasing number of people. In 2009 only 14% of the population was insured; by 2015 it was closer to 39%. The IC forecasts the market penetration rate will reach 50% in 2019; yet much of this projects growth is based on the expansion of micro-insurance, and protection gaps remain an issue.
Indeed, insurance density remains fairly low. According to Swiss Re, premiums per capita in 2015 reached $55, of which $39.80 is life and $15.30 is non life. That compares with a total of $6271 in Hong Kong, $3825 in Singapore, $472 in Malaysia, $281 in China, $58 in Indonesia and $319 in Thailand. However, the Philippines ranks slightly ahead of India ($55), Sri Lanka ($43) and Vietnam ($32). In terms of penetration, the Philippines is somewhat better than some of its regional peers. At 1.9% of GDP, it stands above the likes of Indonesia (1.7%), Vietnam (1.6%) and Sri Lanka (1.2%), though it is behind Thailand (6%), Malaysia (5%) and China (4%). The goal of the IC is to have the penetration rate hit 3% by 2019, which is the average in the ASEAN region.
Some insurers performed particularly well in 2015. For AXA Philippines, a JV between France’s AXA and Metro Bank, total premiums increased by 25% year-on-year to P22.9bn ($484.5m). Philippine American Life and General Insurance Company (PhilAm), with net income of P7.5bn ($150.7m) in 2015, was the most profitable insurer in the country. Manufacturers Life Insurance (Manulife Philippines) was next, with P4.3bn (91m), followed by Pru Life Insurance at P1.8bn ($38.1m), Insular Life Assurance at P1.5bn ($31.7m) and Philippine AXA Life Insurance with P1.4bn ($29.6m). Sun Life was by far the largest insurer in the country for the fifth year running, with P32.8bn ($693.9m) in insurance premiums collected. That was followed by Philippine AXA at P22.8bn ($482.3m) and PhilAm with P21.2bn ($448.5m). The largest non-life company was Prudential Guarantee and Assurance with P3.5bn ($74m) of net premiums written, followed by Malayan Insurance Company at P3.4 ($63.5m), BPI/ MS Insurance with P2.4bn ($50.8m), Charter Ping An at P2.2bn ($46.5m), Pioneer Insurance and Surety (P1.9bn, $40.2m), FPG Insurance (P1.8bn, $38.1m), MAPFRE Insular Insurance (P1.39bn, $29.4m), UCPB General insurance (P1.36bn, $28.8m), Standard Insurance (P1.33bn, $28.1m) and Pacific Cross Insurance (P1bn, $21.2m). In 2016 Sun Life recorded the highest premium income among the insurers, followed by Philippine AXA Life Insurance, BPI Philam Life Assurance, PhilAm, Pru Life Insurance, Manulife Philippines, Insular Life, BDO Life (Generali Pilipinas Life), Manulife Chinabank Life and Sun Life Grepa Financial. One further noteworthy newcomer was life insurer FWD Philippines, which entered the market in 2014 and was already ranked 12th by premiums after only one year in operation.
There are signs that technology is starting to play an increasingly large role in the sector. In early 2016 Sun Life, Voyager Innovations and Smart Mobile, a subsidiary of telecoms firm PLDT, formed a partnership to offer insurance solutions through the use of financial technology. The partnership will target all emerging markets, but will begin with the Philippines.
In December of the same year Sun Life formed a partnership with Universal Storefront Services (USSC), a money transfer company, to sell affordable insurance products. The insurer hopes to reach 5m customers by 2020, with USSC to help Sun Life increase distribution in harder-to-reach locations around the country.
Globe Telecom also recently entered a partnership with Cebuana Lhuillier, a microfinance company with 1800 branches in the Philippines, and Mynt, to jointly offer financial inclusion products. They will work together to allow customers to make cashless transactions, for example, permitting Globe’s GC ash to be used in Cebuana Lhuillier branches.
Inclusiveness is a top priority, and in this respect the country has been doing well, and the country is becoming a model for micro-insurance in Asia. As of mid-2015, 28.5% of the population was covered by micro-policies. The overarching goal is to have the whole country covered by insurance in a decade.
To be classified as a micro-product, a policy can cost no more than 7.5% of the average daily wage of P34 ($0.72) per day, and pay out 1000 times the daily minimum wage (P481,000, $10,200). The priority is also to have the payments made quickly – within a maximum of 10 days – as the poor are frequently in need of immediate cash when they have a claim.
New micro-policies are being continually added, and new regulations being written. Micro-agriculture policies and a micro pre-need regulatory framework were introduced in October 2015. In April 2016 rules regarding the sale of micro-health policies were published. It is expected that as the segment becomes more competitive, offerings will become increasingly attractive and affordable. Once dominated by small, local pre-need and mutual companies, micro-insurance could even see the emergence of large international players. On the local level, Sun Life has focused on addressing inclusiveness issues and is working to extend its reach further into secondary cities and deeper into the countryside. The company aims to have half its business in Manila and the other half outside the capital by 2020.
While the sector is quite healthy and growing, US-based ratings agency AM Best has noticed some imbalances. According to the company, the non-life side of the business is relatively small for the size of the country and for the stage of insurance development. In part, this is simply the consequence of affordability, as for most people in the country, non-life products are luxuries to which they cannot commit funds. At the same time, however, AM Best noted that the dynamics of the segment are not ideal in terms of competition and participation. Also relevant to the non-life segment is the abundance of natural disasters in the Philippines. It is frequently hit by typhoons, experiencing around 20 a year, and is the country most exposed to tropical storms in the world. The Philippines is also on the tectonic “Ring of Fire” and is thus at greater risk of earthquakes and volcanoes. As a result, the chance of being hit by a large claim is relatively high. Natural disasters cost the country about 1% of GDP a year, and these events impact the poor in particular.
As such, the government is pushing to make catastrophe insurance mandatory. Under a new bill, which is supported by the IC, households would be required to take out a policy against certain events. The product, which is being designed with the help of the World Bank, would cover typhoons and related flooding, earthquakes and fire. Covering the risk has been a matter of much discussion. Attempts to get a catastrophe bond issued failed in 2015, and attention has turned towards utilising reinsurance. There has also been talk of developing a disaster pool, bringing together all non-life insurance companies to cover mandatory disaster risk. The Philippine Insurers and Reinsurers Association is pushing for the establishment of such a pool.
Other solutions are in the works, too. The UN, the Philippine government and the private sector have suggested the creation of the Philippines Risk and Insurance Scheme for Municipalities in order to provide budgetary support for localities hit by catastrophe. It would be an index-based product that would pay out based on the severity of the event.
The Asean Question
To a certain extent, the IC has been pushing the increase in capitalisation in order to prepare the sector for competition from ASEAN. South-east Asia, after all, has exceptionally strong insurers, with capital, experience and expertise. With the launch of the ASEAN Economic Community in late 2015, creating a single market for ASEAN members, it is possible that these entities would take market share at the expense of local Philippine insurers. But so far, despite the arrival of the single market, the insurance sector has not experienced any sort of flood or influx. To be fair, financial services did not have a strict 2015 single-market deadline, and it was expected to take time to set up protocols for the relevant products and services. Yet, despite it being generally agreed that two of the four modes of insurance sales – cross-border selling and overseas purchasing – should be allowed, and despite a formal framework being established for the cross-border selling of maritime, aviation and transit insurance, insurers have noted seeing surprisingly little activity. “Contrary to our initial impression that it would open borders for financial services, that has not happened,” said Sun Life’s Mantaring. “Bottom line: there has not been integration.”
The Philippines’ insurance sector is nonetheless well positioned for the future. Its companies are firmly established, weaker institutions are being recapitalised, merged or folded, and insurers have a large market to sell into. Challenges remain primarily around awareness and affordability, and tapping markets outside of large urban areas will require the development of the right products at the right price point.
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