With a strong history and few limitations and restrictions on foreign investment, the Philippine insurance industry is open, thriving, growing and competitive. Unlike the banking sector, insurance is not the subject of great debate about who should be let in and how much equity they should be allowed to own. That said, the industry is facing certain pressing issues. It is seen as crowded and in some lines a bit too competitive. A good number of insurance firms lack capital and need to be shored up. It is also widely acknowledged that the sector should be more inclusive, as it currently serves only a small percentage of the population.
COMPETITION & CONSOLIDATION: As with banking, reforms are being pursued and a number of changes are in the offing. The first insurance firm in the Philippines was Strachman, Murray & Co, appointed as the Lloyd’s of London agent in the country in 1829. In 1896 the Fire Insurance Association was formed – it eventually merged with the Manila Marine Insurance Association and the Manila Accident Insurance Association to become the Philippine Insurers and Reinsurers Association (PIRA) in 1962. Life insurance was first offered in 1898, by Canada’s Sun Life Assurance, and the first local non-life company was founded in 1906 (Yek Tong Lin Insurance Company); the first domestic life insurance company, Insular Life Assurance, was formed in 1910. Social insurance began in 1937 with the Government Service Insurance System. Next, the Insurance Commission (IC) was established along with the first central bank in 1949. Social health insurance was introduced in 1969 and Philippine Health Corporation (PhilHealth) was created in 1995 SECTOR RESULTS: At the end of 2012, the market comprised 79 non-life insurance companies, 29 life insurers and one reinsurance firm. Overall the sector is quite healthy. For the life companies, gross premium income was P120bn ($2.8bn) in 2012 – a record – compared with P86.3bn ($2.08bn) the previous year. Assets were up 15.8%, investment income grew 19%, and paid-up capital rose 3.9%, to P12.8bn ($308m). The net worth of the sector was P129bn ($3.1bn), up 31%. However, net income was 30% lower in 2012 compared with 2011. For non-life companies, assets rose 12% and paid-up capital was P21.1bn ($508m), compared with P20bn ($482m) a year earlier, but net income dropped 22%, gross premiums written were down 4.5% and net premiums were 10.8% lower on the year.
The country is young and much underserved, suggesting that more products will be needed as people age and seek ways of savings, and as the country becomes wealthier and better educated. The median age is 23 and only 23% of the country owns life insurance, according to comments made by Cesar Purisima, secretary of the Philippine Department of Finance. That compares with an average age of 27.1 in Malaysia, 33.5 in Singapore and 34.7 in Thailand. According to a central bank survey conducted in 2008-10, only about 29% households had health insurance and almost 94% of those were under the state’s PhilHealth programme.
CAPITAL REQUIREMENT: While the insurance market is open – there are no restrictions on foreign direct investment in the sector – overseas investors have special capital requirements. If a company is more than 60% foreign owned, it needs to have more than P500m ($12m) in capital. That compares with P350m ($8.4m) through December 31, 2012 and P400m ($9.6m) through December 31, 2014 for companies with 40-60% foreign ownership. Firms that are less than 40% foreign owned were required to have P300m ($7.2m) of capital through December 31, 2012 and P400m ($9.6m) through December 31, 2014. Those with no foreign participation were mandated to have P250m ($6m) through December 31, 2012 and P400m ($9.6m) through December 31, 2014. All new insurers are required to have P1bn ($24.1m) in capital. “Non-life is open,” said Victorio Valledor, president & CEO of Lockton Insurance. “But you need high capitalisation.”
FOREIGN INTERESTS: Some additional burdens are placed on foreign investors wanting to participate in the market. They must be one of the top 200 insurers in the world or the top 10 in their country of origin, and they must have been in business for a full decade. Unwritten rules also restrict the sector. According to a US Department of State 2012 report, only the Government Service Insurance System is allowed to underwrite policies for public projects and companies being privatised. Despite the hurdles, international firms are active in the market. Domestically incorporated foreign life insurance companies include Sun Life of Canada, Pru Life Insurance, Philam Equitable Life Assurance, Manufacturers Life Insurance, Manulife Chinabank Life Assurance and Generali Pilipinas Life Assurance. Domestically incorporated, non-life companies include the Asia Insurance Corporation, MAPFRE Insular Insurance, AIG Philippines Insurance and QBE Insurance.
The Philippines also has branches of foreign life and non-life firms. Most recently, in May 2013, Starr International Insurance (Asia), part of Starr Companies, was granted a certificate of authority to operate by the IC. Starr was reported to have been searching for a local target to acquire, but decided to go it alone in the end.
REGULATIONS & REFORMS: The country recently passed a new insurance code that should help strengthen the industry, as the previous code traced its root back to the 1970s. The new law, Senate Bill 3280, became law in August 2013 and promises to have a wide-ranging and significant impact on the industry in terms of numbers, quality, stability and competitiveness. “The passage of the new insurance code is a major event for the sector,” said Emmanuel Que, executive vice-president at Charter Ping An Insurance and president of PIRA.
NET WORTH: The amendment expands the definition of self insured to include protection of depositors, third parties or clients, allows for the payment of premiums through salary deductions, enables the creation of self-regulatory organisations in the sector, gives the insurance commissioner a six-year term and expands the role’s powers, and extends the length of insurance licences from one to three years in duration.
Under the law, the list of admitted assets will now include mutual funds, real estate investment trusts, salary loans, unit investment trusts and special deposit accounts. Perhaps the most significant change in the legislation is how it deals with capital. Under bill 3280, insurance firms can use net worth, rather than capital, to meet their capitalisation requirements. Net worth in the bill is defined as capital plus retained earnings, plus unimpaired surplus, plus revaluation of assets.
A schedule for ratio increases is part of the bill. Insurance firms require P250m ($6m) of net worth by June 30, 2013; P550m ($13.3m) by June 30, 2016; P900m ($21.7m) by June 30, 2019; and P1.3bn ($31.3m) by June 30, 2022. The capital issue has been a serious concern for the industry, and the new provisions under the amendment to the code will provide a degree of relief.
In 2006 the Department of Finance set a capital target for the sector of P250m ($5.7m) by the end of 2011 under Department Order No. 27-06. At the time, the capital requirement was P50m ($1.2m). However, the jump was too high for most, and implementation was delayed until the end of 2012. More than 50% of non-life companies were unable to meet the first deadline – 61 of 84 were below the threshold at the end of 2011. For life companies, 14 of 33 were under the mark. By the end of 2012, 32 insurers – 31 non-life and one life – were undergoing some form of reorganisation to meet the industry’s capital requirements. Of these, 21 were under conservatorship, three were under receivership and eight were in liquidation.
FALLING NUMBERS: As a result of the capital requirements and the spectre of increased competition, industry leaders expect a fall in the number of insurers due to the closing of existing companies, and the running down of their books, and consolidation. Sun Life, for example, is said to be on the lookout for targets and some other insurers have been in merger discussions. In mid-2012, the insurance commissioner, Emmanuel Dooc, said that nine non-life companies were preparing to combine in four separate transactions. Observers believe that the sector will fall in size and go from being fairly fragmented to relatively more concentrated. “A lot of firms are below their net worth targets and are wooing each other,” said Michael Rellosa, president of Fortune General Insurance and a trustee at PIRA. “Eventually, there will be 40 or 50 left.”
IN COMPLIANCE: Insurers and their representatives say that, with the exception of the capital issue, most insurers are in full compliance with industry regulations. They add that attempts to raise minimum capital punishes good firms that have been in business for decades, some as long as half a century, and note that companies serving small markets and properly structured, especially those which have backed their claims with reinsurance, do not need more capital. The government responds that insurance is an industry of scale and that it is best to have larger firms in it.
Of particular concern is the liberalisation of the market in 2015, when insurers from other ASEAN countries will be able to compete with local firms. Purisima has argued that the extended market will force poorly capitalised companies out of business as the ASEAN Economic Community (AEC) takes shape.
CATASTROPHIC COVERAGE: Insurance is important in the Philippines because of the number of natural disasters it faces. According to research conducted by the Centre for Research on the Epidemiology of Disasters, the country is the most natural disaster prone in the world. It sits in the path of typhoons and experienced more earthquakes, typhoons, volcanic eruptions, floods and landslides than any other nation in the 20th century. Indications suggest that this century could be worse. Storm damage in recent years, especially in the wake of Typhoons Haiyan (2013), Pablo (2012), Pedring (2011), Pepeng and Ondoy (2009), has hit record levels – Ondoy and Pepeng are estimated to have cost the country 2.9% of GDP. Shifting weather patterns, urbanisation and deforestation may have made flooding more severe and increased the number of people affected.
The fallout from Typhoon Haiyan could potentially have a transformative effect on the insurance sector. Government plans to promote and facilitate wider catastrophe coverage will likely be expedited, and public awareness of the benefits of such coverage will be heightened. Furthermore, the disaster will likely drive faster consolidation of the non-life industry, due to the elimination of poorly capitalised players.
TAX: Tax is a major industry concern as well, as the sector has one of the highest tax burdens in ASEAN. Insurers currently pay 12.5% for documentary stamps, 12% value-added or premium tax, 2% fire services tax, local government taxes, a 30% corporate income tax and a 20% tax on interest. The industry argues that this is out of line with regional norms and will put it at a disadvantage when the AEC opens. Singapore insurers pay 7% premium tax and 17% on profits and investment income. Hong Kong firms pay 16.5% on profits, a 10.8% employee compensation levy and a 3% motor insurance levy. In the Philippines, according to PIRA’s Rellosa, a full 25% of property insurance premiums go to taxes.
OUTLOOK: In addition to more traditional insurance options, some specialised segments also promise growth opportunities. “As the market becomes more sophisticated, financial fraud and cyber liability insurance offer significant growth potential for insurers on the commercial side. Meanwhile, innovative protection for newer trends in consumer activities such as smart phones, ATM protection, and travel continues to generate significant volumes for insurance companies,” Mark Lwin, president and CEO of AIG Philippines Insurance, told OBG. Sector authorities have been taking steps to support local insurers’ competitiveness in the upcoming AEC market by creating incentives to consolidate and ensuing insurers have the net worth required to cover risks at home and compete in a regional market.
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