A brighter outlook is expected for the Philippine insurance industry, with the country’s economic fundamentals remaining sound, and the government and private sector pushing ahead with public education campaigns about the benefits of financial security. Financial literacy has historically been weak among the broader population but consumer awareness has started to improve, especially in light of the recent devastation wrought by typhoons and widespread flooding.

In addition, penetration is set to grow with the introduction of new products, such as microinsurance that targets Filipinos on lower incomes, as well as increased participation from overseas Filipinos. A new and quickly growing middle class has also created a profitable target market, but there is still a lot of work ahead for the sector to reach its full potential. Both domestic and foreign players cite the regulatory environment as one of the sector’s structural bottlenecks that need to be addressed to expand overall premiums.

ROOM FOR GROWTH: Insurance penetration levels in the local market are at around 14% – well below that of regional markets, especially on per capita basis. At the end of 2010, the Philippines was ranked the third-smallest insurance market in the East Asian region in terms of premiums, ahead of only Macau and Brunei Darussalam, with the life insurance segment valued at under $2bn, according to the Insurance Commission, the government agency responsibly for the regulation and supervision of the insurance industry.

In a bid to lift the sector, organisations such as the Philippine Insurers and Reinsurers Association (PIRA), the trade organisation of the country’s non-life segment, have been lobbying hard to rewrite the existing insurance code, which many working in the industry feel is outdated. A key complaint regarding the code is the large tax burden. As PIRA noted, non-life companies pay a raft of taxes such as expanded value tax and corporate income tax, among others. The association said that in total the public pays an additional 26.5% in taxes for their insurance compared to 7% in Singapore and 7.4% in Thailand. In the life segment, industry players succeeded in cutting the 5% premium tax to 2% in 2010 after many years of lobbying. Yet some feel this is still too much. Antonio de Rosas, the president and CEO of Pru Life UK, told OBG that the insurance industry is taxed quite heavily in the Philippines, and the country should consider the elimination of the additional 2% tax levied on premiums as a means to increasing revenue. “This would make the industry more competitive with its counterparts in the region, and because demand for life insurance is elastic, any reduction in price would lead to a significant increase in demand,” he said.

IMAGE IS EVERYTHING: The industry has also suffered an image problem, especially after the bankruptcy of some insurance companies and the near collapse of the pre-need segment during the financial meltdown in 2008, undermining overall confidence in the sector. Pre-need is a product unique to the Philippines, which works by pre-paying for products which will be used in the future, such as pension or education plans.

The Insurance Commission has moved to help restore trust in the sector by increasing standards for companies wanting to enter the market and boosting capital requirements for existing firms operating in what is otherwise a very competitive field.

A CROWDED MARKET: There are some 84 non-life insurers and 33 life insurance companies operating in the market. However, despite the large number of non-life providers, the top 10 companies control about 62% of the market, according to the PIRA. Furthermore, about 60 companies have a market share of less than 1% and a number of firms are family-run businesses. This high level of fragmentation has had a negative impact on the sector’s profitability and has led to several instances of poor quality underwriting.

Consolidation is on the cards, and to improve solvency the Insurance Commission increased minimum capital requirements from P75m ($1.7m) to P125m ($2.8m) on December 31, 2010. At the end of 2011 the amount was increased again to P175m ($3.9m) and will be raised every year thereafter until it reaches P500m ($11.4m) by 2015 when the ASEAN Free Trade Area (AFTA) is implemented. The AFTA opens the domestic insurance market to companies from other South-east Asian countries, creating added impetus to ensure the competitiveness of local players.

ALTERNATIVE FRAMEWORK: The Department of Finance (DoF) has said it would not exempt any company from the capital hikes. Thus it expects smaller firms that cannot raise the extra capital to either merge or shut down. The PIRA, however, has been lobbying for the DoF to do away with the paid-up capital requirement and adopt instead a risk-based capital (RBC) framework wherein the capital required would be computed based on the amount of risk a company is willing to take. According to the PIRA, the RBC formula ensures that every risk or product must be backed up with reserves or capital of roughly 200%. Therefore, the more products an insurer sells, the higher the capital and reserves it must maintain.

“About half of the companies on the non-life market would not be able to meet the P175m ($3.9m) threshold,” Emmanuel Que, the executive vice-president of Philippine Charter Insurance and PIRA board member, told OBG. “As most insurance companies are small and family-owned, we are concerned about the social impact of this measure. Rather than kill these firms, we should let them stay but without the ability of assessing large risks.” A number of small companies have been in business for five decades or longer and mostly cover risks like mandatory third-party liability for vehicles or insurance for very small businesses.

“The insurance industry can be compared to the retail industry. There are big businesses like hypermarkets, and there are also ones that can be considered sari-sari [convenience] stores. Under the RBC framework, these hypermarkets and sari-sari stores can still co-exist and cater to their niche markets,” PIRA’s president, Michael Rellosa, said at the opening of the ASEAN Insurance Council in late November 2010.

LIFE: To date, life insurance has been a hard sell in the Philippines given the lack of awareness and low purchasing power among the broader population. According to Insurance Commission data, life policy premiums accounted for only 0.8% of the country’s GDP at the start of 2011, which is about equal to Indonesia, but below that of Malaysia (2.8%) and Thailand (1.8%).

However, life insurance is set to gather steam with the emergence of a stronger middle class, as well as the introduction of new investment-linked products, guaranteed-return insurance, single-pay premiums and microinsurance. The increased participation from overseas workers is also expected to buoy premiums. Indeed, compulsory insurance is now required under the Migrant Workers and Overseas Filipino Bill, passed in March 2010. The insurance premium ranges from $72-100 per year, the cost of which is shouldered by the employer. It is estimated that some 11m Filipinos work abroad.

The main issue for local insurers will lie in navigating the legal framework regarding how to sell policies in foreign countries. One route, according to local players, would be via partnerships with foreign banks which have set up remittance centres.

PREMIUMS: The life insurance industry saw a 21% increase in total premiums in 2011, increasing from P70.7bn ($1.6bn) in 2010 to P85.5bn ($1.94bn). First-year premiums – premiums for new insurance policies – had been expected to surge by 60%, according to a mid-2011 statement by Mayo Jose Ongsingco, the president of the Philippine Life Insurance Association (PLIA) and Insular Life Assurance.

According to the PLIA, the sector’s total premium income increased to P70.7bn ($1.6bn) in 2010 from P57.2bn ($1.3bn) the previous year, a 23.5% jump. First-year premiums meanwhile increased by 59.4% to P34.3bn ($778.6m) in 2010 from P21.5bn ($488.1m) in 2009. Of the first-year premiums, the PLIA reported that nearly two-thirds were sold via bancassurance, with the remainder purchased through the conventional agency distribution channel.

There have been increased efforts to expand bancassurance as a key driver for demand. However, in order to set up a bancassurance deal, banks must have a 5% stake in the insurance company – a limitation that is unique to the Philippine market.

PLAYERS: The industry has remained relatively top heavy, with five firms accounting for around 63% of total premiums, according to the PLIA. For 2010, the top five companies were the Philippine American Life and General Insurance (Philam Life) with P11.3bn ($256.5m) in premiums; Sun Life with P10.6bn ($240.6m); AXA Life, P8.3bn ($188.4m); Pru Life UK, P7.4bn ($167.9m); and Insular Life, P7.1bn ($161.2m). The next five were BPI Philam Life (a subsidiary of Philam Life), Manulife, Grepalife, United Cocolife and Generali Pilipinas.

Philam Life saw healthy growth for most of 2011, as third-quarter premiums amounted to around P10bn ($227m). This was mostly driven by first-year premiums, which grew by 89% in the first nine months of the year to an estimated P2bn ($45.4m), more than double that registered in the same period in 2010, according to the company. Philam Life’s president and CEO, Rex Mendoza, said the surge in single premiums was largely due to new investment-linked products.

In 2011 Sun Life jumped into the number one position, thanks in part to its acquisition of 49% of Grepalife from GPL Holdings, assuming management control. GPL Holdings is a member of the Yuchengco Group. Sun Life, boosted its total premiums by 31% to reach P13.9bn ($315.5m) in 2011, according to the Vancouver-based insurer’s unaudited financial statements.

AXA Life firmed its position as the third-largest life insurer in the country, by breaking the P10bn ($22.7m) premium collection mark for the first time in 2011, which equates to average compound annual growth in premium income of 49.5% from 2009 to 2011. AXA has relied heavily on its bancassurance tie-up with the Metropolitan Bank and Trust, while fourth-place Pru Life UK has mainly utilised its agency network and broker relations with a number of lenders to secure its customer base in the country.

NON-LIFE: Like the life industry, a small concentration of firms controls a large swathe of the non-life segment. In 2010, the top 10 companies had cornered 65% of the market in terms of net premiums, which totalled P22.2bn ($503.9m) in 2010. The Malayan Insurance Company held the largest market share at 13% with P2.5bn ($56.8m) in net premiums. Prudential Guarantee and Assurance was a close second with P2.3bn ($52.2m), followed by BPI/MS Insurance at P1.4bn ($31.8m), Mapfre Insular Insurance with P1.2bn ($17.5m) and Philippine Charter Insurance with P1bn ($22.7m).

The non-life sector is poised for greater growth with the introduction of new compulsory insurance products such as mandatory coverage for agency-hired overseas workers. In addition, the proposed Omnibus Maritime Code would require ship owners to purchase salvage and wreckage removal insurance cover. An increase in spending on construction works is also expected to further spur demand as there are a number of planned or ongoing road, rail and port development projects. The privatisation of the power industry could also generate more business.

For 2010, gross premiums of the non-life industry amounted to P50.4bn ($1.1bn), an 8.5% jump compared to the previous year, according to PIRA. This was substantially higher than the near-negligible 0.1% year-on-year growth rate seen in 2008. Gross premiums for motor vehicles stood at around P13.5bn ($306.5m), an 11.4% increase on the previous year, and accounted for over a quarter (26%) of the 2010 non-life market. Marine and aviation made up another 12% of the market with gross premiums of P6bn ($136.2m) in 2010, which was less than a 1% increase on the previous year.

DEALING WITH CATASTROPHE: Fire and allied perils meanwhile accounted for 36% of gross premiums in 2010, reaching P18.5bn ($420m), a 5% increase on the previous year. The growth in fire and allied perils has been attributed to the increased awareness of insurance among property owners in the wake of Typhoon Ondoy in 2009, which caused significant flooding, as well as a market agreement on a minimum rate for catastrophic perils. The Insurance Commission has implemented a minimum rate of 0.1% of the total insured amount for natural risks such as earthquakes and an additional 0.05% for typhoon and flood. The rates are added to the basic property insurance rate that previously covered only fire. This was deemed necessary as in the past insurance companies had been undercutting premium rates or simply giving away the coverage for these risks for free with the aim of securing a larger chunk of the business, according to PIRA. Major banks have also started requiring catastrophic perils cover as part of their traditional fire policy.

But the high exposure to catastrophes in the Philippines has eaten away at insurance companies’ margins; many of these firms depend heavily on reinsurance to protect their capital base against exposure to catastrophic losses. Fewer natural catastrophes in 2010 saw losses for fire and allied perils fall to around P2.2bn ($50m), about P1.2bn ($27.1m) lower than in 2009 when Typhoon Ondoy hit, according to PIRA. Although no estimates had been released at the time of research, claims are expected to mount for 2011 as the country has experienced a number of tropical storms and flash floods, which have displaced thousands.

“The threat of natural disasters has always been there, but with higher value in the nation now, coupled with the increasing frequency and magnitude of these events, it is becoming a more serious issue and companies need to do much more to address the threat and prepare themselves,” Roberto Crisol, the president and CEO of Philippine National Reinsurance (PhilNaRe), the only domestic reinsurer in the country, told OBG.

POOLED PROTECTION: Crisol added that as the Philippines straddles major fault lines, there is also the constant threat of earthquakes, prompting the insurance industry to move towards setting up an “earthquake pool” to increase protection for middle-income households with between P800,000 ($18,160) and P10m ($227,000) worth of property. Currently the government and the private homeowners carry the burden of reconstruction and rebuilding costs. These types of pools essentially ease the burden of individual insurance companies having to shoulder huge claims – a role similar to a reinsurance company. The Insurance Commission, DoF, PhilNaRe and the Asian Development Bank have been in talks to launch the pool in 2012. Crisol told OBG that pools for covering typhoons and floods would follow, adding that it would be cost effective as they would involve local rather than foreign capital.

CAPITAL MARKETS: Local players note that further development of the country’s capital markets is key for growth going forward as it would allow the insurance industry a good channel for investing money. Currently there are restrictions as to where insurance companies can invest – for example, multi-currency investment requires approval, even for AAA-rated US bonds.

MICROINSURANCE: Although the country is starting to see a rise in the middle class – posting a per capita GDP of more than $2000 in 2011, double the country’s per capita income a decade ago, according to government statistics – this figure is still small compared to other Asian countries, and many Filipinos continue to lack the financial means to purchase conventional insurance policies. An expanding population has also exacerbated poverty rates, especially in rural areas. The Insurance Commission and other government bodies have thus been promoting microinsurance as an option for allowing broader financial security across lower-income economic groups. In addition, the Philippine Development Plan 2011-16, the current economic blueprint for the country, identifies microfinance as a key strategy to build an inclusive financial sector.

Delivered through non-traditional means by partnerships with microfinancing institutions, and through microinsurance agents and brokers, the policies offer limited payout but attach low premiums. Under the DoF’s regulatory framework, premiums should not exceed 5% of the current daily minimum wage rate of non-agricultural workers in Metro Manila. Thus, premiums for a standard microinsurance policy can range from around P30-600 ($0.7-13.6) a month, with life, health and property policies being the main focus.

BANKING ON INTEREST: While major policy writers are unlikely to enter the sector in the near future given the low premiums, there has been a growing interest among small rural banks. Increased interest from the finance sector in offering microinsurance products could see the number of Filipinos covered expand significantly over the coming years. By October 2011, seven rural banks had received licences to offer microinsurance. In December 2011, Bangko Sentral ng Pilipinas (BSP) granted an additional two licences to rural banks.

According to the central bank, nearly 50 more rural banks have expressed interest in providing microinsurance services. However, some industry players are not entirely sold on the idea, asserting it may not be practical as it may run into problems with logistics and administration. Furthermore, if Philippine growth continues as it has, more of the population will well be able to afford more standard policies in the coming years.

OUTLOOK: Premium growth is expected to remain steady on the back of continued economic expansion. The life insurance segment is set to see a hefty rise as purchasing power and awareness rise. Meanwhile, increasingly stringent capital requirements should lead to a more consolidated and sophisticated market, with a smaller number of players in a stronger position to bolster their customer base among the more affluent and financially literate middle class. These developments should help ensure local companies are in a better position to face stiffer competition when the AFTA becomes fully implemented in 2015, which will allow the free flow of goods and services, including insurance, between ASEAN member states.

As for underwriting risks, the main challenge for the sector in 2012 and beyond will be to balance the need for affordable premiums with the need to cover volatile risks, especially in property insurance. Unpredictable weather cycles have left the Philippines insurance market grappling with higher costs of reinsurance with large and unexpected claims. At the same time the market has become more acutely aware of the need to buy protection against such adversity. Coupled with rising per capita incomes this represents an opportunity for insurance firms eager to identify new growth markets in South-east Asia.

After years of relatively slow expansion, sector participants are confident they can achieve double-digit growth in 2012 and 2013. In particular the life insurance sector is set for rapid expansion on the back of the country’s positive economic indicators as well as a high level of untapped passive demand.

Meanwhile, the new property boom should fuel a rise in property insurance premiums as well as life insurance taken out as a precondition for mortgage loans. At the same time, sector stakeholders are looking forward to the establishment of an insurance pool against natural disasters and the establishment of clear regulatory guidelines in motor insurance with regard to both regulated and free market premium rates.

Despite existing challenges, domestic insurers are confident they can withstand an increase in competition from regional peers when they enter the market by 2015. Better capitalised and with a focus on individual segments, the sector is set to become more specialised, with life regarded as becoming most profitable.