BEST S SPECIAL REPORT

Transcription

1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Market Review April 14, 2014 Industry consolidation will improve the market s structure. Philippines Non-Life Sector Takes the Lead As Insurance Industry Faces Capital Challenge The Philippine non-life insurance sector is going through a transition as it scales up to meet higher capital requirements under a new regulatory code. Challenging market conditions, with little driving momentum in the industry, has left many insurers feeling pressured as they cope with capital hikes. A.M. Best believes market consolidation is inevitable as the number of players continues to shrink due to merger activity and license withdrawals. A gradual increase in capital requirements should help to reduce inefficiencies and enhance profitability, given the existing poor economies of scale and high operating costs. Moreover, A.M. Best expects capital enhancements should strengthen the ability of companies to retain more business and improve profitability. Consequently, this could enhance the industry s profile, making it more attractive to investment, external capital and new participants. Historically, regulatory change and reform has been slow in the Philippines. The industry has still not seen vibrant merger and acquisition activity. Given current conditions, A.M. Best believes an abrupt change in the insurance landscape is still a way off. Analytical Contact Jeff Yeung, Hong Kong Jeff.Yeung@ambest.com Researcher & Writer Iris Lai, Hong Kong Editorial Management Rick Micchelli The non-life sector has generated stable underwriting results despite the country s high exposure to natural catastrophes. Low insurance penetration in the Philippines, combined with low risk retention by insurance companies, has contributed to steady business performance for most non-life players (see Exhibit 1 and Exhibit 7). Nevertheless, most companies have low capital bases with less capacity to write substantial business and improve profits. Philippines non-life market space is crowded, with a large number of small to mediumsized companies offering similar personal line products (see Exhibit 2). In addition, nonlife companies have relatively high expense ratios compared to their peers in the Association of Southeast Asian Nations (ASEAN). Going forward, A.M. Best believes the industry would be better served by moving towards a leaner market with more efficient operation. The non-life sector has posted sluggish growth over the Exhibit 1 Insurance Market Statistics ( ) (PHP Billions) Population (Millions) Gross Domestic Product (PHP) 9, , ,564.9 Change in Real GDP (%) Insurance Penetration (Life) % Insurance Penetration (Non-Life) % Insurance Penetration (Total) % Insurance Premium (Life) (PHP) Insurance Premium (Non-life) (PHP) Insurance Premium (Total) (PHP) Source: International Monetary Fund, World Economic Outlook Database (October 2013); Swiss Re sigma reports Exhibit 2 Number of Authorized Insurance Companies Composite Life Non-Life Prof. Reinsurer Total Source: Philippines Insurance Commission Copyright 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 Exhibit 3 New Capital (Net Worth*) Minimum Requirements ( ) PHP Millions 1,500 1,250 1, By June 30, By Dec. 31, By Dec. 31, 2019 Compliance Date 1,300 By Dec. 31, 2022 *Net worth consists of paid-up capital; retained earnings; unimpaired surplus; revaluation of assets as may be approved by the commissioner Source: The Insurance Code (Philippines) Exhibit 4 Philippines Non-Life Insurance Companies Grouped by Net Worth (2011 & 2012) Less than PHP 250M 42% Less than PHP 250M 24% PHP 1.3B + 6% 2011 PHP 1.3B + 4% PHP 900M to 1.3B 7% PHP 550M to PHP 900M 9% PHP 250M to PHP 550M 36% PHP 900M to 1.3B 12% past few years. Despite last November s devastating damage from Typhoon Haiyan in Philippine s central provinces, particularly hard-hit Leyte province, low insurance penetration in the region prevented a large impact on the industry s bottom line. However, the event prompted government and industry action for a national, natural catastrophe insurance scheme. The country s demographic structure, with a high rural and low income population, highlights the potential for microinsurance, which is ripe for further growth. Among ASEAN countries, the Philippines has taken a lead in developing microinsurance products. Capital Stress Builds The insurance industry is confronting regulatory change with the major challenge of stronger capital requirements under the amended Insurance Code, which was passed into law in August The new capital requirements focus on the level of net worth instead of paid-up capital. The components of net worth are broader, including paid-up capital, retained earnings, unimpaired surplus and revaluation of assets approved by the insurance commissioner. The requirement for minimum net worth is 250 million Philippine pesos (PHP) (USD 5.5 million) by June 2013; PHP 550 million by 2016; PHP 900 million pesos by 2019, and PHP 1.3 billion by New entry insurer needs to have PHP 1 billion in paid-up capital (see Exhibit 3). Nineteen out of 80 non-life companies had a net worth lower than PHP 250 million in 2012, according to the Philippines Insurance Commission (IC). In 2011, 35 out of 84 nonlife insurers had a net worth lower than PHP 250 million (see Exhibit 4) Source: Philippines Insurance Commission PHP 550M to PHP 900M 11% PHP 250M to PHP 550M 49% 2 The recent hike in capital requirements has led to industry consolidation. As a result, the number of non-life insurers is shrinking. For example, three non-life companies, Philippines Phoenix Insurance & Surety Corp., Summit Guaranty Insurance Co. Inc. and CAP Gen Insurance Corp., were not issued licenses for failing to meet capital

3 requirements last year, according to the IC. In addition, two non-life insurers were merged into other companies: Utility Assurance Corp. was absorbed by Stronghold Insurance Co. in September 2012; and Manila Insurance Co. was absorbed by Premier Insurance & Surety Corp. Capitalization has been a major issue for most non-life companies. Small to mediumsized players in the non-life industry, in particular, are finding it difficult to comply with increased capital requirements. Lack of resources, the inability of stockholders to raise funds, and too few investors to inject capital are among the difficulties facing Exhibit 5 Philippines Non-Life Top 10 Insurers (2012) (PHP Billions) insurance companies, according to the IC. Also, there has not been much interest in buying into insurance business in the Philippines in recent years. For instance, Starr International has been the only company to launch a branch in the country over the past few years. Regulatory changes are aimed at making the insurance sector more competitive for the upcoming free trade agreement in the creation of an ASEAN Economic Community (AEC) in According to the IC, the competition to sell insurance products would be greater as an even playing field will be established. With increasing capital requirements, the regulator believes that mergers and consolidations will result in the pooling of resources, assets, manpower and liabilities. This will improve the market s structure as smaller companies merge with bigger players to create firms with stronger, more stable financial positions. In other regulatory developments, the Philippines introduced a risk-based capital (RBC) framework in 2006, but it has been implemented as a supplement to the solvency margin requirement. The regulator has stated that the current RBC framework has to be strengthened before it becomes the sole basis for solvency determination of insurance companies under the new Insurance Code. Sluggish Development The non-life sector is shared by a large number of insurers, mostly small to medium-sized domestic players. The top 10 non-life insurance companies generated 62% of total gross premium written (GPW) based on the IC s 2012 report on 81 insurers (see Exhibit 5). The top five players accounted for 41.2%. Fire and allied perils cover was the major line, accounting for 38% of non-life premiums in 2012, followed by motor at 27%. The Philippines has a small non-life market among ASEAN countries, with a premium size similar to that of Vietnam. The non-life industry posted a 10.9% increase in GPW to PHP 54.6 billion in 2012, according to the IC. The non-life industry has posted an average annual growth rate of about 6.5% over the past decade with a penetration of around 0.5%. The non-life sector has been challenged by pricing competition, an unfavorable economic structure, high taxes and the threat of natural catastrophes. Pricing competition continues to drive premium rates down in the Philippines. Motor, fire and personal accident products are generally offered by most companies. However, demand has been tepid. Economic prosperity in the Philippines has not risen at the same rate as other ASEAN markets, which have seen the middle class grow significantly and fuel insurance demand. The Philippines Gross Premiums Written Rank Company Name 1 Malayan Insurance Company, Inc Prudential Gtee. & Assce., Inc BPI/MS Insurance Corporation Pioneer Insurance & Surety Corporation AIG Phil. Ins. Company (Chartis Phils., Inc.) Charter Ping An (Philippine Charter Ins. Corp.) Federal Phoenix Assurance Co., Inc UCPB General Insurance Company, Inc Standard Insurance Company, Inc MAPFRE Insular Insurance Corporation 1.9 Source: Philippines Insurance Commission 3

4 Exhibit 6 Philippines Non-Life Loss Ratio * Loss Ratio (Aggregate) Fire Marine Motor Car Others *Direct Business and Reinsurance assumed Source: Philippines Insurers & Reinsurers Association (PIRA) has a very young population and a high concentration of wealth among a relatively small part of the population. Many individuals remain financially challenged and unable to afford insurance. Investment activity has also been weak in the Philippines due to underinvestment in the infrastructure, power plants and utilities. The Philippines Insurers & Reinsurers Association (PIRA) has pushed for a lower tax structure to improve non-life penetration. Currently, taxes amount to over 26% of premiums, including a 12% value-added tax, a 12.5% documentary stamp tax, a 2% fire service tax and 0.15%-0.75% in various forms of local government tax. The association has lobbied to reduce these various taxes in order to make non-life products more affordable. The non-life sector reported loss ratios ranging from 42% to 50% during a five-year period that ended in Insurers have maintained low retention rates, particularly for higher risk business lines such as fire and allied products, with a retention rate at 22.3% in Total reinsurance premium ceded amounted PHP 32.3 billion, representing 53% of gross premiums in This high reinsurance utilization has contributed to most non-life insurers stable underwriting results despite high natural catastrophes risks. Investment returns have also been a key income source. However, most non-life companies have high operating expenses compared to their counterparts in neighboring countries such as Indonesia and Thailand. As a result, companies need to reduce costs or increase revenue to cover expenses. In 2012, the industry saw a 16% drop in net income to PHP 2.4 billion, according to the IC. Threat of Natural Catastrophes The Philippines are prone to natural catastrophes including earthquakes, typhoons, floods and volcanic eruptions. The country is hit by more than 20 typhoons every year on average. The U.N. has identified the Philippines as the world s third-most disaster prone country after Vanuatu and the Republic of Palau. In the aftermath of Typhoon Haiyan (known locally as Yolanda), the government revealed plans to set up a mandatory risk insurance pool to help local government units better respond to natural catastrophes. The disaster risk insurance pool is expected to cover local government infrastructures, such as municipal buildings, schools and markets. In addition, the U.N. Office for Disaster Risk Reduction has worked with global insurance entities on a new approach for catastrophe risk financing in the Philippines. The proposed catastrophe scheme, known as the Philippines Risk and Insurance Scheme for Municipalities (PRISM), is being designed as a fasttrack way of providing budgetary support after a major natural disaster. The payment of claims is not based on actual losses, but on a pre-agreed amount when a specific trigger is met. For Exhibit 7 Philippines Non-Life Operating Performance (PHP Millions) Growth Rate Year-Over- Year % 4 Year-Over- Year % Chg Operating Results 2010 (%) 2011 Chg 2012* Underwriting gain / (loss) PHP 6, % PHP 7, % PHP 8, % Gross Investment Income 2, , , Operating Expenses 6, , , Net Income Before Income Tax 2, , , Net Income After Tax 2, , , *Direct Business and Reinsurance assumed Source: Philippines Insurers & Reinsurers Association (PIRA) instance, insurance will be paid out in the event of rainfall exceeding a certain number of inches, or wind speed that exceeds a certain threshold. In addition, PIRA, the IC and the Asian Development Bank

5 Exhibit 8 A.M. Best-Rated Insurance Companies Ratings as of March 28, Financial Strength Rating Outlook Issuer Credit Rating Outlook AMB # Company Malayan Insurance Co., Inc. B++ Stable bbb+ Stable National Reinsurance Corporation of the Philippines B++ Stable bbb Stable Starr International Insurance (Philippines Branch) A Stable a Stable Source: Best s Statement File Global have planned for a natural catastrophe pool to cover earthquake risks for households and small and medium-sized enterprises. An earthquake insurance company funded by both the private sector and the government has been suggested to cover the risk. The establishment of Earthquake Protection Insurance Corp. aims to develop the structure for implementing mandatory earthquake insurance coverage with domestic non-life insurers and reinsurers. Currently, only 12% of the country s buildings are estimated to have a fire insurance policy. A number of insurance companies offer earthquake insurance but the high cost is unaffordable for most people. Typhoon Haiyan, which hit the central provinces in November 2013, was recorded as the most powerful landfall tropical cyclone to affect the Philippines. Extreme winds and storm surges brought severe destruction with estimated economic loss of about USD 10 billion, according to figures from Aon Benfield. Insured losses are projected at USD 1.5 billion, representing just a small portion of economic loss due to low insurance penetration in the typhoon-hit area. The material impact of non-life insured losses is expected to drag into the first and second quarters of 2014 as a majority of the claims have not been settled. Natural catastrophes such as windstorms, earthquakes or other allied risks are covered either by extensions to fire insurance policies or under separate policies. Non-life companies offer catastrophe covers backed by reinsurance. Insurers writing fire and allied perils coverage have to secure 5% of their catastrophe risks with reinsurance. National Reinsurance Corp. of the Philippines (PhilNaRe), the country s sole reinsurer, enjoys a compulsory cession from non-life insurers, which are required to cede 10% of their foreign outward reinsurance to PhilNaRe. Reinsurance ceded amounted PHP 32.3 billion, representing 53% of total GPW in 2012, according to PIRA. Fire and allied perils business had 77.6% of GPW ceded to reinsurance. For the January 2014 renewal, there was an overall 20% increase in reinsurance rates for catastrophe loss hit property programs due to the impact of Typhoon Haiyan. The Attraction of Microinsurance The Philippines has the highest microinsurance coverage ratio in Asia at 21.3%, compared with 14% in second placed Thailand and 9.2% in India in third, according to a briefing note published by the Munich Re Foundation titled The Landscape of Microinsurance in Asia and Oceania There were 19.9 million Filipinos covered by microinsurance in 2013, up from 3.1 million in This favorable trend is a bright spot in the Philippines insurance landscape and stands out among emerging Asian markets attempting to capture this untapped market. The country s vast low-income population have unmet protection against natural catastrophe, agriculture, medical and life risk. In Asia, the Philippines has played a leading role in developing microinsurance, supported by the government along with international aid. The Department of Finance launched 5

6 the National Strategy and Regulatory Framework for Microinsurance in 2010, outlining government policy and performance standards for this segment. The key strategies are to promote the participation of private sector in the delivery of microinsurance products and services, and to enhance insurance accessibility to low income groups. Microinsurance is a key priority of the IC, which targets 27 million low income Filipinos for insurance coverage by The country s amended Insurance Code includes a chapter on microinsurance as a financial product and service to meet the poor s risk protection needs. The regulation outlines microinsurance provisions as well as concessions. Microinsurance products are defined as those policies with premiums not exceeding 5% of the current daily minimum wage rate of non-agricultural workers in metro Manila. Prior to 2010, only mutual benefit associations sold low-cost informal insurance products. Various government programs and reforms have fueled microinsurance development. For insurance, Munich Re rolled out its first microinsurance product in the Philippines to provide protection for the lending capacity of cooperatives to low-income groups against extreme weather events in About 19 insurance companies and 17 mutual benefit associations now offer microinsurance. The IC approved 80 microinsurance products in 2012, including 54 life and 26 non-life products. Microinsurance has substantial potential in Philippines current market structure. About 26.5% of the population lives below the poverty line while 51% of the population lives in rural areas. Extending protection to the majority of the population has not just been on the industry s agenda in the Philippines, but also in many emerging markets. However, private insurers are generally reluctant to write microinsurance due to financial considerations. Active participation of private insurers, reinsurers, non-government organizations and government is critical to create a sustainable private-public partnership. In Asia, the Philippines is taking the lead in building the structure to facilitate microinsurance development with regulatory framework in microfinance, more active private participation, and through non-government organizations such as the Asian Development Bank. Going forward, microinsurance offers a potential market for the Philippines to demonstrate its strength in the ASEAN region. Microinsurance must be commercially viable in order to flourish. Government support as well as international aid are key drivers, but this may ultimately raise concerns over financial pressure on the country s fiscal budget. Therefore, long-term development requires the participation of private players to help drive the viability of microinsurance products. Building a cost-effective business model for distribution, operation and administration is a key task for microinsurance providers. Raising awareness on risks and protection needs among the low income segment is essential to create an insurance-buying culture. The realization of microinsurance potential depends on the success on pushing forward these driving factors. Overall, the Philippines has proven to offer a good environment to nourish such development. 6

7 7

8 Published by A.M. Best Company Special Report CHAIRMAN & PRESIDENT Arthur Snyder III EXECUTIVE VICE PRESIDENT Larry G. Mayewski EXECUTIVE VICE PRESIDENT Paul C. Tinnirello SENIOR VICE PRESIDENTS Douglas A. Collett, Matthew C. Mosher, Rita L. Tedesco, Karen B. Heine A.M. BEST COMPANY WORLD HEADQUARTERS Ambest Road, Oldwick, NJ Phone: +1 (908) WASHINGTON OFFICE 830 National Press Building th Street N.W., Washington, DC Phone: +1 (202) A.M. BEST AMÉRICA LATINA, S.A. de C.V. Paseo de la Reforma 412 Piso 23 Col. Juárez, México, DF A.M. BEST EUROPE RATING SERVICES LTD. A.M. BEST EUROPE INFORMATION SERVICES LTD. 12 Arthur Street, 6th Floor, London, UK EC4R 9AB Phone: +44 (0) A.M. BEST ASIA-PACIFIC LTD. Unit 4004 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Phone: DUBAI OFFICE (MENA, SOUTH & CENTRAL ASIA) Office 102, Tower 2 Currency House, DIFC PO Box , Dubai, UAE Phone: A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurer s current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Best s Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile and, where appropriate, the specific nature and details of a rated debt security. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including but not limited to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Any and all ratings, opinions and information contained herein are provided as is, without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services. These rating fees can vary from US$ 5,000 to US$ 500,000. In addition, A.M. Best may receive compensation from rated entities for non-rating related services or products offered. A.M. Best s Special Reports and any associated spreadsheet data are available, free of charge, to all Best s Insurance News & Analysis subscribers. Nonsubscribers can purchase the full report and spreadsheet data. Special Reports are available through our Web site at or by calling Customer Service at (908) , ext Briefings and some Special Reports are offered to the general public at no cost. For press inquiries or to contact the authors, please contact James Peavy at (908) , ext SR