By Michael F. Rellosa
IT has been raining cats and dogs on both sides of the Pacific. California has been experiencing unprecedented rains and is currently experiencing record floods. The Philippines, despite the supposed onset of the dry season, is experiencing unseasonal low pressure areas (LPAs) that are bringing rains to the entire country and torrential rains to parts of the Visayas and Mindanao, with the Zamboanga peninsula as the worst hit.
Scientists and meteorologists have long been warning us of climate change and the resultant aberrant weather, but is anyone really listening? We are used to typhoons hitting our land periodically but over the past decade or so, these typhoons have morphed into super typhoons so much so that our Pagasa weather bureau has amended the warning system to include increased typhoon signals, Wind warnings, rain warnings and storm surge warnings that took us time to comprehend. Now even the ubiquitous monsoon (habagat or amihan) can bring rains that cause disastrous flooding. The Philippines is now considered the most vulnerable nation to natural and catastrophic perils, yet are we taking heed? The estimated insured losses of the recent Typhoon "Odette" has topped the P30 billion mark and both insurers and reinsurers are reeling. Do we really need a string of disasters to take note and proactively shore up our insurance industry to be able to adequately and timely respond to these loss events?
The recent reinsurance treaty renewal season for January 1 incepting treaties has unequivocally shown that the international market has hardened. International reinsurers have imposed difficult terms and contract conditions for our local direct writers. For instance, for non-proportional treaties, portfolios which have suffered losses, are slapped with 13.8 percent to 50 percent in premiums on a risk-adjusted basis. Catastrophe excess of loss treaties with no losses still experienced rate increases from 14 percent to 40 percent. Higher XOL deductibles are common, prompting local insurers to drop their existing first layers to save on costs. This merely means they buy less protection and keep the risk for themselves, thereby reducing their capacity to write new local covers. Meanwhile, for proportional treaties, reinsurance commissions reductions are observed across the board. Standard commissions are reduced by as much as 2 percent, Nat Cat commissions by an average of 4.5 percent, sliding scale commissions by an average of 7.5 percent and profit commission by as much as 5 percent. On top of this, event limits are reduced to as low as 1X the treaty limit. A new loss participation condition was imposed on several participants and aggregate loss limits were also introduced. What is extremely worrying is that for both portfolios, with losses and no losses, there is a decreased capacity, beginning from 30 percent upwards. That means reinsurers who are willing to gamble on the Philippines are limiting their exposures, while there are major insurers that have opted out and have exited the market altogether.
This does not bode well for both Philippine insurers and insured. In the worst-case scenario, we will be left with less access to desperately needed coverage and if we are lucky to have access, it may be prohibitively expensive, all at a time when we need it most.
Over the past two years, and as I have mentioned in previous columns, the local non-life insurance industry has been deep in discussions on whether to continue the tariff regime or to go completely free market. After much study and debate, it was agreed to work toward a free market but in controlled stages. We began by addressing the long-neglected catastrophe peril rates as they have not been changed in at least 16 years. Do take note that in those years and years preceding, the country has been experiencing a string of losses due to the damage brought about by the ever-increasing typhoons and weather disturbances that have visited our shores. As insurance depends on data, the information on loss and premiums were analyzed using both traditional underwriting factors as well as being passed through various proprietary models then reviewed by actuaries to ensure its accuracy. This was done collaboratively by local and international experts who have had previous experience with similar programs in other countries similarly situated such as New Zealand, Indonesia, other countries where Cat Coverages need to be addressed. These experts proposed a rate of 0.4 percent versus the current minimum Cat Rats of 0.15 percent. However the pragmatic industry practitioners foresaw that this might shock the market needlessly and proposed a partial and interim increase to 0.2 percent instead. The Insurance Commission saw merit in this as it indeed shores up the industry, preparing it to be able to build up strength, purchase proper reinsurance protection and be able to provide additional protection for the populace who will be needing more of it. Alas, certain well-placed, influential, and powerful parties who perhaps do not see or appreciate the bigger picture nor had the chance to be enlightened by facts, have reacted negatively and spoke against the badly needed increase.
Given the hardening international reinsurance market on which the Philippine insurance industry is heavily reliant, we are now faced with higher reinsurance premiums, higher deductibles (attachment points), and much less capacity. The new circular of the IC, putting the interim increase in Cat Premiums in suspended animation, has spooked the markets at a tough time. I pray that we will not experience any more Ondoys or Odettes in 2023 or until the matter is resolved.