By Michael F. Rellosa
DESPITE the global focus on disaster, disaster risk and the attendant topics of disaster risk mitigation, response and management, the Philippines, which happens to rank as the country most prone to disaster and disaster risks per the latest study titled The "World Risk Index Report," lags far behind in activities needed to bring the topic to the awareness of the man on the street, which is crucial given the need for an "all of society" approach to address them.
There are many areas of preparation that our country can take, and it is heartening to know that we have different agencies of the government as well as affected industries in the private sector that get support and guidance from international lending and developmental institutions hard at work to craft policies and solutions to effectively manage disaster risks.
But what are these risks that we are highly vulnerable to and need to prepare for? These are what we call in the insurance industry as catastrophic perils such as earthquakes, typhoons and floods. These perils are a result of our being in the typhoon belt, as well as being within the Pacific "Ring of Fire," characterized by frequent seismic and volcanic activities. Just in August of this year, we experienced a 7.0 magnitude earthquake in Abra affecting over half a million people and causing 11 deaths, 609 injuries and P84 million in agricultural damage alone. This was followed by Super Typhoon "Karding" with 12 dead, 67 injured and over 1 million people affected. Just about a week ago, we had Severe Tropical Storm "Paeng," which caused even more havoc affecting the entire archipelago with reports as of November 6 showing 156 individuals dead from landslides and floods, 141 others injured and 37 people remaining missing. Damage to infrastructure is estimated at P4.17 billion, while for agriculture, the damage estimate currently stands at P113.51 million. The effects were so severe and far ranging that on Nov. 2, 2022, President Ferdinand Marcos Jr. declared a state of calamity over large swathes of the country. The damage has prompted the Department of Finance to estimate that the Philippines may incur as much as P1.5 trillion in losses from such calamities within the next five decades.
The insurance industry has mobilized and is adopting measures to assure its sustainability and to strengthen its ability to be able to service claims in the aftermath of a catastrophic event. It has also taken steps to manage the risks that it takes on by minimizing the volatility of its portfolio and maximizing its retention via a pooling mechanism called the Philippine Catastrophe Insurance Facility to be launched in January 2023, a topic I have written on in an earlier column.
One may ask, how then is the industry ensuring its sustainability given the expected losses it may incur as predicted by experts around the globe? To help understand the industry's moves, it is best to understand the characteristics of disaster risk:
1. It is forward looking. It estimates the likelihood of loss or damage over a given period.
2. It is dynamic. It can increase or decrease over time.
3. It is invisible. It comprises both the threat of rare high impact events as well as the more frequent though less expensive events.
4. It is unevenly distributed around the globe. These perils affect all areas of the planet, but there are certain countries such as ours that are more exposed and therefore more vulnerable.
5. It is emergent and complex. Managing such and evolving and complex risk will entail an approach that looks at the entire picture.
The insurance industry with the guidance and scrutiny of its regulators, the Insurance Commission, and with the input and assistance of global experts is attempting to correct its own vulnerability by first reviewing current rates for catastrophic perils, which stand at 0.1.5 percent. These rates have not been reviewed and tested in three decades and everyone agrees that the risk scenario then is vastly more different than the risk scenario we currently find ourselves in. After analyzing claims data of the industry spanning several years and passing through various global models and benchmarking the same against global catastrophic peril rates, it was ascertained that the pure risk or technical rate should be in the vicinity of 0.4 percent. This was deemed by the industry as perhaps too high for the local market to absorb and a decision was made to correct the rates in increments, thus the new rate of an average of 0.2 percent will come into effect in January 2023. This is to ensure that the insurance mechanism where people who face a common peril contribute to a common fund, out of which those who suffer loss or damage from such peril are indemnified, and is kept working seamlessly for the greater good of the Filipino insuring public.