Domestic non-life insurers are facing increased negative pressure on the balance sheet strength and operating performance amid rising challenges in accessing reinsurance capacity, says AM Best.
The global credit rating agency is revising its outlook on the Philippine non-life insurance market to ‘Negative’ from ‘Stable”, citing the challenges the sector faces.
In a new Best’s Market Segment Report, titled “Market Segment Outlook: Philippines Non-Life Insurance”, AM Best notes that the market historically has relied on reinsurance to mitigate underwriting volatility and exposure to catastrophe accumulations, and to subsidize acquisition costs.
Hardening reinsurance market
With hardening reinsurance market conditions globally and a reduced appetite for property catastrophe risks in the Philippines, carriers struggled to place proportional reinsurance programmes in the most recent 1 January and 1 April reinsurance renewals. This inevitably led to changes in the reinsurance programmes for many non-life insurance companies in the Philippines.
“Property insurance is the largest line of business in the Philippines and has represented 30% to 40% of gross premiums in recent years,” said Chris Lim, associate director, AM Best. “Faced with shrinking proportional reinsurance capacity and a reluctance to lose market share, domestic non-life insurers may have limited alternatives but to increase their premium retention and assume higher net retained liabilities.”
According to the report, AM Best expects that underwriting performance would be subject to greater volatility, driven by increased retained exposure to natural catastrophe risks. With higher retention, non-life insurers bear a heightened sensitivity to climate risks and modelling inaccuracies. Underwriting performance for motor insurance also is likely to be pressured given various headwinds over the near term, including a post-COVID claims frequency normalization.
Mitigating factors to the negative outlook include insurers’ strengthened capitalization in recent years, supported by a phased increase in the minimum capital requirement.
“This enhanced capital position may provide some Philippine non-life companies better opportunities to support portfolio diversification via expansion into non-property lines; for example, travel and personal accident insurance,” said Michael Dunckley, director, analytics, AM Best. “Greater demand for motor insurance given a higher number of vehicle sales projected for 2023 is likely, while growth of the domestic InsurTech space, as well as an increasing use of e-commerce apps, also present opportunities for insurers.”