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Pricing catastrophe insurance

By Herminia S. Jacinto

PRICING products is always a difficult task to do. Vehicles, goods and even food products can put together the cost of raw materials, labor and other items to arrive at the total cost. But pricing services and other intangible products is a big challenge. How does one price the cost of an airline ticket, franchise fees, honoraria and other services? How do you price protection? How do insurance companies compute the price of a fire policy which will protect properties from basic dangers like fire, lightning and allied perils? The process is long and tedious. So many factors are considered like the structure and location of the property to be insured, wind conditions, loss experience and other relevant factors. An insurance-property-underwriter-friend of mine said that they wish they could be like fortune tellers who can predict when and where typhoons, floods and other calamities will happen.

The Philippine insurance industry has existed for a very long time already and should be considered experts in pricing property and casualty insurance. But there is no such claim. Changes happen everyday, especially climate change. The Philippines is visited by about 15 typhoons every year and the number seems to be increasing. We have had the storm surges, the big typhoons which cause a lot of flooding in several places in the country. Earthquakes have occurred in several places in Mindanao, Quezon and even the Bicol provinces! Our weather experts have warned us about stronger ones so we can prepare just in case they indeed happen. We hope and pray though that we will be spared from what they call the "Big One."

The price of protection has increased tremendously all over the world and the supply has started to dwindle due to climate change. Our own government has recognized the importance of this issue and has created our own Climate Change Commission under the Office of the President. The commission is tasked with coming up with policies and measures to combat the disastrous effects of climate change. Among those identified are rising sea levels, extreme rainfall, coastal erosion, increasing frequency and severity of tropical cyclones, among others.

It is under this scenario by which the insurance industry has decided to form and implement the Philippine Insurance Catastrophe Insurance Facility (PCIF). The insurance industry and the regulator want to provide maximum protection for catastrophic perils like typhoons, floods and earthquakes, ideally for the entire population of the country. This is the reason why the rates have to be reviewed to make them more risk-appropriate and sustainable. Minimum rates have to be imposed so competition in pricing will be controlled and acceptable to the world reinsurance market. Considering the risks and the frequency of their occurrence, reinsurance is not going to be cheap.

Referring now to House Resolution 632 introduced by Rep. Wilbert T. Lee in the 19th Congress which directs the House committee concerned "to conduct an inquiry, in aid of legislation, into the abrupt, unreasonable and untimely increase of catastrophe insurance premium rates,"... (italics mine). It is not fair to accuse the Insurance Commission, the PCIF, and the insurance industry in general that this regulation is abrupt and unreasonable. The industry association, the Philippine Insurers and Reinsurers Association, has conducted a long and serious review and study of these rates with the assistance of experts in the actuarial field and global reinsurers. Understandably, consultations with consumer groups and the insuring public are difficult because of the technical issues involved. Insurance pricing cannot be compared to pricing of goods like sugar, onions and agricultural products.

We hope there will be another hearing that will be scheduled by Congress with experts on catastrophe risks who will be invited. We also suggest that representatives from the Climate Change Commission and the Department of Environment and Natural Resources be invited to provide the data based on their research findings and experience. This will be a good opportunity for our lawmakers to appreciate the role of insurance in protecting our people and their properties.


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