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Sustainability as applied to Insurance

By Michael F. Rellosa


Sustainability is an oft-discussed topic nowadays, and the recent catastrophic fires in Los Angeles emphasize the importance of the word for the insurance industry in the US and especially in the Philippines, where natural catastrophic perils are prone to happen.


Sustainability refers to the ability to maintain something over time. In the context of insurance, it means ensuring that an insurance company can continue to operate effectively while providing coverage, even when faced with increasing risks, like the ongoing fires in places like Los Angeles. The press was rife with reports on the fact that many insurers pulled out of the area months or days before the fire occurred, leaving scores without any insurance protection. The problem was that scant attention was paid by the public and perhaps the government when this was happening. Previous fires and their increasing frequency forced Commercial insurers to pull out just when such coverage was needed.


The wildfires in Los Angeles have posed significant challenges for both residents and insurance companies. These fires lead to large-scale damage to homes and properties, which means insurance companies must pay out more claims. If the frequency and severity of these fires increase due to climate change, insurers face greater risks and higher costs.


When a lot of claims come in after disasters, insurance companies need enough money from premiums (the amounts people pay for insurance) to cover these costs. If they charge too little, they might not have enough money to pay for all the damage, which could put the company at risk.


If insurers don't charge adequate premiums, they could go out of business. This means people wouldn't have insurance when they really need it, leaving them vulnerable to losing everything in a fire.


Adequate premium rates can encourage homeowners to take steps to make their properties safer against fires. For example, if someone knows their premium is lower if they have fire-resistant materials or defensible space around their home, they may be more likely to invest in those improvements.


By charging appropriate rates, insurers can build up a financial reserve. This reserve helps them prepare for future disasters, ensuring that they can support policyholders after events like wildfire.


When insurers decide to leave a high-risk area due to frequent wildfires or disasters, the remaining companies might be overwhelmed with claims or may raise their rates significantly. This can make it difficult or too expensive for people to get insurance. It could lead to a situation where some homeowners cannot afford any insurance at all, leaving them unprotected.


We are looking at this from a distance as these happened in America, but what if this scenario plays out in the Philippines, where circumstances are rife for such a scenario considering the fact that we are the country most prone to NatCat events such as typhoons, floods and earthquakes. Will we have enough resources to count on for recovery? We all know the answer to that, but what we can do is to spread the risk – allow the private sector to take on some of these risks and spread it further into the global reinsurance market. You may be aware that the local industry has been hard at work trying to provide avenues for such to occur but are hamstrung by our inability to correct our rates to reflect the true cost of risk, making it unacceptable to the reinsurance market. If only we can hurdle this roadblock then it will help pave the way for other mechanisms to play out.


In summary, adequate insurance premium rates are essential for maintaining the sustainability of insurance companies, especially in areas prone to natural disasters like wildfires, hurricanes, tornadoes in the US and earthquakes, typhoons and floods in the Philippines. This approach ensures that insurers can remain in business, provide necessary coverage, and support communities effectively when they face crises. By considering the risks and charging appropriately, the insurance industry can better prepare for the future and help protect people and their properties.



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