THE new year, still in its infancy, is witnessing a looming battle between two camps within the insurance industry: between those who espouse maintaining the tariff regime in rating risks to be insured and those at the opposite end, espousing a nontariff or free market regime.
For the uninitiated, tariffs are fixed price lists that determine the premium rates, which insurance companies can charge consumers for insurance products sold by them. When premiums are tariffed, insurance companies are not allowed to vary the prices chargeable on an insurance policy (fixed price). The opposite therefore is the nontariff or free market regime where rates vary according to how the insurer assesses the risk it is to take on.
There are pros and cons for each camp, the question is what would be better for the insurance stakeholders, foremost of which are the insureds and the insurers, given the current setting.
Those who want to keep the status quo, or the pro-tariffs, maintain that there exist two potential rationales for the regulation or control of insurance prices. The traditional explanation for the need to control insurance premium rates is due to costly information and solvency concerns. This view shows that the insurers’ incentive to incur excessive financial risk and even engage in “go-for-broke” strategies may result in inadequate prices.
The danger then is that consumers might buy insurance from carriers charging inadequate prices without properly considering the greater financial risk involved. This leads to poor incentives for solvency safety which in turn could induce a wave of “destructive competition” in which all insurers are forced to cut their prices below costs to retain their market positions. The solution on hand is to reintroduce and strengthen the system of uniform prices developed by an industry-rating organization subject to regulatory oversight to prevent excessive prices.
The other side, however, maintains that there are enough safeguards in place to guard against “destructive competition” such as the Philippine insurance industry’s being under the risk-based capitalization regime where the measurement of the minimum amount of capital appropriate for an insurer to support its overall business operations depending on and in consideration of its size and risk profile. It therefore requires a company with a higher amount of risk to hold a higher amount of capital. If a company then goes beyond what is deemed safe and prudent, it will be required to put up a commensurate amount of capital — a disincentive to “destructive competition.” However, in the Philippines, though we are already governed by the RBC, current laws muddle the situation as it dictates the old solvency requirements on top of the RBC, resulting in confusion. This is a case for the need to update the Insurance Code to keep up with global financial and regulatory developments.
This then becomes a case of when you tinker with something, you would have to necessarily tinker with the other areas, as well.
This would probably give the impression of a Gordian knot before us, and it is. There are numerous side issues of equal importance which would likewise have to be addressed. The arguments stated above are just the tip of the iceberg.
What is needed is for the industry and regulator to work hand in hand to rectify a situation that by a combination of culture, market characteristics, market’s state of maturity, opposing agendas, outdated methods, laws and regulations topped by benign neglect has morphed into a monster.
We can be hopeful though, as there is a realization within the Industry and among the various stakeholders that things would need to change, and moves have begun to address this. What also offers hope is the fact that the regulators are willing to listen and cooperate with the industry players to find the best and most efficient way out of this quagmire. This is of utmost importance as without this badly needed cooperation and open lines of communication, the Gordian knot just gets tighter.
All therefore bodes well for the insuring public, correct, risk-appropriate premium rates and a strong vibrant and more importantly a resilient and sustainable insurance industry that is strong enough to withstand loss shocks brought about by catastrophic risks, which seem to have become a rather common occurrence.