By Michael F. Rellosa
THIS is a paper I had the opportunity to present at the seventh Global Platform for Disaster Risk Reduction, held in Bali, Indonesia from May 23 to 28, 2022, and organized by the United Nations Office for Disaster Risk Reduction that I would like to share with readers.
Sitting at the apex of climate and seismic risks, the Philippines has long tried to address the effects of these risks through various means, primarily through the introduction of micro-insurance products. The number of Filipinos covered by inexpensive, short-term micro-insurance products rose to a record P53.7 million in 2021 alongside total premiums, which exceeded the P10-billion mark for the first time. As far as nonlife insurance firms are concerned, they also grew their micro-insurance premiums by 31.5 percent to P1.2 billion in 2021 from 2020's P913.5 million.
These short-term and cheap products have been increasing in sales, but as Cat (catastrophe) perils are covered by the non-life sector, there was realization that micro-insurance was not the only way to directly address the gap. Therefore, recognizing that a systemic multi-sectoral collaboration was essential to address the insurance gap, the Philippine insurance industry, together with its regulators, the Insurance Commission and with the guidance and technical assistance of the World Bank and the GIZ (German Cooperation), as well as inputs from the top global brokers — AON, Guy Carpenter and Willis — collaborated on the creation of the Philippine Catastrophe Insurance Facility or PCIF.
The facility was envisioned to redirect Cat risks written by the local industry into a facility that will share the pooled risks with participating companies. By doing so, the facility enables insurers to cover more catastrophe risks, at the same time, allowing them to manage their exposures to catastrophes more effectively. The PCIF aims to satisfy four core objectives:
1. Strengthen social and economic value of insurance.
The PCIF enables more insurers to provide badly needed coverage against disaster risks, thus promoting the financial resilience of the populace. This facility likewise ensures timely claims servicing, post disaster.
2. Higher insurance penetration over time.
The enhanced ability to develop and offer Cat insurance lends itself to an increased capacity which, in turn, leads to a marked increase in penetration over time. Complementary measures, such as an education campaign for the grassroots, coupled with willingness to review and adapt the product to the needs of the target population segments, will enhance this penetration.
3. Adequate and sustainable catastrophe premium rates.
As the Philippine insurance industry has limited financial capacity to accept and retain Cat risks, owing to rates that have not been reviewed and updated in decades, the creation of the PCIF necessitates a hard look at the current rate vis-a-vis the global experience, via actuarial analysis and modeling. Such a correction to technically proven rates will increase premiums an estimated 50 percent, ensuring a more resilient industry where premium reserves will be sufficient to respond to disasters.
4. Increased local catastrophe retention.
Without the PCIF, local insurers are forced to cede out the majority of the disaster risks they write to the foreign reinsurance market. With the PCIF, retention will increase, thereby growing the premium base which, in turn, results in greater leverage in negotiations with the foreign reinsurance market giving the local industry better price and conditions, ensuring to the benefit of not only the insurer but the insured as well.
In the course of its development, the PCIF has morphed into two work streams, the first (PCIF1), which would cover the existing insureds via the just discussed pooling mechanism; the second (PCIF2) is being set up to cover the underserved portion of the populace, broken down into the residential and SME (small- and medium-sized enterprise) markets. The target markets would include Class C households numbering about 6 million or 30 million individuals, as well as Class D with 12 million households or 60 million individuals. The PCIF2 will be a property insurance product covering against Cat perils that has two parts, an indemnity-based part and a parametric part that would ensure an early pay out which is badly needed post disaster. The amounts to be covered remain small to be able to cater to the underserved portion of the population, however, it will be adjustable as it can be bought in small increments or units, up to a specified amount.
PCIF 1 and PCIF 2 are likened to the outrigger canoe or banca, ubiquitous in the Philippines, where each PCIF initiative serving as the outriggers supports the country symbolized by the canoe in its goal to be sustainable, and able to bounce back after a disaster. Expect both to be operational toward the fourth quarter of this year.