Political/economic risks impact on the insurance industry

The Philippine insurance industry faces unpredictable prospects in the New Year due to the current political exigency in the country which has caused the economy to decline to discouraging levels further aggravated by the depreciation of the peso vis-a-vis dollar.

The carnage of five ruthless bombing incidents in the Metro Manila area last Dec. 30, 2000, causing many deaths and over 100 injured adds a new dimension of uncertainty and this will immediately affect the tourist trade.

On the basis of its 1999 performance, 109 non-life insurance companies produced gross premiums in the amount of P18.3447 billion which is a decline of 1.87 percent compared to the P18.6928 billion experienced in 1998.

However, from 1994 to 1997, the growth rate of gross premiums averaged 11.46 percent but the Asian economic crisis which started in July 1997, resulted in a sharp downward slide to a negative growth of 7.68 percent in 1998. In addition, the overcapacity in the international reinsurance markets which induced unbridled competition among the major domestic insurers caused premium rates especially for large industrial and commercial risks to drop to uneconomic levels resulting in lower earned premium income for the industry.

An interesting observation is the fact that the top five non-life insurance companies accounted for 37.37 percent of the total gross premiums written in 1999. The forecast for the year 2001 is that it will be difficult and tough for the non-life sector to develop an appreciable improvement.

The reasons are quite a number. Firstly, the inflow of foreign and domestic investments have substantially slowed down attributable to the current political environment and this was confirmed by the Board of Investments as a number of major foreign projects have either been deferred or put on hold until a more stable situation prevails in the country.

Lesser investments mean less premium generating opportunities for the industry. Then the sharp decrease in motor vehicle sales projects a reduction in premium volume for this class of business whilst falling importations will result in lower premiums for the marine insurance class.

There will be increased demand for insurance protection of property due to terroristic acts and this may be available depending on the underwriting attitude of the insurers with adequate resources and reinsurance cover from the international markets.

On the other hand, the life sector of the insurance industry in 1999 which is composed of 38 companies with two more licensed in the year 2000 but who are not yet in full operation, generated a total premium income of P22.403 billion which represents an increase of 15.73 percent compared to the P19.3586 billion produced in 1998.

During the period of 1995 to 1999, the average growth rate of this sector was a satisfactory 16.1 percent. It was only in 1998 when the growth rate fell to 11.64 percent because of the economic fallout in mid 1997. In terms of first year premium of new policies, the 38 life insurers wrote P5.2259 billion which was a 7.68 percent betterment over the P4.853 billion written in 1998. Likewise, 1998 was not exactly a good year as its new business premiums increased by only 4.85 percent over that of 1997.

It will be noted that in the prior years of 1995-1997 the average growth rate was an impressive 18.52 percent. Despite the present economic scenario, the life sector continues to buck the trend although the increasing unemployment rate will affect the group life insurance portfolio and to some extent sales of individual policies.

While there are 38 life insurers in the market place the top five insurers accounted for 76.01 percent of total premium volume in 1999 and for new business or first year premiums on new policies, the same top five life insurers obtained 77.43 percent of the total premium of ordinary policies excluding group life and accident and health policies. The balance of 22.57 percent was spread among the remaining 33 companies which indicates a top-sided sharing of the new life premiums in 1999 as well as in the prior years.

Undoubtedly this is not a desirable situation but the new foreign companies many of whom are global players are not to be taken lightly as they have immense resources, brand names, versatile products and advanced information technology to eventually obtain a bigger share of the market in the long term. The domestic life insurers will need to enhance their corporate strategies, develop new and innovative policies and market more aggressively in order to meet squarely the intense prevailing competition.

(The author is a risk and insurance management consultant.)