RP insurance industry starts to consolidate

The consolidation, and thus the strengthening of the Philippine insurance industry is necessary and inevitable, according to both the practitioners and the regulators.

There are 94 registered non-life insurance companies and 34 life insurers at the end of 2006.

Emilio S. de Quiros Jr., president of the Philippine Life Insurance Association (PLIA) said it has occured in the country’s banking industry, and "I can see the same writing on the wall for the insurance industry."

"The industry will have to face the reality that we need to operate in a competitive environment that is going to be governed by international best practices. We also need to accept the reality and brace ourselves that consolidation would be imminent," De Quiros, who is also president of the Ayala Life Assurance Corp., added. He was formerly the executive vice president of the Bank of the Philipppine Islands (BPI).

Already, four life insurers are reportedly poised to go through the process of merging, or consolidation in the first semester of 2007. Three life insurers is reportedly considering going public via the initial public offer (IPO) route.

For the Insurance Commission (IC), the biggest concern is the non-life insurance industry where there are too many players (94) with more than half are believed to be under capitalized. That means the non-life companies may not be able to serve claims made by the insuring public.

The life sector has 34 players, and the IC believes that majority will not have any problems meeting capital requirements. However, the sector could still use some "trimming" or consolidating.

The number of policies terminated in 2005 ballooned to 1.6 billion from the 545,872 in 2004, or a 202 percent decrease in business.

For ordinary life policies, it fell 127 percent from 522,467 in 2004 to 1.1 billion in 2005.

The penetration rate fell to four percent based on an estimated population of 85 million in 2005. The highest achieved in recent memory was six to seven percent in the ’80s.

The Philippines is said to insure 15 percent of the total population with only five percent covered by private insurers. The rest are covered by government pension funds like the Social Security System (SSS) and the Government Services and Insurance System (GSIS).

Among the major factors are negative impact of troubled pre-need industry, aggravated by confusion of the two industries, reduction of national disposable income, competition from other financial sectors, lack of public education, high taxes, and lack of affordable insurance products.

Other disturbing "writings on the wall" indicators are:

• there were only 458 non-life company underwriters in 2005, a decline of 13 percent from the 527 registered in 2004. It achieved a relative high of 604 in 2002;

• there were only 431 general agents in 2005, or a decline of 30.53 percent from the 619 in 2004;

• there are just 86 insurance brokers in 2005, compared to the 127 in 2004. First time the number of insurance brokers numbered less than a hundred since the star of the 21st century;

• Accredited actuaries fell from 52 in 2001 to 45 in 2004, and 41 in 2005; and,

• Non-life company underwriters shrunk from 589 in 2001 to 527 in 2004, and 458 in 2005.

The IC wants another 24 actuaries by the start of the second semester, or theoretically one new actuarian for every life insurer, on the assumption that the major players have already more than one.

Last year, the IC ordered that all insurers to have a minimum networth capital base of P100 million starting this year. This will escalate in the next four years to P500 million, in a bid to catch up with international standards.

By July this year, all insurers must have complied with the P100 million net worth capital requirement. Failure to do so will mean non-issuance of the certificate of authority (COA), meaning they can not operate or sell new policies.

Likewise, the IC is implementing a risk-based capital framework much like the Basel II risk-weighting framework for the global financial community.

Mesanwhile, the PLIA proposes that the life sector be divided or classified into sub-sectors much like the banking industry which has a universal, commercial, thrift and rural bank classifications with the equivalent capital requirements.

The pre-need industry is likewise classified in such a way that the capital base dictates the type of products the company can sell.

"This way, small and medium sized companies who may choose to offer limited products and tap only certain specific markets are not imposed the same burden as that required from big companies," De Quiros pointed out.