Proposed earthquake insurance to free gov’t from financial burden

MANILA, Philippines - The proposed earthquake fund will free the National Government from the huge financial burden in the event of an earthquake.

Likewise, the proposed Earthquake Protection Insurance Co. of the Philippine or EPIC, provides the average residential homes as well as small and medium enterprises (SME) protection, which has been available only to the higher income segment of society.

Based on a report produced by David Kinloch, a consultant for the Asian Development Bank (ADB) said EPIC would be the issuer of earthquake insurance coverage especially to those for whom it is not currently available.

It would relieve the damaging financial burden on government in the event of an earthquake disaster.

Floods take something like $2.57 billion out of a local economy on an annual basis.

“A major earthquake would take something like $114 billion out of the system, or 32.5 percent of the Philippines’ gross domestic product (GDP), from a 7.2 earthquake in Metro Manila. And 7.2 is a horrible number because that was the number in Bohol recently,” Kinloch pointed out.

The experience of the kind of devastation caused by Typhoon Yolanda, and the unpreparedness of the National Government to deal with a catastrophe of such magnitude only asserts the urgency of such a natural catastrophe-type of insurance.

The consultant pointed out that earthquake insurance is currently available in the Philippines at a price. It is particularly available to large corporations and through a government self-insurance. It is currently, however, not readily available to medium residential homeowners and to SMEs.

“And this is what the program is going to be about,” Kinloch added.

After much research, consultation with various stakeholders in government and private insurers, and research on international experiences, the proposed EPIC seems like the best option.

It was decided and agreed by everyone concerned, and in fact, announced by the Insurance Commission (IC) at the international working group meeting on the July last year, that there would be established a Highly Capitalized Single Product Direct Catastrophe Insurer.

The consultant explained that the company will stand beside the existing market, not in front of it and not in competition with it. But it will provide by its very size the security that the insuring public requires.

“By channeling business into this company, it will relieve the market of the risk, it will free up capital to pursue other more profitable lines of business, and that the market will not lose net income as a result of the establishment of this new corporation,” the ADB consultant assured.

EPIC will have a local board of directors, an international advisory group, an audit investment and compliance committee, and a management team and staff, which will be made up of Filipinos.

Local insurance companies, local companies, local banks and parents of local companies will be invited to participate. And any insurance company that meets the investment criteria may also join.

Such a formation will also make it a good candidate for a high credit rating to be able to tap foreign sources of fund, whether in the form of debt or assistance. It helps that the country is already investment grade rated.

However, the earthquake insurance must be mandatory in nature, much like the comprehensive third party liability (CTPL) in the auto industry.

“The only way that this can work is if there is some form of compulsion to take out the insurance,” Kinloch said.

Based on data released by the Bangko Sentral ng Pilipinas (BSP), some 68.2 percent of residential buildings are not mortgaged through the banks. It is either inherited or is owned by private financial resources, private loans or people just pay cash.

So there is a huge amount of property that is not effectively controllable by either the banks or any other means. The same are generally not covered by natural catastrophe insurance.

To attain a certain level of strong compulsion, the earthquake insurance and EPIC must be raised to the level of legislation, and ultimately implemented by the local government units (LGUs).