Non-life insurers face daunting challenges

MANILA, Philippines - The country’s non-life insurance industry is cornered by three major challenges that threaten to further reduce its shrinking numbers.

The Philippine Insurance and Reinsurers Association (PIRA), the only trade organization of non-life insurers, said that high taxes, the rising cost of business, and increasing competition are the three major challenges.

PIRA chairman Emmanuel R. Que said that roughly 26 percent of the premiums paid for non-life products are government tax, including withholding tax, documentary stamp tax (DST), value-added tax, local government unit (LGU) fees, fire taxes, among others.

That means for every peso paid for protection by the insuring public actually offers protection equivalent to P0.75.

To correct the anomaly, insurers proposes a flat premium tax of 12 percent, DST at two percent or a maximum of P100 per document.

Que argued that the proposal is consistent with their reason for being. He said that insurance is an important financial tool for Filipinos, and that government should make insurance more affordable to the majority of Filipinos by reducing taxes.

“We have made studies that show that the government will in fact earn more in terms of taxes when more Filipinos would be able to afford insurance compared to the present status where only a handful of Filipinos are buying because the high taxes make the price of insurance prohibitive,” the PIRA chairman pointed out.

Not long ago, the life insurance sector was able to reduce the five-percent premium tax to just two percent. Since then, it has been growing by leaps and bounds, with the government coffers being among the beneficiaries.

Meanwhile, doing business just got more expensive with the proposed increases in consolidated fees and charges. Last month, the Insurance Commission (IC) proposed increases in consolidated fees and charges, which could jack up or almost doubles the costs of doing business with the IC.

This is on the top of the substantial increase in reinsurance cost and stiffer reinsurance terms in the aftermath of Typhoon Yolanda.

The country has only one local reinsurer in the National Reinsurance Co. With the increasing number of natural catastrophes, foreign reinsurers have increased premiums.

The Philippine Institute of Volcanology and Seismology or Phivolcs said that an earthquake in the Manila Trench, an ocean trench west of the country that runs as deep as 5,400 meters, could trigger tsunamis up to eight meters high. 

Philvocs chief Dr. Renato Solidum warned that an earthquake in Metro Manila is already “ripe for the picking.” It may happen anytime soon, and studies after studies have shown the extent of damage such an earthquake would cause.

Phivolcs calls it “The Big One.” A 7.2-magnitude earthquake caused by the movement of the West Valley Fault that runs through the eastern side of Metro Manila, from Sierra Madre to Laguna. The fault line crosses the eastern side of Quezon City, western side of Marikina, western part of Pasig, eastern part of Makati, parts of Taguig, and Muntinlupa.

The fault has moved four times in the past 1,400 years and moves every 400 years, plus or minus 100 years. The last time an earthquake occurred along the West Valley fault was in 1,658, or around 355 years ago.

Estimated damage from this earthquake is grim. Experts said that 35,000 people would die, 114,000 others will be injured, 170,000 residential buildings will collapse and 340,000 other buldings will be damaged, and hundreds of fires will be ignited.

Of 1,000 medium rise buildings (10 to 30 stories) 11 percent will collapse and 20 percent will sustain minor damage. Two percent of high-rise buildings (30 to 60 stories) are expected to collapse while 12 percent will sustain moderate damage.

Meanwhile, the opening of the local economy to the rest of the region through the 2015 Asean integration will bring more competition. Premium rates from the regional players are cheaper as these are not burdened with so many tax forms.

Competition in the field of insurance is expected to heighten, as competing with the region’s major insurance companies. Already US insurance giant AIG has returned to the Philippines and Starr International Insurance (Asia) Ltd. followed just months after.

STARR International Insurance (Asia) Ltd. is part of STARR International Co. Inc., one of the world’s dominant private insurance holding company.

“The main challenge here is how to grow the business locally. We can only compete internationally if we are strong locally. As it is right now, our local business has not really taken off, with gross premium written (GPW) only reaching P60.5 billion for the entire 2013,” the PIRA head said.

This is only around six percent higher than the P57.6 billion the industry posted in 2012.

Que said that competition should generally bring premium rates down.

Instead, competition locally has turned cutthroat resulting in breaches in tariff rates. With more competition as a result of the ASEAN integration, insurers would have a harder time maintaining its strength if it could not charge the proper rate.

From a high of over a hundred non-life insurers a decade ago, there are just 69 end 2013. Insurers with foreign partners dominate the market with the top 20 players accounting for over 80 percent of premiums.