A costly apocalypse

The four horsemen of the apocalypse, harbingers of the end of time, warned us of conquest, war, famine and death; a fifth one was said to have warned of chaos but none of them foretold just how costly it would be.

Yes, here we are now, right in the heart of chaos, with our planet burning and drowning at the same time.

The signs are everywhere,  from the wind-driven wildfires in Maui – we’ve heard the news about what happened last month as wildfires ripped through Hawaii’s second largest island and killed more than 100 people – to the heavy downpour over the weekend at the yearly Burning Man festival held in the usually scorchingly hot Nevada desert – for the first time in 10 years, heavy rains turned the ephemeral town of Black Rock City into a giant muddy mess, leaving tens of thousands of attendees wet, stranded and running short of food and water.

Here in Manila, it’s raining non-stop too.

Climate change, indeed, is as real as it can get and everybody is feeling the debilitating impact – from households to businesses.

Insurance crisis

The insurance business, in particular, is now on the brink of a crisis because of the risks posed by our changing climate. The non-life insurance industry – those that provide insurance to our properties, whether it’s a sprawling industrial factory, a single detached house or a towering condominium –? is particularly affected.

I didn’t realize the enormity of the problem until tycoon Helen Yuchengco-Dee, the woman at the helm of the Yuchengco Group, told me that “a very big turmoil is happening in the property insurance market.”

I arranged an interview with Eden Tesoro, chairperson of the Board of Trustees of the Philippine Insurers and Reinsurers Association (PIRA) and senior vice president at Yuchengco-owned Malayan Insurance Company Inc., to find out.

To put it simply, she said, the cost of reinsurance – the insurance for insurance companies – has gone up by 50 to 100 percent, as reinsurers are now counting the cost of climate change-related risks and other factors. Thus, reinsurers, mostly foreign companies, are now charging a hefty price or avoiding catastrophe areas like the Philippines.

Eden said that while the reinsurance market has generally become competitive the last couple of decades, it turned on a dime just this year, no thanks to the combined effects of the pandemic, increasing natural catastrophes and the war in Ukraine.

But wait. Can’t our Philippine insurance companies just do away with reinsurance so that the cost of our premiums don’t skyrocket?

Unfortunately, without reinsurance, it would be impossible for insurance firms to continue operating, Eden said.

Reinsurance allows insurance companies to offer products which on their own they would not be able to sustain. This is especially true if the losses are very large, say the destruction of a multi-billion industrial facility due to fire or the destruction of 1,000 households due to heavy flooding. Without reinsurance, insurance companies will not be able to sustain this magnitude of losses, and will severely limit the coverage they provide to the insuring public.

The sinking of the Titanic is an example of a massive loss. Reinsurance enabled insurers to pay for the insurance of the “unsinkable” Titanic, which sank in 1912. Insurers paid one million British pounds within 30 days of the loss. The collapse of the World Trade Center in 2001 due to terrorist attacks is another example, worth over $40 billion.

True enough, because of the rising cost of reinsurance, local insurance firms are affected. Property insurance in the Philippines will surely go up. The premiums we pay will increase. Be forewarned.

Insurance or coffee?

Eden, however, said that it’s an additional cost that would ultimately benefit policyholders, especially now that natural calamities are becoming more and more unpredictable.

“Let’s say you own a typical home worth about P1 million. The premium rate for covering your home against fire & lighting, earthquake, typhoon and flood is around 0.200 percent so that’s P2,000 net of taxes. Add another 25 percent for tax and we have about P2,500. That premium rate of 0.2 percent is not even half of one percent,” she said, adding that it’s roughly the same amount people spend for a few orders of Starbucks coffee.

The P2,500 is the old rate. With an additional 50 percent cost, total premium for a P1 million property would be P3,798.63 and with a 100 percent increase, it would be P5,064.84.

But Eden said that an annual premium of roughly P5,000 for one’s own home is money worth spending.

“I think that spending money to cover our hard earned assets against insurable perils is one of the best decisions we can make. We owe it to ourselves, to our children and to our loved ones, and to those we owe money to or employ,” she said.

There is no stopping the impact of climate change everywhere in the globe. But if we think these wildfires are thousands of kilometers away from us, we are mistaken.

It may not be the end of the world just yet but for sure, it’s becoming a costly apocalypse of sorts and all of us are paying for it, whether it’s with the floods we endure, a delayed flight and or a drenched festival in a usually sun-baked desert. Now, our insurance costs will go up, too.

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Email: [email protected]. Follow her on Twitter @eyesgonzales. Column archives at EyesWideOpen on FB.