How the mutual insurance sector and the commercial insurance market can work together to help insurance buyers in the Philippines.
With 7,000 islands, and more than 36,000km of coastline, the Philippines is one of the most vulnerable countries in the world to disaster and climate change. Some 74% of the population and 80% of its land area are exposed to disaster. Manila and its surrounding area is the most exposed city in the world to the devastating effects of a major natural catastrophic event, according to data compiled by Verisk Maplecroft.
Yet it remains a sad fact that today the Philippines is chronically under-insured as a nation. Insurance penetration of the non-life business in the Philippines is less than 0.5% and is one of the lowest in the world with many citizens having no insurance cover at all.
The protection gap – the difference between insured and economic losses – remains huge in the Philippines despite the availability of innovative and increasingly affordable insurance solutions. Narrowing this gap is a long held aim and there is no doubt this will strengthen the Philippines’ financial resilience and that of its people.
If the ordinary Filipino has any insurance at all, it is likely to be of the micro- insurance kind, mainly provided at low cost by mutuals which have dominated insurance provision in the country for decades and have undoubtedly been a force for good.
About 30 million of the 38 million insured population carried some form of micro-insurance as at end of 2015, according to the Philippines Insurance Commission, and this number is expected to increase to 50 million by 2018, covering roughly half of the total population.
While it is fair to say the Philippines has the highest micro-insurance penetration in Asia, the insurance penetration in the Philippines is still low.
The scale of poverty in the Philippines and other social factors means there are huge opportunities for the commercial insurance market to meet the protection needs of the population. There is an opportunity for insurers to establish and develop a new source of revenue in the personal lines non-motor segment if they can find a means to cooperate with the mutual and cooperative sector.
It sometimes seems as if the commercial insurers and the mutuals exist in two parallel worlds and yet there could be significant synergies between commercial insurers and the mutual if there was an open, ongoing dialogue. For this to happen, the mutuals and the commercial insurers should start working more closely with each other.
Mutuals are usually founded with specific objectives, or “movement” – the usual terminology used in the mutuals community. Currently there are three main streams of mutual movements in the Philippines:
- Cooperatives belong to Cooperative Union of the Philippines will be supported by the Cooperative Insurance System of the Philippines;
- Cooperatives belong to the National Confederation of Cooperatives will be covered by the Cooperative Life Mutual Benefit Services Association; and
- Cooperatives belong to the Philippine Federation of Credit Cooperative Organizations will be supported private insurance companies.
These mutuals tend to be very focused and targeted in serving specific communities across the country based on the community’s trust, observed norms, cooperatives’ values and share capital. However, the nature of the mutual means they often act very independently which can be an obstacle to the development of comprehensive mutual/cooperative insurance.
Mutuals and the communities they serve need to build their trust in commercial insurers, and vice versa. They do not have to change the way they operate, but it is time to recognise the advantages private insurers can bring to the table.
By leveraging commercial insurers’ expertise and financial resources, mutuals can increase their efficiency as well as technical know-how in various areas such as risk management and corporate governance. For the commercial insurance market, it is also essential for them to understand that ‘mutuality’ is not an idea contrary to commercial success. They need to see the business value and potential of reaching out to this grass roots segment of the market.
As a reinsurer, we believe that all risk should be assumed at a commercially viable rate: there is a fair pricing element to the provision of cover which is worth buying.
But the main point is that the commercial insurers have to start believing that community-based organisations such as the cooperatives are excellent distribution channels and that this can be a commercially sustainable business model the poorest in society can afford and embrace.
To achieve this, it is vital for insurers to put the poorest in society at the centre of this initiative and to understand how this segment reaches out to the protection source when needed. Commercial insurers should also simplify their products, delivery and compensation system for effective distribution to the cooperatives and the members they serve.
The success of such an initiative lies in the ability to understand the segment and address the complexity of poverty and in particular, the needs and priorities of the poor. Just as the mutuals, private insurers do not have to change the way they handle their policy holders, they just need to adopt a “partnership” way of thinking.
The driving concept in this partnership means insurers must get closer to the mutuals, helping, supporting and enhancing the good work they do. A partnership would help both sides realise the importance of empowerment in local communities.
There is no doubt that aided by better IT systems, data analysis and management practises, the Philippines insurance market has grown in recent years and these insurers have well- established operational procedure and infrastructure. Not only can these private insurers share their best practices on risk management and corporate governance, but they can also assist the mutual system is in training and professional development.
By training and educating a new generation of insurance professionals, such as the elected and appointed representatives of mutuals as well as their managers and employees, the mutuals’ long term commitment to local communities will surely be enhanced. This will also help build the trust between mutuals and the commercial insurance market.
Finally, an important piece in completing the integrated insurance protection solution is the engagement from Government.
As has been the case for a while, mutuals have historically grown up around different movements and this “separateness” has hindered the development of a universal system of cooperative insurance.
Therefore, it will be helpful in addressing this issue if the Philippines Government or regulator can provide enabling policies and regulatory environment to encourage greater dialogue between commercial insurers and the mutuals on product development, training and capacity building and knowledge sharing, for example, on impact assessment, operating systems and procedures enhancement.
We are glad to see encouraging progress has been made recently. The Insurance Commission of the Philippines issued a new directive in late January this year on the demutualisation of domestic mutual life insurance companies, guided by the principle of protecting existing policyholders.
The demutualisation process will effectively allow mutual insurers to have access to new sources of capital and build a stronger financial position.
We believe the time has now come for the Philippines market to join forces to provide an integrated solution with a more resilient, holistic approach towards insurance protection.
This will bring tremendous long term benefits to Filipino people and the Philippines economy in general.
This article first appeared in Asia Insurance Review magazine March 2017 issue.
