On November 8, 2013 typhoon Haiyan made landfall on the Visayas, in the provinces of Samar, Leyte and Cebu in the Philippines. When the typhoon hit land with gust of up to 375 km/h, Haiyan was one of the strongest tropical cyclones ever recorded, killing more than 6,300 people and leaving hundreds of thousands homeless. Its devastation highlighted the vulnerability of the Philippines towards natural catastrophes and its urgent need for more effective insurance protection. Microinsurance, in particular, which paid out immediately after the event, was heavily sought after following the catastrophe, as people recognized its benefits.
High microinsurance coverage, but low insurance penetration
Among the APEC (Asia-Pacific Economic Cooperation) countries, the Philippines exhibit the highest microinsurance coverage. According to the Microinsurance Network, the country reached a coverage of 28% in 2014, up from 21% in 2012, meaning that 28 million of the roughly 100 million Filipinos enjoy some form of microinsurance coverage. By comparison, Thailand had a coverage of 14% and Indonesia of just less than 1% in 2012. Going forward, the Insurance Commission of the Philippines aims to increase the coverage to about 50% by 2018.
While microinsurance coverage is relatively high in the Philippines, the country’s insurance penetration, the share of insurance premiums in Gross Domestic Product (GDP), is still very low at just 2% in 2014. By comparison, the average for emerging markets worldwide is at 2.7%, while Thailand, for instance, has a penetration of 5.8% (according to Swiss Re Sigma). Currently, microinsurance products account for more than 75% of all policies issued in the Philippines. However, their contribution to the overall premiums is a mere 3%. In 2015, the Philippines registered terrific premium growth of about 18% to a total volume of USD 4.9 billion and for 2016, the Insurance Commission reckons with an increase of as much as 28% to a premium income of about USD 6.3 billion. Much of the growth is expected to come from microinsurance products, as a broader range of products is authorized and awareness for the benefits of insurance increases. Still, while by 2018 about 50 million Filipinos are expected to enjoy some kind of microinsurance protection, only 5% of all premiums will be generated by these products.
High exposure to natural catastrophes
The determination of the Philippines’ Insurance Commission and the government to promote the take-up of insurance comes as no surprise given the country’s high exposure to natural catastrophes such as typhoons, floods and earthquakes. In fact, 74% of the population and 80% of the country’s territory are exposed to natural disasters, making the Philippines the country with the 10th highest natural catastrophe exposure worldwide by number of inhabitants potentially affected. According to the Global Climate Risk Index, which takes into account both the number of fatalities and economic losses, the Philippines ranked 4th globally from 1995 – 2014.
Despite this high exposure, traditional insurance products remain largely out of reach for most of the population, given the fact that roughly 25% live in poverty. The Philippine Government realised the protection gap quite early. Already in 1997 it launched its National Strategy for Microfinance to enhance access to some kind of formal financial services for the low-income sector. In 2006, the plan was expanded with the National Strategy for Microinsurance, based on the inclusion of Public-Private Partnerships and with support from developmental organisations.
Microinsurance was defined as a product that had to meet the risk protection needs of the poor. Premiums were capped at no more than 7.5% of the current daily minimum wage rate, while guaranteed benefits were limited to not exceed more than 1,000 times the daily minimum wage rate. As the government promoted microinsurance quite actively, the range of licensed products has steadily increased. By 2014, roughly 170 different products and variations had been given the green light by the regulator, while 23 mutual benefit associations (MBA), 18 life and 24 non-life insurance companies, as well as 42 rural/cooperative bank agents and about 100 microinsurance agents had been approved.
Tailored microinsurance solutions can be profitable
In 2012, life insurance products accounted for 85% of the country’s microinsurance premiums of USD 56.5 million, according to data from the Microinsurance Network. Property, accident and agricultural products hardly featured. The Philippine regulator realised this imbalance and announced to approve further products in 2016, addressing areas such as microagriculture and micro-health. In addition, according to the Insurance Commission, there is heightened interest from international insurers to access the Philippine microinsurance sector. While in the past, MBAs and cooperatives dominated the competitive landscape, international players show an interest to enter the sector.
Nevertheless, traditional non-life insurers have not yet bought into the concept of microinsurance, questioning its profitability and viability. Some still seem to hold the belief that microinsurance fulfils purely philanthropic purposes. However, in Peak Re’s view, (re)insurers need to change their mindset as microinsurance is not philanthropy, if product design, distribution and claims handling are tailored specifically to the needs of the target group, microinsurance solutions will be profitable and sustainable.
In order to make microinsurance commercially viable, products have to be simple and straightforward. They also have to be affordable, but it doesn’t mean that they have to be cheap. Both the claims and the distribution process have to be simple and efficient, so the protection can reach the needed hands easily. Insurers, reinsurers and distribution partners can work together on commercially viable microinsurance projects, which help the Philippine community to build their own business and generate assets, and thus narrowing the poverty gap.
Holistic approach is needed to reduce the protection gap
Furthermore, the protection gap of the Philippines can only be addressed through a joint approach of risk prevention and mitigation measures with risk transfer solutions, possibly combining insurance and public private partnership. To highlight the need and importance of risk prevention, the UN hosted the first Southeast Asia event of its newly launched global initiative, the UN Private Sector Alliance for Disaster Resilient Societies (ARISE), in Manila, one of the most disaster exposed cities in the world, in November 2015. Twelve leading Philippine companies joined the programme, emphasizing that risk informed private sector investments are more cost effective than relying solely on post disaster response and recovery. ARISE encourages a better risk management outcome by setting up businesses in a smarter way and thereby minimizing the exposure to disaster risk.
According to the UN initiative, disasters cause losses in the magnitude of about USD 300 billion per annum. Their impact could be greatly reduced if private investments, which account for 70% to 85% of overall investments worldwide, would be more wisely structured. Under the UN framework for disaster risk reduction, losses should be reduced substantially over the next 15 years.
Based on a stronger involvement of the private sector at national or local level, a more resilient infrastructure should be established which better withstands floods, storms, earthquakes and other forms of natural and man-made disaster.
Public-Private-Partnerships (PPP) is an acknowledged and efficient approach to increase coverage and address the protection gap. By combining the capabilities of governmental organisations or public developmental institutions, like the International Finance Corporation or the World Bank, with the expertise of insurers and capital market entities (e.g. in securitised debt or private equity), financial preparedness can be greatly enhanced. The Philippines is exposed to various disaster risks which requires a holistic pre- and post-event financial protection approach. The current initiatives such as ARISE, catastrophe bonds, pool solutions, microinsurance and traditional commercial insurances are contributing collectively to narrow the protection gap.
Based on its experience from other developing and emerging markets in Asia Pacific, Peak Re fully supports a further expansion of the microinsurance coverage in the Philippines and South East Asia region. Currently, the company is in discussions with related parties to support microinsurance initiatives which will contribute to sustainable and societal development in these markets.
In addition, Peak Re is active in raising the awareness for the wide ranging opportunities that insurance can offer. In April 2016, for example, Peak Re joined the Philippine General Insurance Conference, an annual conference dedicated to the Philippine general insurance industry, for the third time. This year’s theme was “The protection gap, digital revolution, natural/ manmade disasters and market disruptions in an ever changing environment” and Peak Re presented an outlook of the current state and trends of the microinsurance sector in the country.
