Philippines: Challenges exist but growth is exhilarating

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In the 2018 Singapore International Reinsurance Conference (SIRC) Supplement, Mr. Allan Santos, President and CEO of Nat Re, says challenges do exist but with government’s massive infrastructure programme and household consumer spending poised to grow further, the sentiment in the Philippines insurance industry remains buoyant.

Read his article below.


Philippines: Challenges exist but growth is exhilarating

by Mr. Allan Santos, Nat Re CEO

The year 2017 was a remarkable one for the Philippine insurance industry. Total assets, liabilities, net worth, paid-up capital, investments and premiums for life, non-life insurance  companies, and mutual benefit associations all set record highs and double-digit growth rates. Insurers have been profitable as well with the net incomes of life and non-life firms growing by around 56% and 6% respectively.

Insurance penetration, which is premium over gross domestic product, has likewise improved, inching up to 1.64% at the end of 2017 from 1.61% at the end of 2016. Life insurance coverage has finally breached 50% of the Philippine population or 54m Filipinos, an improvement from less than one-fifth of the population in 2010.

All round record growth

This industry-wide record growth from the previous year has spilled over to the first half of 2018. The industry’s premium income grew 24.3% y-o-y, once again outpacing the 9.6% nominal expansion of the Philippine national economy. Variable life products and motor car insurance products continued to drive expansion of life and non-life sectors, respectively. Microinsurance has also demonstrated stellar performance with premium contributions increasing by 23.4% and total number of lives covered by microinsurance products growing to one-third of the Philippine population.

This thriving insurance industry is underpinned by the sustained expansion of the Philippine national economy in the second quarter of 2018. Its quick-paced 6% growth – among the highest in Southeast Asia – is fuelled, in part, by the boom in construction, particularly the implementation of the national government’s PHP8-9tn ($164bn-$180bn) infrastructure programme. This ‘build build build’ initiative, which bodes well for the non-life insurance sector, is underway with majority of the 75 big-ticket projects in the construction or pre-construction stage.

Tax cuts will also spur insurance sector growth

As at the end of 2017, insurance density, or premiums over the total population, had grown by almost 10% to PHP2,477 per person. This figure could rise even further with Filipinos now having heftier disposable incomes. The outlook on this robust household consumer spending remains bright with the Philippine department of finance citing that 90% of individual taxpayers will enjoy the benefits of the newly implemented income tax cuts.

Mobile phone applications to sell insurance begins

An alternative channel for selling insurance products could have the potential to widen the reach of insurance products to markets still unserved by insurance agency or bancassurance channels. In 2018, the Insurance Commission issued a circular that enhances the framework for insurers to use mobile ‘phone applications to sell their products. This regulation will also allow insureds to pay their premiums through ‘phone credits, a big convenience for clients covered by microinsurance or other simpler insurance products with small premiums. This could be an emerging opportunity particularly in the Philippine market where more than half of its population access the internet through a mobile device.

Data privacy act implemented

Lastly, the full implementation of the rules and regulations of the Philippine data privacy act, effective March 2018, emphasised the government’s push for financial institutions, business process outsourcing agencies, and other entities to take more aggressive measures to protect their clients’ confidential personal information. This new regulation could spur greater demand for cyber insurance policies and encourage local insurers to innovate and develop more of these products.

Aside from these growth drivers, Philippine insurers are also faced with two major regulatory developments. These could prove to be a boon or a bust for the firms depending on how swiftly and effectively they cope with these new regulations.

All (re)insurers are expected to comply with the Insurance Commission’s more stringent reserving standards and phased increases in risk-based and minimum capitalisation requirements. In particular, the minimum net worth of insurance companies will increase from PHP550m ($11m) in 2016 to PHP900m ($18m) in 2019 and ultimately to PHP1.3bn ($26m) in 2022.

IFRS to be introduced soon

There is also the forthcoming introduction of the new global insurance accounting standard, IFRS17, effective in 2021. While these new regulations could strengthen the solvency of insurance companies and promote a regionally competitive Philippine insurance industry operating at global best practices, these developments do not come without potential challenges to the firms.

New reserving standards

First, the new reserving standards and the progressive increases in risk-based and minimum capitalisation requirements could be difficult for some insurance companies to comply with. Since the implementation of the new regulation, 11 local insurance companies have either been shut down by the regulator or have voluntarily surrendered their licenses due to their inability to meet the capital requirements. If more firms are not adequately prepared for higher minimum requirements in the coming years, we run the risk of losing more of our local firms and leaving mostly multinationals in the Philippine market.

Secondly, adopting IFRS17 entails implementing new systems and processes and changing the way data is collected, analysed, and processed, which requires a workforce that is properly trained for these new systems and processes. Again, insurers that have not sufficiently prepared for this may end up not complying with the new regulation or, worse, falling behind their competitors.

High taxes and prolonged soft markets are a serious challenge

Another challenge that the industry continues to face is the stiff taxes on our non-life insurance products which are still among the highest in the region. These make it difficult for insurers to compete with other financial institutions like banks with their more affordable products which, in turn, serves as another obstacle to raising the country’s low insurance penetration rate. The prolonged soft market and the thin pricing margins in the property insurance market also endanger the health and viability of this sector.

The Philippines’ newly implemented law for tax reform for acceleration and inclusion (TRAIN) has become a double-edged sword for the industry. While it helped increase disposable incomes by lowering individual income tax rates, it imposed higher excise taxes on gasoline and on new automobiles. As a result, motor vehicles sales fell sharply in the first half of 2018, a reversal of the case last year where the Philippine motor industry was the second fastest growing market in Southeast Asia.

Tax laws to be simplified further

The Insurance Commissioner also cites the simplified computation of tax on estates under the TRAIN law could affect the life insurance business. Historically, people would purchase life insurance to use the proceeds to pay off stiff estate taxes. However, with the new scheme the taxes on estates will be lower, which means the need to resort to this practice is reduced.

Despite these challenges, I remain cautiously optimistic about the sustained growth of the Philippine (re)insurance industry as growth of the insurance industry in emerging markets continues to outpace that of the developed markets. According to Swiss Re’s sigma report, non-life premiums in emerging markets in 2017 rose by 6.1%, far better than the 1.9% growth in emerging markets. Life premiums in emerging markets grew at double digits while life premiums in developed economies actually shrank.

Growth prospects for our local (re)insurance industry in particular remain bright on the back of the continued rise of the Philippine economy. With the government’s massive infrastructure programme rolled out and with household consumer spending poised to grow further, demand for both Non-Life and Life insurance products is expected to remain buoyant.