The Philippine insurance market is expected to get a boost from the government’s proposal to launch a PHP10bn ($190m) catastrophe risk insurance scheme, says Moody’s Investors Service.
The plan is launched by the Government Service Insurance System and the World Bank to cover losses for damage wreaked by typhoons and earthquakes.
Aside from the country’s high catastrophic exposure, higher capital and reserving requirement, industry consolidation and economic growth are expected to boost the insurance industry.
The agency says the Insurance Commission’s higher capital requirement under the risk-based capital framework “will improve the industry’s resilience and capacity to support future premium growth.”
Insurance companies have been increasing their minimum capital in phases under the insurance law. The capitalisation requirement will again increase to PHP900m in 2019 and PHP1.3bn by 2022.
Moody’s also says the Duterte administration’s ‘Build, Build, Build’ infrastructure programme would also drive non-life premium growth. It emphasises that the country’s strong economic growth would continue to support insurance demand. “Our baseline scenario assumes that real GDP growth will stay at 6-7%, which has prevailed over the past decade,” Moody’s said.
However, it believes that regulators’ promotion of market consolidation will reduce competition in the industry.
Despite ample growth opportunities, the insurance industry has to deal with a number of constraints.
According to Moody’s, underwriting profit for non-life insurers has led to a high dependence on investment income, which also implies that insurers’ profit will be sensitive to market interest rates.
In the life sector, Moody’s noted that investment-linked policies dominate product mix, while growth in traditional life policies, which typically contain more protection elements than variable life policies, have been virtually flat.
“This suggests [that] the industry is still lagging in expanding its core protection function. The penetration rate for life insurance was a modest 1.23% in 2016,” it said.
The credit watchdog also says the lack of long-dated assets hindered growth in long-duration insurance products, revealing that total bonds outstanding accounted for only 35% of Philippine GDP in 2017, compared with 81% for Singapore and 95% for Malaysia.
“This led to insurers’ higher holdings onto loans for asset and liability duration matching, and stock and fund investments for backing their large in-force book of variable life policies,” it said. A