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Bumpy ride for RP insurance industry

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By ERIK DELA CRUZ/Business Mirror | 01/13/2009 10:30 AM

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With the current global recession widely expected to be far worse than any of the recessions seen in the past few decades and likely to inflict more pain on consumers, regulators and industry executives see a bumpy ride for the Philippine insurance industry in 2009.

But the Insurance Commission, the industry watchdog, says the industry is generally resilient and most players are now well-capitalized. Those with capital that is less than the required minimum levels are being pressured to comply with the agency’s more stringent capital requirements so they can cope with increased business volatility.

The global economy will continue to falter, many financial analysts say. And emerging markets are predicted to go through a significant slowdown, especially those dependent on foreign financing and trade, like the Philippines.

As orders for Philippine exports fall, analysts say businesses are likely to continue cutting back expenditures and reduce costs through wage and job cuts.

Wage cuts and job dislocations will hit not just Filipinos at home but also those working abroad, especially in countries now in recession. As thousands lose their jobs and remittances slow down, consumer spending is predicted to decelerate.

“The insurance industry thrives when the economy is progressing, so you can expect insurance companies to operate in a difficult environment in 2009,” said Vida Chiong, deputy chief at the Insurance Commission.

Nobody knows the depth and duration of the global recession, and the uncertainty will likely keep financial markets edgy, she said.

Consumers, Chiong said in an interview with BusinessMirror, will take a wait-and-see attitude and cut back expenses, making it difficult for insurance companies to sell their products.

“Sales started to decline only in the latter part of this year when AIG [American International Group Inc.] hogged the headlines in September,” she said. Worried about their investments, some insurance policy holders rushed to redeem their policies.

In the same month, US investment- banking giant Lehman Brothers filed for bankruptcy.

AIG, until recently the world’s biggest insurer by market capitalization, was saved from bankruptcy by a US government bailout. It has announced plans to sell its assets worldwide, including those in the Philippines, to be able to repay the loan from the Federal Reserve.

“Amidst the global financial turmoil, people now tend to question as to whether it is wise to invest in instruments like insurance to prepare for the future,” said Gregory Martin, chief strategic marketing officer of Sun Life Financial Philippines.

Insurance companies may see the value of their investments in stocks and government securities declining further if the market turmoil continues, Chiong said.

“Luckily,” she said, “their investments in stocks and government securities account for less than 50 percent of their investible funds. The rest are in loans.”

Prudential regulatory measures are also in place, she said, and that insurance companies are able to meet the risk-based capital (RBC) ratio requirements, which serve to protect the insuring public. RBC refers to the amount of capital that a financial institution requires in order to cover eventual losses and still remain solvent over a certain time horizon, which is usually one year.

“The conservative provisions of the Insurance Code also help insulate the insurance business from the fallout of the crisis,” she added.

“Indeed, there are serious issues affecting the global investment market today,” said Indren Naidoo, chief financial officer of the AXA Group. “What started as a subprime mortgage crisis in 2007 has grown into a major credit crunch, with some US financial giants experiencing liquidity problems.”

AXA is a global player in the financial protection and wealth management businesses. In the Philippines, the group has a joint insurance venture with Metropolitan Bank & Trust Co.

Naidoo stressed, however, that Asia continues to be a source of growth for many businesses.

“Asia remains a growing region supported with a rehabilitated banking system, improved business climate and strong consumer base,” he said, adding that the Philippine economy itself is relatively healthy.

Naidoo said the Philippines’s economic fundamentals remain sound and that the slowdown here will likely be less dramatic than in other countries. The domestic economy, he predicted, will likely grow at a moderate pace 3 percent to 4 percent next year.

“The trouble is, when people are faced with weeks of negative news, it can be tempting to offload decent long-term assets and follow the herd, even if everyone’s stampeding in the wrong direction,” he said in a recent letter to AXA policy holders.

There is no need for policy holders to panic, he said. “Yes, there are issues facing the global investment market right now, but most of us who acquire life insurance do so for long-term reasons, giving our portfolios plenty of time to recover.”

Naidoo added, “Making dramatic changes to your portfolio on the basis of today’s headlines means actualizing ‘paper’ losses, and your potential to recoup those losses is significantly reduced when a rebound arrives—as it usually does in the long term,” Despite the gloom and doom, some industry players are upbeat about business prospects in 2009, especially those engaged in bancassurance, or the selling of insurance products by a bank.

Philippine National Bank (PNB), for one, is optimistic that earnings next year will improve especially with the consolidation of its bancassurance business with subsidiary PNB Life Insurance Inc.

“We will maximize our bancassurance business. In terms of earnings, we’re looking at something better in 2009,” said Rebeca de la Cruz, senior vice president, chief operating officer and officer-in-charge of PNB General Insurers Co. Inc. (PNBGen).

PNBGen is the nonlife insurance subsidiary of the bank.

PNB recently announced the completion of sale of its 40-percent stake in Beneficial-PNB Life Insurance Co. Inc. (BenLife), which raised P700 million. The divestment is in line with its thrust to consolidate its bancassurance business with PNB Life.