Fitch backs proposed earthquake insurance fund

Posted at 02/20/14 7:25 AM

MANILA, Philippines - Fitch Ratings is backing the earthquake insurance fund being proposed by the Insurance Commission (IC) and the Asian Development Bank (ADB).

The international credit rating agency said the fund would not only free the Philippine government from financial burden but would also reduce the risk on the country’s struggling non-life insurance industry.

“Fitch takes a positive view of this risk-pooling initiative, as it improves the adequacy of pricing natural perils and reduces government’s recovery burden,“ it said.

The proposed fund would be managed by a single entity, known as the Earthquake Protection Insurance Company of the Philippine or EPIC, thus freeing the non-life insurance companies from the huge risk accompanying destruction from an earthquake.

The burden of having to take on the responsibility of billions of pesos in claims would likewise to passed on to EPIC, thus allowing the national government to spend more on social services and infrastructure, Fitch noted.

The rising trend of natural catastrophes has become more evident in the past three years. Natural calamities have increased an average of over 60 percent in the past three years alone. From 2010 to 2012, an average of 368 incidents of catastrophes have occurred, including floods, fire, landslides, earthquakes and droughts.

Likewise, economic losses from four major natural catastrophes in the past two years have amounted to roughly P76 billion. These include the flooding caused by Habagat in August 2012, Typhoon Pablo in December 2012, the Bohol earthquake and Super Typhoon Yolanda in late 2013.

Fitch said that the rising catastrophe trend and limited underwriting capacity means most non-life insurers’ retention ratios average about 50-percent, with the remainder ceded to reinsurers.

“The demand for reinsurance is high, but increasingly costly due to previous high losses. Insurers are also required to offer 10-percent of the risk to the Philippines’ sole reinsurer, the National Reinsurance Corporation of the Philippines (PhilNaRe),” the credit rater said.

Fitch said natural hazards, if improperly managed, have the potential to create volatility in the underwriting performance of individual insurance companies.

The IC expects net losses for the non-life insurance sector in the fourth quarter of 2013 due to Yolanda.

EPIC will be a single entity with the principal target of the residential sector as well as the small and medium enterprises (SME).

“By channeling business into this company, it will relieve the market of the risk, it will free up capital to pursue other more profitable lines of business, and that the market will not lose net income as a result of the establishment of this new corporation,” according to David Kinloch, as ADB consultant.