Mergers, alliances key to survival of non-life insurers

The country’s non-life insurance industry must start a restructuring process that will involve mergers and joint ventures in the face of increasing reinsurance premiums and global financial trends.

Reinsurance premiums have reportedly increased by at least 30-percent with certain classes moving up by an incredible 100 percent due to huge losses experienced by the international reinsurance industry resulting from the Sept. 11, 2001 terrorist attacks on the United States.

There are 116 non-life insurers in the Philippine market and the lower portion of the industry is finding it hard to keep up with the increase reinsurance premiums or the higher demand for their ability to pay claims.

Recently, the Insurance Commission (IC) issued a circular (Department Order 31-01) increasing the paid-up capital of insurers to P50 million from the existing P10 million. IC chief Eduardo T. Malinis said that the dramatic increase in natural and man-made disasters forced the regulatory body to issue the order to ensure that insurers were capable to paying claims.

"The capitalization of P10 million today is too small," Malinis said.

Companies incapable of meeting the new capital requirements, increasing reinsurance premiums and disasters should merge or enter into joint venture arrangements. "They should merge if they want to continue operating," the Commissioner added. "Or they can sell their policies to more stable insurers."

That was the same line being considered or recommended by non-life players as well.

Citystate Insurance (Phils.) Corp. managing director Anthony Tan said that there were "too many" players with a large number incapable of meeting claims.

Tan added that global trends also point to rationalization and the consolidation of financial institutions including the insurance sector.

"The non-life companies in the Philippines must form strategic alliances or merger. The 116 non-life insurers are too many. That must be reduced to about half," he stressed.

The insurance business has a cycle which experiences soft and hard market. For the past six to eight years, the Philippine theater experienced a soft market, where the rates were very low due mainly to stiff competition. Falling rates plus the unusually high number of man-made and natural disasters cause global re-insurers to actually lost their shirts, and they now want to recoup. The Sept.11 bombing only aggravated the situation.

"That pushed the market over the brink. So now when most of the local markets started renewing their treaties, they were hit with high rates and deductibles," Michael F. Rellosa, executive vice president of Citystate Insurance (Phils.) executive vice president Corp. pointed out.

Premium rates grew by 20 to 30 percent depending on the class of insurance and the primary or principal insurer. Certain classes increased by a whooping 100 percent.

The reinsurers have also limited the capacity for certain perils suc has terrorism and sabotage, which is available but you have to pay through your nose.

Rellosa said that local insurers had no choice but to seek the assistance of international reinsurers since the low paid-up capital of insurers could not cover for all the possible claims in the Philippines. "Therefore, the reinsurers will give the local insurers a very high rate and deductibles this year, with various exclusions like those for terrorism which can be acquired at a high rate."

Citystate Insurance is looking to generate gross premiums of P150 million this year after registering a modest P16 million last year. It will increase its capital base from a fair P80 million as of end December 2001 to P300 million by end 2003.

Of the total gross premiums generated last year, 35 percent represented premiums in the motor insurance, another 27 percent for fire insurance, 25 percent in personal accident and casualty, and the remaining 13 percent came from a splattering of other insurance products like marine insurance.