Insurers undercutting rates: Prescribed rates designed to protect public

MANILA, Philippines - Despite all the warnings of earthquake, tsunami and other worsening natural catastrophes staring down on mankind, several insurance companies prefers fast gains over long term protection for the insuring public.

“There are non-life insurers that continue to nose dive the minimum prescribed rates in insuring homes and other properties against natural calamities, in violation to Insurance Commission ruling,” unnamed insurers told The STAR.

IC Circular 21-2010 states that undercutting rates would jeopardize the financial solvency of insurance companies and their ability to settle claims. It prescribes a minimum rate of 0.10 percent of the total insured amount for natural risks such as earthquakes, and another 0.05 percent for typhoon and flood. These rates are added to the basic property insurance that usually covers only fire and lightning.

By complying with the minimum rate, the insurer must charge a premium of at least P15,000 a year to insure a P10-million house and lot against typhoon, flood and earthquakes.

However, several non-life insurance companies have dropped their minimum rate to 0.7 percent.

That is not only a violation of the IC ruling, but also against the memorandum of agreement signed by majority of the non-life insurance companies licensed by the Commission. The accord also formed a task force to monitor compliance of the minimum rate.

“The task force is not working. Insurers are still nose diving rates in the face of the Japan disaster,” complying insurers said. “There is still a problem of enforcement.”

They added that the IC must be stricter and firmer like the Bangko Sentral ng Pilipinas (BSP). “The time for leniency is over. Typhoon Ondoy and the recent Japan natural disasters should point to the inevitable,” they said.

In a recent Senate public hearing, Public Works Secretary Rogelio Singson said that the country would experience massive damages and loss of life in the event that an earthquake hits the country.

A recent World Bank study said that most of Metro Manila lies close to the tectonic fault lines, the same fault lines that caused the recent Japan tragedy.

The same report said that 90 percent of all earthquake fatalities worldwide since 1960, over 1.1 million people, have been Asians. The March 11 quake and tsunami in Japan only ups the stake.

Insurers are also asking the IC to ensure that all domestic and foreign insurers are following regulations regarding re-insurers.

Section 215 of the Code states that “no insurance company... whether foreign or domestic, shall retain any risk on any one subject of insurance, an amount exceeding 20 percent of its net worth”. In other words, one should reinsure (spread the risk) over his maximum retention.

“The accumulation of risks especially for earthquake, typhoon and flood, (otherwise known as catastrophic perils) that an insurer could take is controlled by the Commission. We are supposed to take out adequate reinsurance protection, computed as being equal to or in excess of five percent of the companies net retained insured values,” they added.

Violation of the regulation not only puts the insuring public at risk of not getting sufficient protection but it likewise makes insurers unable to meet claims.

An insured property should receive indemnification when it is damaged due to natural catastrophes. The insurance company should immediately indemnify the claimant then turn around and make claims to it re-insurer.

A re-insurer insures an insurance company since the size of insures life or property is usually bigger than what a single insurer covers. There is only one local re-insurer while the rest of the reputable re-insurers are foreign.

Insurers warned that in the March 11 disaster was not only natural perils but also damage to auto, property, marine, and human life.

“Claims must be immediately paid. Insurers must first pay all claims and later reimburse with their re-insurer. If they keep on undercutting rates, they may not be able to pay claims,” they said.