Philippine earthquake insurance pool seems ripe for convergence market involvement

The Asian Development Bank (ADB) is supporting the development of a public-private initiative to create the first earthquake insurance pool for the Philippines. The project aims to launch a functioning earthquake insurance involving government, local insurers and the international insurance and reinsurance community by 2015 and the ADB has committed an initial grant of $500,000 to provide technical assistance to the project.

The funding was approved on the 20th December 2012 and will finance a consultancy team who will look into how best to structure an earthquake insurance pool with the assistance of the private re/insurance market as well as local insurers. A demand analysis will be undertaken as well as creation of business and financial plans and risk modelling firm Catalytics will be engaged to provide risk modelling for the facility.

An article in the Philippine Star says that the earthquake insurance pool will be aimed at providing earthquake cover to small and medium enterprises (SMEs) and the residential insurance sectors, two which are particularly vulnerable from natural catastrophe events. The aim is to develop a financially sustainable reinsurance facility which enables local insurers to offer earthquake cover and encourages international reinsurers to get involved providing the backstop for earthquake events, with another goal being to reduce the burden on the government.

The ADB is quoted in the article as saying; “The earthquake catastrophe insurance pool will strengthen national private insurance companies and their ability to underwrite new policies on catastrophe risk, and enhance their capacity to proactively manage and transfer risk to international reinsurance companies.”

The article says that the earthquake insurance pooling facility will be structured in four specific layers, each providing a certain amount of cover. The first layer will involve local Philippine non-life insurers who will cover the smaller claims or the first layer of larger claims, for example claims of P100,000 to P1 million (which is up to around $25,000). The next layer will involve international re-insurers that will cover larger claims, for example up to P10 million, which is around $250,000. The third layer will be provided by the Philippine government and the top layer according to the article is likely to be major non-life insurance firms.

From the way the article is worded, and also the details provided by the ADB on the project, it seems that who provides what level of financing for the backstop is still under assessment and the project will look to devise the most robust sources of capital possible for each layer of coverage.

The project documentation from the ADB says that one of the tasks that will be undertaken is to develop a funding structure for the pool which will ensure long-term sustainability. An investment prospectus will be created and a roadshow undertaken to ensure appropriate capitalisation of the facility.

There could well be a role for the reinsurance convergence markets here, via the use of instruments such as catastrophe bonds, collateralized reinsurers and reinsurance-linked funds, to provide the higher layer of protection for the earthquake pool. This also seems like an ideal opportunity for the World Bank to utilise its MultiCat cat bond structure to provide the backstop for major earthquake losses which would enable the pool to support the provision of insurance in the lower layers.

Third-party and capital market investors certainly have the investment appetite for reinsurance and catastrophe risk at the moment and a Philippine earthquake layer of risk would likely prove very attractive as a diversification opportunity for the specialist investment vehicles in the space. If the layer was well structured its likely the ILS and reinsurance-linked investment markets could support much of the cover alone.

Capital market investors would welcome the opportunity to be involved in an initiative such as this, as long as the premiums paid remained realistic. The Philippines has been the focus of a number of studies looking at the use of cat bonds and capital market risk transfer instruments to provide disaster reinsurance cover, this project to create an earthquake insurance pool seems like the perfect opportunity to test the feasibility of third-party capital backing Asian reinsurance facilities.

The Asian Development Bank renewed its calls for cat bonds and reinsurance to be used in risk financing Asian catastrophe risks just last week.