Philippines renews push for mandatory catastrophe insurance

The Philippines Insurance Commission has renewed its efforts to push through a bill that would make property catastrophe insurance mandatory in the country, after lobbying failed to get the idea ratified before the change of President in the country.

The proposal would see a significant increase in catastrophe insurance premiums within the Philippines and as a result require backing from reinsurance capacity.

Under the proposal, households and small businesses in the Philippines would have to take out mandatory insurance coverage against natural catastrophes. By making the coverage mandatory the idea is to protect the most vulnerable, homeowners and small to medium enterprises.

The Philippines has been working alongside the World Bank on a range of initiatives to increase uptake of catastrophe or disaster insurance in the country, as well as to pool the risks in order to more efficiently transfer them to reinsurance or capital markets capacity.

The Philippines Department of Finance has been working with the World Bank on a strategy to set up a property catastrophe risk insurance pool for homeowners and businesses, which would help to back the mandatory insurance policies.

At the same time the pair have been working on a catastrophe risk pooling initiative for local government units, with the aim of providing liquidity rapidly after disasters strike, as well as having ongoing discussions about a Philippine catastrophe bond issuance.

The mandatory insurance coverage would provide homeowners and businesses with cover for typhoon, earthquakes, flooding caused by typhoons and also fires. The insurance product was designed in collaboration between the Insurance Comission, the World Bank’s International Finance Corporation unit and the Philippine Insurers and Reinsurers Association (PIRA).

The proposed mandatory catastrophe insurance was approved by the Department of Finance, but then went to the President for an executive order to mandate households and SME’s have catastrophe insurance cover, but this happened at the time of a Presidential election and President Benigno S. Aquino III did not get it signed before he left office.

Now, with President Duterte and his administration in power, the Insurance Commissioner Emmanuel F. Dooc is pressing ahead with the proposal, hoping to get it approved so the catastrophe insurance coverage can be implemented.

The local insurance industry in the Philippines has been lobbying to get the initiative pushed through and PIRA is also supporting the initiative and continuing to push for the establishment of a catastrophe insurance pool (CATpool).

Local media reports suggest that lobbying has increased in recent weeks and there is an increasing expectation that the required executive order will be received. The implementation of a mandatory property catastrophe insurance product in the Philippines could be a huge stimulus for growth in premiums ceded to the international reinsurance market in the future.

Any catastrophe insurance pool established to back the policies would require its own backing, likely through international reinsurance markets or potentially the much discussed World Bank catastrophe bond.

Discussions on a Philippine cat bond ground to a halt late last year, as the costs associated with issuance were deemed too high. However, a risk pool and then transferring that risk to the reinsurance and capital markets may make this a simpler transaction, but still a cat bond would be a more expensive route to tap the capital markets than reinsurance and allowing ILS funds to participate on a collateralised basis.

The key is to get the mandatory catastrophe insurance proposal implemented, resulting in the need for a risk pool and ultimately for risk transfer to global reinsurance or ILS markets.

Having mandatory insurance in place will increase the Philippines resilience to disasters and enable its population to recover more rapidly. It will also stimulate much greater need for catastrophe risk transfer, with the ILS market well-positioned should it be called on to assist, either through a catastrophe bond or other collateralised means.