The Philippines government continues to expand the role of insurance and reinsurance markets in its disaster risk financing arrangements and to better protect its people, businesses operating in the country and government-owned assets, with the latest initiative a new catastrophe risk pool for the private sector.
According to local media reports the Insurance Commission of the Philippines, led by Commissioner Dennis Funa, has signed a memorandum of understanding (MoU) with the Philippine Insurers and Reinsurers Association (PIRA) and reinsurer National Reinsurance Corp. of the Philippines (NatRe) to develop and set up the Philippine Catastrophe Insurance Facility.
This catastrophe risk pooling facility could be even larger than the still in the bidding stage indemnity reinsurance program to cover around US $19.6 billion of the Philippines state-owned assets and infrastructure, the reports suggest.
PIRA director Michael F. Rellosa explained to the media sources that the catastrophe risk pool would provide a new source of insurance protection to private assets in the country, against losses from typhoons, flooding, and earthquakes, while volcanic risk was also under discussion.
The risk pooling facility would be designed to enable private insurers to write more business, then tapping the pool for reinsurance like capacity, while the catastrophe pool would then be reinsured by NatRe and perhaps global reinsurance markets as well.
There’s an element of protectionism here as well though, as reports suggest a desire to retain premiums within the Philippines, rather than seeing it all going offshore to reinsurance providers.
Rellosa said that local insurers could maximise their retention by leaning on the catastrophe risk pool, but then leverage global reinsurance capital at the retrocessional level to cover peak loss events.
The Insurance Commissioner suggested the motivation is to extend more disaster insurance protection to those that lack coverage today.
“We want our target crowd to appreciate the importance of property insurance as a risk transfer mechanism in the event of disaster,” Funa commented. “In a country such as oursm that is beset by a host of disasters, the desired output of the MOU is a most welcome development.”
Every household in the country could be covered by this catastrophe insurance facility, Funa explained and some reports suggest the government is considering whether it can make disaster insurance mandatory up to a certain level.
NatRe would be the lead reinsurance provider for the facility, but given the potential size of this risk pool, if every household was covered to a degree, global reinsurance support would be essential and perhaps also capital markets coverage.
The MoU signatories are inviting local insurance companies to join a working group to develop the catastrophe risk facility.
It seems there are a range of goals here, from retaining more risk premium in the Philippines to the benefit of its insurers, to expanding insurance penetration, to reducing the potential fiscal burden on the government after disasters strike.
Ultimately, the best way to achieve all of these is to tap into the deepest and most efficient sources of risk capital available.
By accessing the capital markets, as it already has with its first World Bank catastrophe bond recently, the Philippines could bring more reinsurance capacity to back a catastrophe insurance facility that would allow premium to be retained at home, while its own local insurers would be the originators of the risk and policy providers for the customers.
As the capital markets only want to hold the peak catastrophe exposures it can reduce volatility for the catastrophe risk facility, while leaving control in the hands of local operators.
However it pans out, this initiative is another positive step in the Philippines mission to extend insurance to the many, while reducing the fiscal burden on the government and taxpayer.