Non-life insurance Increase net worth in 2022

While the non-life insurance market in the Philippines is expected to expand this year along with the economy, an increase in net worth by the end of 2022 will put additional burden on small insurers, forcing them to merge or consolidate, according to a global insurance credit rating agency.

According to an October analysis from Insurance experts, “premiubuildm growth is likely to be back on track, in line with a resurgence of gross domestic product (GDP) growth projections.”

Following last year’s better-than-anticipated 5.6 percent growth, which reversed the record 9.6 percent GDP drop in 2021 as a result of the strictest lockdowns implemented at the start of the epidemic, the government is aiming for 7 to 9 percent growth this year.

“After experiencing a significant decline in 2020 due to the COVID-19 pandemic, non-life premiums began to show indications of recovery in 2021. Prior to the pandemic, the Philippine non-life insurance sector had one of Southeast Asia’s highest five-year average compound growth rates; once the economic climate improves, it is anticipated to resume its upward trajectory.

The “Build, Build, Build” infrastructure initiative was another factor in non-life insurers’ development, according to source, and it would “serve as a catalyst to the long-term expansion of the property, construction, and engineering insurance segments.”

Micro-insurance, in which the Philippines is a regional leader, would help the non-life sector flourish as more people would have access to affordable insurance products.

Due to the Philippines’ geographical location in the “Ring of Fire,” which is prone to earthquakes and volcanic eruptions, and its regular exposure to powerful typhoons.

IC expressed concern over the upcoming industry-wide increase in the required minimum corporate net worth from the present P900 million to P1.3 billion comes to an end.

The Philippines would have a higher capitalization requirement than many of the more established insurance markets in the region, considering the size of its own market, by the end of 2022, citing a Senate bill that was intended to block the implementation of this year’s net-worth increase under the Amended Insurance Code.

As a result, by December 2021, more than 25% of non-life enterprises had net worth of P1.3 billion, according to the rating agency.

However, it added, continues to anticipate that additional fundraising efforts and mergers among the mid-tier non-life companies would be crucial for the surviving insurers to reach the [increased] capital requirement by the stated time.

Given their often specialized business sectors and extremely low premium bases, small to mid-sized insurers may find it difficult to meet the increased capital requirement, which could result in some players giving up their licenses.

As small players face pressure to underwrite growth and profitability (in addition to the difficulties of process improvements and digitalization projects), it may not be appealing for stakeholders to provide more capital to help them fulfill the capital need, the report added.

Large insurers, however, might have an advantage because their management teams won’t have to spend time on capital raising or M&A (merger and acquisition) activity to comply with the new rule, according to AM Best.

According to AM Best, the increase in the minimum net-worth threshold will likely enhance the industry’s overall capital position and consolidate the segment’s currently dispersed structure. According to AM Best, the increased minimum net-worth requirement “would likely enhance the combined capital position of the industry and consolidate the segment’s currently dispersed environment,” the company stated.

Given the substantial difference between their current capital bases and the increased minimum net-worth requirement, it continued, “over the short future, a further increase in [net worth] may place an additional hardship on several small to medium-sized insurers.”

The reduction of tariff rates on the fire and auto operations of non-life players was also noted by insurance experts, which warned that this move “may damage insurers’ profitability if pricing competition intensifies.”