Poor ratings of Standard & Poor - I Honesto General Inquirer
November 12, 2006
GLOBAL credit rating agency Standard & Poor (S&P) proclaimed a negative outlook for the Philippine insurance industry, both life and non-life. Primary Credit Analyst Nandini Vijayaraghavan at Singapore wrote the August 3 report.
The nonlife report starts: "The outlook of the financial strength of the Philippine nonlife insurance industry is negative, despite slightly improved profitability across the sector. Inadequate capitalization and reserving, and political uncertainty, adversely impact the performance of non-life insurers. The lack of industry consolidation has resulted in an intensely competitive environment. This, coupled with insufficient professional expertise and a currently weak regulatory framework relative to some regional markets, has meant that the risk profiles of the Philippine nonlife insurance industry remain relatively high."
Sometime ago, the Insurance Commission set the minimum paid-up at P50 million. This is now to be raised to P100 by year's end and to P500 million by 2010.
The premium reserve, margin of solvency and the retention limit per risk are all subject to the provisions of the Insurance Code.
S&P mistakes the noise from the opposition as political uncertainty. Be that as it may, this uncertainty does not affect the nonlife industry. I would feel very uneasy if we had the political certainty of Singapore where the ruling party holds 82 seats out of 84, and the two lonely opposition members are constantly being harassed.
The intense competition does not stem from the lack of industry consolidation. The intensity results from the fact that, in 1994, the Insurance Commission, in line with the Asean free trade agreement, dismantled the cartel that had kept premium rates artificially high for decades.
Under a free and open market, premium rates have steadily plummeted. Today, fire insurance rates, on average, are about one-fifth what it used to be, but total volume is up, meaning more Filipinos are buying more insurance than ever before.
How does S&P feel about this market phenomenon? Would S&P prefer lesser or no competition?
Competition is much more intense among the big insurers, foreign and domestic. This is why, as S&P points out, the 10 largest companies write 65 percent of the business. The small Filipino companies are happy to stay within their respective little niches in the market. There are profits to be made in those little niches.
For the sake of operational efficiency, an American insurer, which S&P must surely rate highly, does not write a fire policy with less that P10,000 annual premium.
This means all that highly profitable residential risks are up for grabs by the Filipino insurers, whose budgets are unburdened by extremely expensive expats .
Also, the small companies write the other businesses that the big companies do not want but are equally profitable, such as the compulsory third party liability, and a wide range of surety bonds (guarantee payment, customs, bail, to mention only a few).
The Market Overview and Performance Expectations of the report merely expand the opening statement.
S&P says the industry is "heavily fragmented."
Does S&P prefer a monolithic industry? As an insurance broker, I would hate to deal with a monolith. I prefer an industry where I can shop around for the best deals for my clients.
S&P talks about lackluster investment climate. The insurance code has very strict rules on investment of insurance funds, enforced strictly by eagle-eyed auditors of the Commission. The rules sacrifice earnings at the altar of safety. You want to speculate with other people's money? Find some business other than insurance.
To be sure, some small Filipino insurers are clinging by their fingernails for dear life. They will fall by the wayside in due time. But others are in good shape.
As an insurance broker, I place business not only with the big companies but also with small companies. In the Philippine scheme of things, there is a place in the sun for the small well-run insurance company.
S&P claims the Philippines has insufficient professional expertise. Every company has as much professional expertise as it needs to compete.
S&P talks of "a currently weak regulatory framework." The Philippine insurance code has existed for three-quarters of a century. In fact, it is the only insurance code in this part of the globe.
S&P makes its ratings by analyzing financial statements and the rules of the Insurance Commission. S&P should look at what is happening on the street.
Next week, I will discuss S&P's analysis of the life insurance industry.
Related Site: Standard & Poor's
Previous columns: The fallacies of SWS hunger survey 11/06/06 Binay at the ramparts 10/30/06 The raging storm around Milenyo 10/23/06 The RSBS tragedy 10/16/06 Talking to Harry 10/09/06 GSIS: Huge sums for public relations 10/02/06 SSS: Good news/bad news 9/25/06
