Insurance industry gears up for afta

We have, as a nation, started to move forward after Yolanda and it was heartwarming to see aid pouring in not only from our own compatriots fortunate enough to have been spared, but from the global community as well. One of the biggest equalizer is a natural calamity, and one that has the unfortunate dimension of Yolanda has proven this again, but the resilient Pinoy will, no doubt, rise above this, thanks to the multitude of people who showed genuine concern, aid and love.

As we continue to move on as a people, our own government is gearing up towards 2015 for the ASEAN Free Trade Area which will grant foreign companies greater access to the Philippine market because of the lifting of market barriers in the region. The country’s insurers are certainly preparing for it and lawmakers are considering the implications of the ASEAN Free Trade Agreement in the proposed amendments to the Insurance Code, including the capital hike provision for local insurance companies.

Among our neighbors, the Philippines has the lowest penetration of the market as far as insurance is concerned. However, I think the industry is thriving well enough, considering the figures we got from PIRA (Philippine Insurers and Reinsurers Association). PIRA general manager Fortunato Peralta shared that the industry (non-life sector) grew 12.8 percent in 2012, up from P41.3 billion in 2011 to P46.6 billion last year, with net premium growing by 5.74 percent, from P35.6 billion to P37.1 billion in 2012. Quite anemic if we consider the country’s economic growth for the same period, and even more so if compared to the life insurance sector which grew by an amazing 35-50 percent. This is not far from the average growth rate registered by this same sector in the last five years (2008 to 2012) where the life insurance industry grew by 59 percentin terms of direct premiums income, according to PIRA. On the average, this translates to 11.8 percent/year.

Because of the capital hike program instituted by the Insurance Commission, however, net worth and total resources of the entire industry did not grow as much. The capital requirement of P125 million in 2011 rose to P175 million (40 percent increase), and in 2012 this went up to P250 million, another 42 percent increase.  For new companies entering the industry, they should cough up P1 billion in paid-up capital. This, of course, means that only the big boys with serious money can call themselves insurers, effectively ridding us of fly-by-night operators, and rendering our local insurance companies competitive with our ASEAN competitors. Earnings before taxes for the entire industry was P5.1 billion in 2012, slightly up from P4.997 billion in 2011, a mere 2.33 percent increase.

Not surprisingly, most of the insurance companies were able to meet the new capital hike requirements, hefty as they were. Some prudently went into mergers, while two or three voluntarily ceased operations, unable to meet the requirement.

Speaking for the non-life sector, fire and property insurance continue to make up the bulk of the business, comprising 38 percent of the total portfolio, followed closely by motor car insurance at 37 percent, miscellaneous at 25 percent and marine insurance at 10 percent.

In all these, PIRA laments that the non-life sector trails miserably behind the life insurance sector, bogged down by an oppressive tax structure. According to PIRA GM Peralta, the current tax structure takes away 24.5 percent of the premium earnings of the sector, plus another 2 percent for fire service tax, as compared to the light tax burden of 2 percent on premiums on the life insurance sector. “The new law giving tax relief to the life insurance sector has a sunset provision. After five years from the effectivity of the new law, no more taxes will be imposed on life insurance policies”, said the PIRA official.

Even Insurance Commissioner Emmanuel Dooc has spoken out about the big burden on the back of the non-life sector brought about by the existing tax structure, and unless lawmakers consider this in the amendment of the insurance code, this sector will not be competitive when AFTA comes into effect by 2015. Non-life insurance’s 27 percent maximum tax rate (of this, 12 percent goes to VAT and 12.5 percent to documentary stamp tax) versus the life insurance sector’s maximum of two percent tax does seem grossly lopsided, heightened much more by the new law granting it tax relief with a sunset provision to boot. PIRA is petitioning that their VAT should at least be placed in the same level as the life insurance sector which is two percent.

As the insurance industry gears up for the Asean Free Trade Services Framework (AFAS) which includes the financial sector, the major players shape up for stiff competition. To be sure, some foreign companies will set up commercial offices here. The life sector as well as the non-life sector and all the sub-sectors in the insurance industry have already been opened up for liberalization, so there should be some interesting positioning in the market as host countries draft their own regulatory framework.

Taking a brief look at the comparative tax burden in the ASEAN region, we see that the doc stamps are highest in the Philippines at 12.5 percent compared to zero in Singapore, Vietnam and Hongkong, and only RM10 in Malaysia, .4 percent in Thailand and Rp6,000 in Indonesia. For the VAT which is 12 percent in the Philippines, it is seven percent in Singapore, 10 percent in Vietnam, five percent service charge on insurance policies for corporate accounts only in Malaysia, 3.5 percent for PA and seven percent for others in Thailand, and non-existent in Hong Kong and Indonesia. For corporate income taxes, we are highest at 30 percent followed by Vietnam, Indonesia and Malaysia at 25 percent, Singapore at 17 percent and Cambodia at five percent.

Still on the insurance issue, PIRA, on the initiative of the Asian Development Bank, is also pushing for mandatory earthquake insurance, and for it to be affordable, it must necessarily have a big base which can only be achieved if it becomes mandatory. This should be separate from fire insurance, of course, and from PIRA we learned that in earthquake-prone Philippines, only the big accounts get earthquake protection. The thrust now is to have at least the higher middle class residential owners to avail of this protection. For easy computation, for a P1 million house, one has to pay an additional P1,500 in premiums on top of the fire premium of P1,000. The government should seriously consider this as having earthquake insurance coverage effectively removes much of the subsidy it has to give out when such a calamity strikes.

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As this goes to print, I will be winding down my Tokyo Motor Show foray and going back home very early Sunday morning, in time to join the whole nation in cheering Manny Pacquiao. Go Manny!!

Mabuhay!!! Be proud to be a Filipino.