Fitch lauds tighter insurance regulations

MANILA, Philippines - International credit agency Fitch Ratings said that the tightened regulation by the Insurance Commission (IC) on capital and risk weighting is positive for the country’s insurance industry.

“It weeds out under-capitalized players and (it) should reduce industry overcrowding while the Philippines prepares for the ASEAN Economic Community framework in 2015,” Fitch said in a special report on the country’s life and non-life insurance industry.

The rating agency also pointed out that stiffer regulations on the industry provides an ample cushion for the industry in times of excessive catastrophe losses, and is better reflective of the insurers’ business profiles  against their ASEAN peers.

After nine months into 2013, total non-life industry net worth increased to P55 million while life sector total net worth stood at P113 million.

Fitch considers that life insurers with a significant market share of five percent and above are unlikely to be affected by the capital hike, as they consist mainly of capital-rich foreign players.

The capital hike should have more of a direct impact on the non-life sector where market share is rather dispersed among the local players.

IC statistics indicate that the number of non-life insurers has significantly dropped – from 85 in 2010 to 69 in 2013. 

“The vastly untapped insurance market – with no restriction on foreign ownership and improving macroeconomics – will continue to attract foreign investors,” the report stressed.

Some foreign firms, such as Mitsui Sumitomo Insurance Co. Ltd. and Starr International, had already registered with the IC to enter the sector.

“Foreign-owned companies pose a threat to Filipino insurers in that they wield strong capitalization, underwriting capability and brand power. This is especially prevalent in the life sector where foreign insurers hold more than a 60-percent total market share,” Fitch said.

The non-life sector as relatively controlled by locals, but saturated by small and family-owned players where cutthroat pricing is common. Unsustainable premium rates and rising underwriting expenses like reinsurance costs have resulted in a decline in earnings in the last four years.

As of the third quarter of 2013, return on equity and return of average assets stood at 4.9 percent and 2.2 percent, respectively.

Fitch believes that more market consolidation is expected to occur with enhanced regulatory standards and the upcoming 2015 ASEAN economic integration, especially among small and under-capitalized players, which will face difficulties in obtaining fresh capital to meet the heightened capital requirements.