23 September 2002 14:14
PERSONAL FINANCE
The rash of earthquakes, typhoons and floods affecting various areas in the world has caused insurers and reinsurers
significant losses.
In recent years earthquakes have ravaged Taiwan, Turkey, Greece and India while of late, torrential rains and floods
have devastated Central Europe particularly Germany, Austria, Czech Republic and Russia including China, India, Nepal,
Bangladesh, Thailand, Korea and Vietnam in Asia.
Damage and destruction of inundated homes, buildings, roads, bridges, agricultural crops and the disruption of
business and commerce including loss of hundred of lives are expected to reach billions of dollars.
Without a doubt, natural disaster causes unpredictable effects on the economic growth of a country.
In all likelihood, most of these economic losses are not privately insured so that in the final analysis, it is the
government of each affected country that will bear the greater percentage of the uninsured cost of natural
disasters.
On an average, only 5% to 10% of the losses are recoverable from insurers and reinsurers.
The resources of the global insurance industry are not inexhaustible and the spate of abnormal losses experienced in
underwriting risks of natural perils have influenced global reinsurers to adopt more stringent underwriting benchmarks,
higher pricing and higher deductibles as well as sharing of losses by the primary insurers.
Furthermore, with the sharp reduction in the net worth of many of the leading global insurers and reinsurers
resulting from the insured losses of September 11, 2001 and the fall in prices of equities comprising part of their
investment portfolios, it has come to the point that signals are being transmitted to Philippine nonlife insurers that
reinsurance capacity for earthquakes, typhoons, floods and volcanic eruption will be in short supply and that
acceptances of natural perils risks will more or less be carefully allocated only to qualified insurers.
In effect, globalization of insurance also means global sharing of insured losses which translates into global
insurance pricing of risks especially those attributable to natural perils.
A study by the United Nations shows that globalization is not tilted in favor of the developing nations of the world
and this is true in the case of the Philippine insurance industry.
Being a relatively small market in the perception of global reinsurers and with total paid-up capitalization of the
nonlife sector in the amount of approximately P8 billion or around US$160 million, the industry's dependence on
international reinsurance support is obvious considering its low retention capability in line with conservative
underwriting practices.
To cope with this dilemma, it will be necessary for the Philippine non-life insurance industry to close ranks and in
partnership with the government to pool resources and establish a tax-exempt reserve fund that can be built up over the
years to meet losses caused by natural perils.
In fact, this fund will serve as a national retention which will then interest global reinsurers to provide
catastrophe reinsurance protection in excess thereof based on the submittal of a catastrophe modeling study undertaken
by experienced scientists.
There are currently a number of pooling arrangements in operation around the world and these are in New Zealand, the
United States, Taiwan, Turkey, Iceland, Switzerland, Hawaii and France.
A pool in the United Kingdom provides reinsurance protection for the British insurance industry solely against the
risks of terrorism and sabotage.
The potential benefits of an industry-managed pool are as follows: (1) It minimizes the economic impact of a major
national catastrophe; (2) Overseas reinsurers will inject foreign capital following a disaster; (3) It promotes the
benefit of insurance to society, and (4) It encourages construction of safer buildings and reduce the potential damage
from an earthquake.
The Philippine insurance industry in joint venture with the Government Service Insurance System (GSIS) and the
National Government should be proactive rather than reactive in their strategy to mitigate the catastrophic losses
caused by natural perils specifically the earthquake risk which can gravely stunt the economic growth of the
country.
Reynaldo A. de Dios, risk and insurance management consultant.
[AIW [Asia Africa Intelligence Wire]] |
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