STRUCTURING A PUBLIC-PRIVATE EARTHQUAKE

INSURANCE COMPANY IN THE PHILIPPINES

A PRESENTATION TO THE PHILIPPINES INSURANCE AND REINSURANCE ASSOCIATION

MANILA, OCTOBER 2013

WHY EARTHQUAKE AND NOT OTHER PERILS

OF ALL THE NATURAL PERILS, EARTHQUAKE HAS THE MOST DEVASTATING EFFECT ON

THE MOST NUMBER OF PEOPLEAND BUSINESSESAND PROPERTIESAND THE GOVERNMENT BALANCE SHEETAND THE COUNTRY’S ENTIRE FINANCIAL SYSTEM

THE PHILIPPINES IS AMONGTHE COUNTRIES MOST VULNERABLE TO NATURAL HAZARDS: EARTHQUAKE RISK IN

THE NCR CAN AFFECT UP TO 32.5% of GDP

Philippines: Economic Exposure

Modeled amount of GDP (Gross Domestic Product) present in hazard zones that are thereby subject to potential losses. EM-DAT: The OFDA/CRED International Disaster Database – www.emdat.be – Université Catholique de Louvain, Brussels.

OBJECTIVE & DEFINITION OF THIS PROGRAM

TO PROVIDE A LEVEL OF INSURANCE TO THOSE FOR WHOM, CURRENTLY, EARTHQUAKE INSURANCE COVERAGE MAY NOT BE AVAILABLE OR WHO ARE NOT AWARE OF ITS EXISTENCE

TO RELIEVE, TO THE MAXIMUM EXTENT POSSIBLE, THE FINANCIAL BURDEN ON GOVERNMENT IN THE EVENT OF AN EARTHQUAKE DISASTER

TO PROTECT AND INSURE, TO THE MAXIMUM EXTENT POSSIBLE, LIABILITIES OF THE RETAIL BANKS OF THE PHILIPPINES I RESPECT OF MORTGAGES GRANTED TO THEIR CUSTOMERS IN THE DEFINED CONSUMER BRACKETS

WHAT DEFINES ‘MIDDLE CLASS & SME’?

A PRIVATE DWELLING, OCCUPIED AS SUCH, VALUED, BY PURCHASE PRICE OR OTHER PROFESSIONAL MEANS, WITHIN A RANGE OF PhP3 MILLION TO PhP12 MILLION.**

A SMALL OR MEDIUM SIZED BUSINESS ENTITY DEFINED AS SUCH UNDER THE PHILIPPINES FINANCIAL REPORTING STANDARDS FOR SMEs, EFFECTIVE 1 JANUARY 2010, THE HEADLINES OF WHICH ARE;

AN ENTITY HAVING TOTAL ASSETS OF BETWEEN PhP3 MILLION AND PhP350 MILLION OR TOTAL LIABILITIES

OF BETWEEN PhP3MILLION AND PhP250 MILLION NOT REQUIRED TO FILE FINANCIAL STATEMENTS UNDER SRC RULE 68.1 NOT THE HOLDER OF A SECONDARY LICENSE NOT A PUBLIC UTILITY **

**SUBJECT TO DISCUSSION AND AGREEMENT BY TECHNICAL COMMITTEE AND OTHERS

WHY ONLY MIDDLE CLASS & SMES?

OTHER GROUPS ARE CATERED FOR BY OTHER MARKETS;THE LESS FORTUNATE CAN RELY ON SOME LEVEL OF

GOVERNMENT SUPPORT IN THE EVENT OF DISASTERTHOSE WELL OFF HAVE ACCESS TO EITHER INSURANCE

OR SELF FINANCINGAS DOES ‘BIG BUSINESS’

THE MIDDLE CLASS HOME OWNER MAY HAVE ACCESS TO SOME LEVEL OF INSURANCE BUT TAKE UP AND AWARENESS ARE BOTH TOO LOW FOR FINANCIAL COMFORT.

WHY SHOULD THERE BE AN EARTHQUAKE

PROGRAM?GOVERNMENT SHOULD BE INVOLVED FOR THE

COMMON GOOD AND PRUDENT FINANCIAL MANAGEMENT.THE PROGRAM CAN SAVE $BILLIONS ON THE GOVERNMENT BALANCE SHEET IN THE EVENT OF DISASTER. IT WILL NOT SOLVE ALL OF THE FINANCIAL STRAINS THAT A CATASTROPHE BRINGS BUT CAN HELP WITH IMMEDIATE FINANCIAL RELIEF.

THE INSURANCE INDUSTRY SHOULD BE INVOLVEDTO INCREASE PUBLIC AWARENESS OF THE BENEFITS OF INSURANCE, IN ORDER TO ENHANCE THE INDUSTRY’S PROFILE AND FOR ADDITIONAL FINANCIAL BENEFIT.

FINANCIAL INSTITUTIONS SHOULD BE INVOLVED TO PROTECT THEIR BALANCE SHEETS

THE PUBLIC SHOULD BE INVOLVED FOR PEACE OF MIND

WHAT WERE THE OPTIONS CONSIDERED

GOVERNMENT OWNED CATASTROPHE REINSURER. Compulsory cession from all local underwriters.

GOVERNMENT OWNED DIRECT INSURER.

PUBLIC / PRIVATE TRADITIONAL CO-INSURANCE POOL. Government managed.

PUBLIC / PRIVATE TRADITIONAL CO-INSURANCE POOL Independently managed.

PUBLIC / PRIVATE OWNED CATASTROPHE REINSURER.

PUBLIC / PRIVATE OWNED DIRECT INSURER. Local market participation through equity (voluntary) and distribution.

GOVERNMENT OWNED ENTITIES

THE PRIMARY OBJECTIVE OF THE PROGRAM IS TO TAKE FINANCIAL RISK OFF THE GOVERNMENT BALANCE SHEET.

FOR THIS REASON ALONE, THE OPTIONS OF A GOVERNMENT WHOLLY OWNED INSURER / REINSURER WERE DISCOUNTED.

IN ADDITION, HOWEVER, SUCH SCHEMES COULD ALSODILUTE GROSS AND NET PREMIUM INCOME TO THE LOCAL MARKETCREATE SUSPICION OF SELECTIVE ‘TAX RAISING’ AMONGST THE PUBLICREQUIRE SIGNIFICANT ADDITIONAL AUDIT AND COMPLIANCE TRAILS CREATE POLITICAL CHALLENGES REGARDING CLAIMS SETTLEMENT IN

THE EVENT OF A DISASTER

TRADITIONAL CO-INSURANCE POOLS

A PUBLIC / PRIVATE CO-INSURANCE POOL WHICH WAS MANAGED BY A GOVERNMENT ENTITY WAS CONSIDERED TO BE UNWIELDY AND ADMINISTRATIVELY COMPLEX.

THE GOVERNMENT AGENCIES INVOLVED AGREED WITH THIS VIEW

IN ADDITION, THE MARKET, THROUGH PIRA COULD NOT ACCEPT A SITUATION WHERE THEIR FUNDS AND RISKS WERE MANAGED BY A THIRD PARTY.

A STRONG CASE FOR A PRIVATELY MANAGED POOL (SIMILAR TO THE EXISTING MACHINERY POOL)WAS MADE BUT, AFTER CONSIDERABLE DISCUSSION, WAS DISCOUNTED.

REASONS FOR DISCOUNTING A PUBLIC / PRIVATE POOL MANAGED BY THE MARKET

A CATASTROPHE POOL IS DIFFERENT FROM A ‘NORMAL’ POOL WHERE ATTRITIONAL LOSSES ARE ROUTINELY PAYABLE AND THERE CAN BE A CLEAR ACTUARIAL (PREMIUM / CLAIMS/ RESERVES/ INVESTMENT) TREND FOR RATING.

BECAUSE OF THE RISK CAPITAL INVOLVED, CATASTROPHE POOLS REQUIRE AN INTERNATIONAL CREDIT RATING TO OBTAIN REINSURANCE SUPPORT.

IN JUNE, 2013, THE CREDIT RATING AGENCIES WHICH WOULD SPECIFICALLY PRECLUDE THE ESTABLISHMENT OF AN INTERNATIONALLY ACCEPTABLE POOL IN THE PHILIPPINES AND WOULD PLACE TOO GREAT A BURDEN ON THE INDIVIDUAL MEMBERS.

THE REVISED DEFINITION OF A ‘POOL’

‘........ANY ENTITY, AGENT OR CONTRACTUAL AGREEMENT THAT PROVIDES A MECHANISM FOR COLLECTIVE

ACCEPTANCE AND SHARING, EQUAL OR OTHERWISE, OF INSURANCE RISK AMONGST ITS MEMBERS.

THE MEMBERS (WHICH CAN ALSO BE REFERRED TO AS OWNERS OR SHAREHOLDERS) ARE THE

ULTIMATE GUARANTORS OF THE POOL, ASSUMING ALL LIABILITIES ARISING FROM THE POOLING

ARRANGEMENTS.

PUBLIC / PRIVATE REINSURANCE COMPANYTHIS OPTION WAS CONSIDERED CAREFULLY AND AT LENGTH

BUT WAS FINALLY DISCOUNTED.WITH THE EXPECTED INCREASE IN BUSINESS BROUGHT ABOUT

BY COMPULSORY INSURANCE, MANY OF THE DIRECT INSURERS WITH A SMALLER CAPITAL BASE (AND EVEN MANY OF THE LARGER ONES) WOULD STRUGGLE TO MAINTAIN MARGINS OF SOLVENCY / RBC REQUIREMENTS

A DOMESTIC REINSURER IS JUST ANOTHER ‘LINK IN THE CHAINLACK OF INTERNATIONAL CREDIT RATING WOULD PRECLUDE

MANY LOCAL INSURERS FROM EQUITY PARTICIPATIONTHERE COULD BE ANOMALIES IN CLAIMS SETTLEMENT IN THE

EVENT OF A CATASTROPHE

PUBLIC / PRIVATE DIRECT INSURER A NEW, HIGHLY CAPITALISED, MONO-LINE DIRECT CATASTROPHE

INSURER STANDING ALONG SIDE THE EXISTING INSURANCE MARKET CAN PROVIDE THE SECURITY REQUIRED BY THE INSURING PUBLIC

IT WILL RELIEVE THE EXISTING MARKET OF CAPITAL AND SOLVENCY CONCERNS IN WRITING AN INCREASED VOLUME OF BUSINESS

BY UTILISING EXISTING DISTRIBUTION CHANNELS, IT WILL COMPENSATE THE MARKET THE MARKET FOR LOSS OF GWPI BY INCREASING NET PROFITABLILITY THROUGH COMMSSIONS AND PORTFOLIO TRANSFER FEES

THERE WILL BE SPEED AND UNIFORMITY IN CLAIMS PAYMENTSEQUITY PARTICIPATION OPPORTUNITIESLIMITED GOVERNMENT PARTICIPATION TO ASSIST IN CREDIT RATINGANOTHER EXAMPPLE OF PHILIPPINES ECONOMIC MATURITY

15

THE WAY FORWARD – WORKING SUB-GROUPS AND RESPONSIBILITIES

LEGAL – DRAFTING AND MANAGEMENT OF COMPULSORY INSURANCE LEGISLATION AND NEW INSURANCE COMMISSION & ANY OTHER NECESSARY REGULATION

FINANCIAL – THE ROLE OF ADB. CAPITAL AND STRUCTURE, CREDIT RATING, RATING

AND ACTUARIAL, ERM & CORPORATE GOVERNANCETECHNICAL – POLICY COVERAGE, WORDINGS,

REINSURANCE & PORTFOLIO TRANSFERDISTRIBUTION – USE OF EXISTING CHANNELS, DIRECT

MARKETING, CONSUMER EDUCATION, DRMM & RECOVERY

Board of Directors

EQ InsuranceCompany of

the Philippines(EPIC)

ADB PARTICIPATION THROUGH /FOR/WITH

GOVERNMENT AS DEEMED APPROPRIATE

EQUITY PARTICIPATIONFROM LOCAL & INTERNATIONAL

PRIVATESECTOR

MARKET TARGETTED: RESIDENTIAL & SME RISKS

PRIVATEInsurance

Companies

CompulsoryEarthquake

InsurancePolicy

ALL Building Owners Shall be Required

By LAW to be insured

Against Earthquake

Local companies and their shareholders may be invited

to participate as equity stakeholders

Local insurers may be recognised in

policies / certificates of

insurance

REINSURANCEPROGRAM

Distributor 100%

ManagementTeam

(EVEN) IF YOU LIVE ABOVE THE PROPERTY

THRESHOLDONE SINGLE STROKE OF FATEONE ACCIDENT, CALAMITY OR

CRISISCAN SEND YOU FALLING

(BACK) THROUGH THE CRACKSSENATOR ‘SONNY’ ANGARA, APRIL 2013

THANK YOU FOR COMING TODAY.