In a recent report, credit rating agency AM Best has revised its outlook on the Philippine non-life insurance market segment from stable to negative.
The change in outlook comes as domestic insurers face increased negative pressure on their balance sheet strength and operating performance. The key reason for this shift is the rising challenges in accessing reinsurance capacity.
Historically, the Philippine non-life insurance market has heavily relied on reinsurance to mitigate underwriting volatility and exposure to catastrophe accumulations, as well as to subsidise acquisition costs.
However, the global reinsurance market has been experiencing hardening conditions, and there is reduced appetite for property catastrophe risks in the Philippines.
As a result, many non-life insurance carriers have struggled to place proportional reinsurance programs during recent renewals, which forced changes in their reinsurance programs.
The property insurance line of business is particularly affected, being the largest in the Philippines and representing 30% to 40% of gross premiums in recent years.
With shrinking proportional reinsurance capacity and a reluctance to lose market share, domestic non-life insurers may be left with limited alternatives but to increase their premium retention and take on higher net retained liabilities.
AM Best expects that this shift in reinsurance dynamics will result in increased underwriting performance volatility, driven by the higher retained exposure to natural catastrophe risks.
Non-life insurers now bear a heightened sensitivity to climate risks and modeling inaccuracies due to their higher retention levels.
Additionally, motor insurance underwriting performance is also expected to face pressure due to various headwinds over the near term, including a normalisation of claims frequency post-COVID.
Despite the negative outlook, AM Best points out some mitigating factors for the Philippine non-life insurance market.
Insurers have recently strengthened their capitalisation, supported by a phased increase in the minimum capital requirement.
This enhanced capital position could provide some non-life companies with opportunities to diversify their portfolios by expanding into non-property lines, such as travel and personal accident insurance. The projected higher number of vehicle sales in 2023 could also increase demand for motor insurance.
Moreover, the growth of the domestic insurtech space and increasing use of e-commerce apps present additional opportunities for insurers.
