Insured losses from the recent 7.8 magnitude earthquake in Mindanao are expected to remain minimal due to the Philippines’ low insurance penetration rate, according to a report from AM Best. While the seismic event caused significant infrastructure damage and loss of life, the country’s persistent protection gap means that the vast majority of economic costs will be borne by property owners and the government rather than private insurers.
Why does the Philippines face a wide protection gap?
The Philippines remains one of the most disaster-prone nations globally, yet insurance uptake remains low, leaving a substantial “protection gap” between economic losses and insured losses. According to AM Best, this trend persists because insurance is not yet a standard component of risk management for many households and small businesses. When major events like the 2013 Bohol earthquake occur—which resulted in insured losses between $55 million and $100 million—the financial burden often falls heavily on the public sector. This reliance on state-funded recovery highlights the limited reach of the private non-life insurance market in mitigating large-scale catastrophe risks.
How are insurers shifting their risk strategies?
Domestic non-life insurers are increasingly retaining more catastrophe risk rather than offloading it entirely through reinsurance. AM Best notes that this is a strategic move to balance rising reinsurance costs against profitability targets. By participating in risk-sharing programs, such as the Philippine Catastrophe Insurance Facility, insurers aim to absorb the primary layer of exposure. However, this strategy carries trade-offs. Increased net retention makes these companies more sensitive to climate-related volatility and reveals potential inaccuracies in traditional risk models that may not fully account for current seismic realities.
What are the long-term trends for catastrophe risk?
The industry is moving toward a more complex balancing act. As insurers retain more risk, they face greater scrutiny regarding their ability to pay out during major events. Historical data, such as the 2013 Bohol incident, serves as a benchmark for the scale of potential claims, but current models are being tested by the increasing frequency of natural disasters. According to AM Best, the future of the market depends on the accuracy of these risk models and the ability of insurers to maintain solvency while covering the “primary layer” of damages in a high-risk environment.
Frequently Asked Questions
Why are insured losses in the Philippines lower than in other countries?
Low insurance penetration is the primary driver. Many property owners do not hold comprehensive catastrophe insurance, meaning that most infrastructure and home repairs are funded privately or by the state.
What is the Philippine Catastrophe Insurance Facility?
It is a risk-sharing mechanism designed to help the domestic non-life insurance market absorb the primary layers of catastrophe risk, reducing the immediate dependency on international reinsurance markets.
How do earthquakes affect insurance premiums?
When insurers retain more risk to manage high reinsurance costs, they often adjust their underwriting strategies, which can impact premiums and the availability of coverage in high-risk zones along the Ring of Fire.
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