Excess Loss Insurance Helps Philippine Insurers

Excess loss insurance, often called reinsurance, is like a safety net for insurance companies in the Philippines. It helps them stay afloat when they face unexpectedly large claims. Instead of paying everything themselves, they share the risk with another insurance company (the reinsurer). This is especially important in a country prone to natural disasters like typhoons and earthquakes.

Why Philippine Insurers Need Excess Loss Insurance

The Philippines is no stranger to natural catastrophes. On average, the country experiences around 20 typhoons each year, not to mention earthquakes and other calamities. When these disasters strike, insurance companies can get hit with a huge number of claims all at once. Imagine a powerful typhoon sweeping across Luzon, causing widespread damage to homes and businesses. Suddenly, the insurance companies are faced with bills far exceeding their initial estimates. This is where excess loss insurance steps in. It’s designed to cover those extraordinary losses that could potentially bankrupt a smaller insurance company. For instance, a recent study by the Philippine Statistics Authority (PSA) showed that natural disasters cost the Philippine economy billions of pesos annually, highlighting the need for robust risk transfer mechanisms like reinsurance. Smaller insurance companies in the Philippines often rely heavily on excess loss insurance to manage their exposure, particularly to catastrophic events.

How Excess Loss Insurance Works: A Simple Explanation

Think of it like this: an insurance company, let’s call it “Luzon Insurance,” sets a limit for how much they can comfortably pay out in claims. Let’s say that limit is ₱10 million. Anything beyond that is covered by their excess loss insurance policy. So, if a major earthquake results in ₱30 million worth of claims for Luzon Insurance customers, the excess loss insurance will cover the ₱20 million that exceeds Luzon Insurance’s limit. Excess loss insurance comes in different forms, but commonly involves Luzon Insurance paying a premium to the reinsurer in exchange for their guaranteed coverage if losses go above the agreed-upon threshold. It’s like paying for a high-powered backup plan.

Types of Excess Loss Insurance

There are various types of excess loss insurance, and Philippine insurers can choose the one that best suits their needs. Two common types are:

• Per Risk Excess of Loss: This covers individual claims that exceed a certain amount. For example, if Luzon Insurance has a per-risk policy with a ₱5 million retention, and one single claim costs ₱7 million, the excess loss insurance would cover ₱2 million.
• Per Event Excess of Loss: This covers the aggregate losses from a single event, like a typhoon or earthquake. If a typhoon causes Luzon Insurance to receive ₱50 million in claims, and their per-event excess of loss policy covers losses above ₱30 million, the reinsurer would pay ₱20 million.

Philippine insurers will carefully consider several factors when choosing a specific type of excess loss insurance, including the level of risk they are willing to absorb internally (the retention level), their financial capacity, and the specific types of risks they underwrite. The Insurance Commission of the Philippines (IC) regulates these types of agreements to ensure local insurers are using sound reinsurance contracts.

Benefits of Excess Loss Insurance for Philippine Insurers

Beyond just surviving big disasters, excess loss insurance offers many other advantages to Philippine insurance companies:

• Financial Stability: It protects their capital and solvency. Insurance companies need to have enough money to pay claims and stay in business. Excess loss insurance ensures they can do that, even after a major catastrophe.
• Increased Underwriting Capacity: It allows them to take on more business. Knowing they are protected by reinsurance, insurers can offer policies to a wider range of clients and underwrite more complex risks.
• Access to Expertise: Reinsurers often have a global perspective and deep expertise in risk management. They can provide valuable insights and advice to Philippine insurers on how to improve their underwriting practices and manage their exposure to various risks especially in the context of climate change.
• Stabilized Profitability: It helps to smooth out earnings and reduce volatility. By transferring some of the risk to reinsurers, insurers can avoid huge swings in their profits from year to year.

For example, let’s say a local insurer wants to offer more comprehensive earthquake coverage but is afraid of the potential losses. By purchasing excess loss insurance, they can confidently expand their product offerings. The Insurance Commission recognizes the importance of reinsurance and encourages, but does not mandate, its use by insurers to better manage their risk profiles.

Challenges in Obtaining Excess Loss Insurance

While excess loss insurance is beneficial, securing and maintaining it can pose some challenges for Philippine insurers:

• Cost: Reinsurance premiums can be expensive, especially for companies operating in high-risk areas. The cost of reinsurance will depend on several factors, including the coverage limits selected, and the perceived risks in the company’s operating area. As global reinsurance rates increase, some Philippine insurers may find it more difficult to afford the necessary coverage.
• Complexity: Negotiating and structuring reinsurance treaties can be complex and require specialized expertise. Insurance companies often need to work with brokers who have experience in the reinsurance market.
• Availability: In the aftermath of a major global catastrophe, reinsurance capacity can become scarce, and prices can increase. For example, following major hurricanes in the US or devastating earthquakes in Japan, global reinsurers can reduce their exposure and increase their rates globally, potentially affecting the accessibility and affordability of reinsurance for Philippine insurers.
• Data Quality: Reinsurance companies rely on accurate data from insurers to assess risk and price premiums. If a Philippine insurer has poor data collection practices or lacks sufficient historical data on their claims experience, it can be difficult to obtain favorable reinsurance terms.

Choosing the Right Excess Loss Insurance

Selecting the right excess loss insurance policy requires careful consideration. Here are some factors Philippine insurers should consider:

• Risk Profile: Understand your company’s specific risks and exposures. What are the biggest threats to your business? Are you more concerned about individual large claims or cumulative losses from a single event?
• Financial Capacity: Determine how much risk your company can afford to retain. What is your maximum tolerable loss? Choose a retention level that is appropriate for your financial strength.
• Reinsurer Reputation: Choose a reinsurer with a strong financial rating and a proven track record. Look for a reinsurer that has experience working with Philippine insurers and understands the local market.
• Coverage Terms: Carefully review the terms and conditions of the reinsurance policy. Make sure you understand what is covered and what is not. Pay attention to any exclusions or limitations.
• Broker Expertise: Work with a knowledgeable and experienced reinsurance broker. A good broker can help you navigate the complexities of the reinsurance market and negotiate the best possible terms on your behalf.

For example, If Luzon Insurance is particularly concerned about typhoon risks, they should select coverage tailored to that: per-event excess of loss insurance specifically designed for typhoon damage. They should also ensure that the reinsurer is financially sound and experienced in handling claims related to typhoon damage in the Philippines.

The Role of the Insurance Commission

The Insurance Commission (IC) plays a vital role in regulating the insurance industry in the Philippines. The IC oversees reinsurance arrangements to ensure that local insurers are adequately protected and that their reinsurance programs are sound. They also monitor the financial health of reinsurers and ensure that they meet certain solvency requirements. Although the IC does not mandate that insurers purchase reinsurance, it recognizes the important role that reinsurance plays in risk management and financial stability. The IC also provides updates on the reinsurance market; for example, a report from IC highlighting the increased reinsurance activity following a particularly damaging typhoon.

The Future of Excess Loss Insurance in the Philippines

The demand for excess loss insurance in the Philippines is likely to grow in the coming years, driven by several factors:

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• Increasing Frequency and Severity of Natural Disasters: Climate change is expected to lead to more frequent and intense typhoons, floods, and other natural disasters, which will increase the demand for insurance coverage and, consequently, the need for reinsurance.
• Economic Growth: As the Philippine economy grows, there will be more assets to insure, leading to greater demand for insurance and reinsurance.
• Increased Awareness of Risk: As Filipinos become more aware of the risks they face, they are more likely to purchase insurance, further driving the demand for reinsurance.
• Regulatory Developments: The Insurance Commission may introduce new regulations that encourage or require insurers to purchase reinsurance to improve their financial strength and risk management capabilities.

For instance, new construction projects and business investments in coastal areas will necessitate enhanced insurance coverage, which in turn increases the importance of insurers having sound excess loss insurance arrangements. Furthermore, as the sophistication of the insurance industry increases, it’s likely that more insurers will adopt more advanced forms of reinsurance to better manage their specific risk profiles.

FAQ Section

What is excess loss insurance? Excess loss insurance, also known as reinsurance, is insurance for insurance companies. It helps them pay out large claims that exceed their financial capacity.

Why do Philippine insurers need excess loss insurance? The Philippines is prone to natural disasters like typhoons and earthquakes, which can result in massive insurance claims. Excess loss insurance protects insurers from financial ruin in these situations.

How does excess loss insurance work? An insurer sets a limit on how much they can pay in claims (retention). If claims exceed that limit, the excess loss insurance covers the remaining amount. Insurers pay a regular premium for this protection.

What are the different types of excess loss insurance? Common types include “per risk excess of loss” (covering individual large claims) and “per event excess of loss” (covering total claims from a single event like a typhoon).

How do insurers choose the right excess loss insurance? Insurers should consider their risk profile, financial capacity, the reinsurer’s reputation, the coverage terms, and utilize the expertise of a broker.

What role does the Insurance Commission play? The Insurance Commission regulates the insurance industry, including reinsurance agreement, to ensure the stability and credibility of the insurance providers and the industry, making sure insurers have adequate protection and are financially sound.

References

Philippine Statistics Authority (PSA) data on the economic impact of natural disasters.

Insurance Commission (IC) reports and regulations on reinsurance.

Relevant industry publications on reinsurance trends in Southeast Asia.

Don’t wait until the next disaster strikes! If you’re an insurance provider serious about protecting your business from the effects of an overwhelming high-cost claim, the strategic decision to explore the benefits of excess loss insurance is now for your protection and your policyholders’ peace of mind. Contact a trusted reinsurance broker today and secure a solid future for your company. Your financial stability and long-term success depend on it.