Leveraging insurance for a sustainable future

As the world moves towards a sustainable future, the global economy is committed to achieving a net-zero economy, with 90% of industries driving an unprecedented transformation. In this transition, according to a report published by Sustainable Market Initiative, the insurance industry has been investing in, enabling, and protecting the efforts of multiple industries as they adapt and transition towards a sustainable future.

In the Philippines, the insurance sector has assumed a proactive stance in addressing its growth. In the third quarter of 2023, the Insurance Commission (IC) reported that the overall net income of the industry reached a 9.38% year-on-year (YoY) increase compared to the same period in 2022.

A similar report mentioned that the life insurance sector had a net income increasing by 10.32%, while the non-life insurance industry saw substantial growth of almost 15%, with net income reaching P5.48 billion. On the other hand, mutual benefit associations (MBAs) faced a slight decline of 3.05% in net income YoY, primarily attributed to a significant rise in total underwriting expenses.

One of the significant drivers of growth in the Philippine insurance sector is the rising middle class, which is becoming more inclined towards securing their future through insurance products like life insurance, health insurance, and retirement plans.

In addition, the pandemic has also heightened this awareness, with more people realizing the importance of having adequate health coverage.

Philippine Health Insurance Corp., also known as PhilHealth, is the Philippine social health insurance program by the government aimed at ensuring universal health coverage and protecting the vulnerable population against the high costs of healthcare. According to an open-access article published in the Journal of Economics and Finance, PhilHealth has significantly increased healthcare utilization among indigent Filipinos, particularly for outpatient care and hospitalization.

Challenge in the uninsured

Despite the growth of the Philippine insurance industry, it still faces several challenges that hinder its development. The insurance penetration rate remained at a remarkably low 1.68% at the end of the third quarter, according to data from the IC. This figure leaves many Filipinos vulnerable to health and financial risks due to the lack of insurance coverage.

In fact, a survey conducted by research firm Capstone-Intel Corp. mentioned that 59% of Filipinos do not have private medical insurance. Out of the total number of respondents, only 35% of Filipinos have private medical insurance while the remaining 6% are uncertain. 30% of the respondents cited government health programs as sufficient for their healthcare needs.

Meanwhile, many Filipinos perceive insurance as an unnecessary expense rather than a sound investment in their future. The similar survey found that 63% of those who lack medical insurance stated that the high cost of insurance is the primary factor for their non-availment.

Insurance Commissioner Reynaldo A. Regalado attributes the low penetration rate to insufficient financial literacy and lack of access to financial products and services, particularly in rural areas.

Prospects in digital, growing demand

Despite the challenges facing the Philippine insurance industry, there are also several opportunities for growth and development. In a report published by GlobalData, the insurance market is expected to grow at a compound annual growth rate (CAGR) of over 5% from 2023 to 2027.

Digital technology is also revolutionizing the insurance industry, making it more accessible, efficient, and customer-centric. With the increasing use of technology and the internet, Filipinos are becoming more receptive to online insurance services, which offer convenience and accessibility.

The integration of artificial intelligence (AI) is transforming core processes, making them more predictive and responsive. According to YCP Solidiance, AI-enabled processes are expected to enhance customer interactions, improve productivity, and enable the development of more data-driven products and services.

Insurance companies are also leveraging digital platforms to reach a wider audience and provide personalized insurance solutions. Fintech insurance is gaining traction in the country, with companies offering a wide array of insurance products, such as virtual insurance products and embedded insurance, which integrate insurance functionality within technology and related services.

The increasing demand for microinsurance has also gained traction as these products cater to the needs of low-income individuals and families who cannot afford traditional insurance coverage. These products include micro-life and health insurance, micro-agricultural insurance, and micro-need options like memorial, educational, and pension plans.

According to a report by Insurance Asia, the surge in demand is driven by the need to mitigate risks like death, injury, and property damage, particularly among low-income earners. With the government’s support, microinsurance providers have been expanding their reach and offering affordable insurance products to Filipinos in remote and underserved areas.

As insurers continue to adapt and innovate in response to changing market dynamics, the Organization for Economic Co-operation and Development (OECD) mentioned that collaboration among industry stakeholders, policymakers, and regulators will be crucial in driving sustainable growth and ensuring the long-term viability of the Philippine insurance sector.

Embracing sustainability

Sustainable insurance has been driven by the need to address environmental, social, and governance (ESG) issues. The United Nations Environment Programme Finance Initiative (UNEP FI) defines sustainable insurance as a strategic approach that involves responsible and forward-looking risk management and innovation to provide quality and reliable risk protection.

The UNEP FI Principles of Sustainable Insurance (PSI) serve as a worldwide model for sustainable insurance, aiming to prevent and reduce ESG risks and better manage opportunities. While the PSI is not legally binding, it serves as a voluntary and aspirational framework for sustainable insurance.

In the Philippines, there are efforts to promote sustainable insurance, particularly in the agricultural sector. The IC has issued circulars to establish agricultural insurance concepts, and there are pending legislations mandating insurance for man-made disasters in environmentally critical projects.

Furthermore, according to an article by Chambers and Partners, commercial players and legislative bodies are actively promoting sustainable insurance.

For instance, the agricultural sector in the Philippines is highly susceptible to environmental risks, such as natural disasters and climate change. To address these challenges, IC issued Circular Letter No 2015-53 (IC CL No 2015-53), which established the Agriculture Insurance Framework. This framework introduced two main agricultural insurance concepts: parametric-based microinsurance and index-based agricultural insurance.

Parametric-based microinsurance involves the use of pre-defined parameters to determine payouts. At the same time, index-based agricultural insurance is based on the occurrence of specific weather events, such as typhoons or droughts. Both approaches aim to provide affordable and accessible insurance solutions to farmers and agricultural businesses, helping them manage environmental risks and maintain financial stability. — Mhicole A. Moral