President Art and the rest of the PIC Board Members, Colleagues in the Philippine Insurance Industry, Friends, Ladies & Gentlemen.

I do not intend to speak exhaustively about all the issues affecting our industry, particularly the non-life nor act as a doctor and prescribe solutions to the industry’s problems. I will leave that task to our good friends at the PIRA like Noel, Ben and Brian and other insurance associations. Instead, I would like to just dwell on a few issues and hopefully be able to inject new perspectives.

Coming back after a two-year absence, I am happy to see many familiar faces in this gathering as well as in other gatherings I attended previously. It seems that the saying “insurance executives never retire, they just get recycled” is true. However, I am amused if not concerned that the same problems that afflicted the industry before I left are still the same problems today.

Among the serious concerns is the continued erosion of premium rates. I was told by a friend that the composite rate for Fire and Allied Perils has gone down to as low as 0.045-0.050%. I told him that at that rate our computer system would likely break down. It is programmed to automatically allocate a rate of 0.10% for Earthquake and 0.05% for Typhoon/Flood which would make the rate for Fire and other perils -0.10. Unfortunately, while this issue is talked about in just about every gathering of insurance executives, the result is more of the same as most of us  seem to be afflicted with the illness “NATO”  (No action, Talk Only).  There also seems to be a sense of futility among us as can be gleaned from what a number say – if I don’t write the risk because the rate is too low, somebody else will. I talked to one of my broker-friends and inquired why brokers don’t push more for correct rates because that would mean bigger brokerage income for them. He replied that that would be in the case of a perfect world but since it isn’t, for him small brokerage is better than no brokerage.

For others, there is the feeling of being overwhelmed by the enormity of the problem that they are paralyzed into inaction. Anyway, they believe, whatever they do will just be a drop in the bucket. Still others are lulled into complacency, in the belief that one doesn’t have to do anything extraordinary, problems will solve themselves.

But unfortunately, the problem of the premium rate erosion will not simply go away or solve itself. Some statistics from the IC Annual Report should provide some insight into the effect of this problem on our industry.

While the number of policies increased from 2004 to 2007, the Total Premiums Written decreased from 2005 to 2007, a reflection of the reduction in premium rates.

But even if these statistics raise some alarm bells, no one seems to want to take the first step in charging proper rates for fear of losing business. Hence, a number in the industry believe that premium rate stabilization will only come with the iron hand of the IC. But I counter by asking, if we are unable or unwilling to police or self-regulate our industry, are we not in fact inviting or opening the doors for the government to intervene perhaps not just in this area but maybe later in others as well? I believe that the best way to build a firewall against government intervention in or encroachment into private industry domain is for us to run the industry so efficiently and effectively that government would not be able to run it better nor have a reason to even want to run it.

That is why whenever we can charge the proper rates, we ought to do just that. Maybe we won’t necessarily make the situation much better but hopefully it won’t get any worse. As the saying goes, it is better to light a candle than curse the darkness.

To break the impasse, PhilNaRe is willing, as it has offered several times in the past, to set up and manage a pool into which all companies will cede a certain percentage of every direct policy that they write. This will provide a mechanism to check and monitor premium rates and for up-to-date market statistics to be compiled. PhilNaRe will keep a retention on the business ceded but retrocede the balance back to the market.

Another serious concern is the natural catastrophe exposures of the industry in which premium rate erosion is also a major related issue. As you know, the Philippines lies in the so-called Pacific ring of fire where earthquakes and volcanic eruptions are not matters of if they will occur but rather when.  So far the Philippines has been lucky because we have been spared from a major earthquake like the one that recently struck a city in Italy or even a tsunami like  the one that engulfed the rest of Southeast Asia and spread across the Indian Ocean several years ago. But we also know that the longer that a strong earthquake doesn’t hit the Philippines, the closer it gets to being hit by one. What is alarming though is our industry’s failure in general to build up reserve funds for the time that a catastrophic event comes. Let’s take a look at some industry statistics from the IC Annual Report. Would we be comfortable if we got to know  that the industry’s total net worth covers only a small proportion of the Earthquake risks it writes:

2005 – 2.73%   2006 -  1.89%   2007 – 3.49%*

*Total Earthquake risks/liabilities dropped by 48%

If we apply just a 5% PML on the 2007total Earthquake liabilities, we will come up with a loss of almost P56B. Compare that to the industry’s total net worth in the same year of just P39B which would be totally wiped out by the loss.

Another question, would we be disturbed if we found out that the total net income of the industry only answers for a miniscule proportion of its Earthquake liabilities?

2005 – 0.14%   2006m – 0.06%   2007 – 0.13%

I said earlier that another major concern is catastrophe exposures in which premium erosion is also a major problem. From the IC Annual Report, one can see that the average premium rate for Earthquake has also been eroding:

2003 -  0.126%
2004 – 0.122%
2005 – 0.089%
2006 – 0.043%
2007 – 0.100%

A continued increase in Cat exposures without a corresponding increase in premium income will certainly affect the rating of your Excess of Loss covers and will add to the cost of your protections without adding proportionally to your bottom-line. Furthermore, the increasing frequency and severity of natural losses may harden the position of reinsures towards companies located in catastrophe-probe country like the Philippines. So that is something that we need to watch out for.

The recently released Swiss Re Sigma No. 2/2009 publication described 2008 as “one of the costliest catastrophe years in history.” Natural catastrophes and man-made losses caused 240,500 fatalities and resulted in economic losses of US$259 billion. Of those economic losses, insured losses amounted to US$52.5 billion, of which 85% were due to natural catastrophes and 15% due to man-made disasters. Of the 311 catastrophe events in 2008, 137 were considered natural catastrophes and 174 were categorized as man-made disasters.

While I have not talked about Typhoon/Flood, there are also some disturbing developments about these two classes of business. Loss Ratios have deteriorated over the recent years and require serious review.

                 2003     2004      2005     2006     2007
Typhoon      10%     46%      15%     361%   255%
Flood           27%     45%      131%     57%     70%

What is also of concern to us was our experience last year. Typhoon Frank hit us across several classes of business – Property of course, Marine Hull, Marine Cargo … and Motor. The latter was due to floods which gave rise to claims against the Acts of God extension of the Motor policy. This is worrying because of the expected increase in the frequency of floods everywhere due to the effects of global warming as well as man’s disregard for nature (garbage dumped and tress cut indiscriminately) and the fact that most insurers do not charge extra premium for this extended peril.
 Looking back, it was to arrest the erosion of Cat rates that NationalRe introduced the minimum Cat rates several years ago. This initiative drew the support of both the IC and the PIRA and led to the issuance of the IC circular regarding these minimum rates. Although we can’t claim it to be a total success, still we draw comfort from the fact that at least there has been a benchmark or reference for Cat rates. Without the minimum rates, we believe that there would have been a freefall of rates and perhaps we may now be seeing Fire policies extended to cover Cat perils … for free.

In the belief that Cat risks should not be subject to the normal market competition so that reserves can be built up for the time that a major catastrophe happens, PhilNaRe is prepared to set up and manage a Catastrophe Pool, as it has offered several times in the past. While the mechanics can still be refined, the general idea is for all Earthquake, Typhoon and Flood risks in the market to be ceded to a Pool under uniform terms and conditions. One necessary feature of the Pool to ensure its success is a compulsory cession requirement from all companies writing natural perils and for exemption from any kind of tax.
                          
Turning now to PhilNaRe, I am happy to report that the company still managed to post a bottom-line profit of P94 million in spite of having to weather its worst underwriting year, incurring an underwriting loss for the first time in the last 19 years (earthquake year). Although this represents a drop of around 85% from the previous year’s record profit (both underwriting and investment had good outcomes), it nonetheless underscores the strength of the company. Just as the true mettle of metal is tested by fire, the financial strength of the company was also tested by the severity and frequency of the domestic and overseas losses it suffered particularly from its Property and Marine Hull portfolios. For reporting purposes to our Board, we define a major loss as one where our retention is at least P5M for Fire and P1M for other lines. In 2007, the company only had 13 major losses amounting to around P48M. In 2008, the number of major losses soared to 61 amounting to nearly P561M. Total Gross Claims of the company increased from P609M in 2007 to P1.24B in 2008.

The ability of the company to absorb such a high frequency and severity of losses can be attributed to the Capitalization Enhancement Program it embarked on in 2004. At that time, the company’s Board and management already saw the need to further strengthen the financial condition of the company to prepare it to write  larger risks and become a major player in the domestic reinsurance market as well as to penetrate the regional markets. It also wanted to be able to provide better and more services to its clients. The CEP consists of 4 stages, three of which have been completed. The first was the increased capital from its existing shareholders; the second was the merger between the company and the then Universal-Malayan Re; the third was the IPO and the fourth is finding a strategic partner to bring in not just more funds buy more importantly transfer technology. With the CEP, PhilNaRe’s paid-up capital soared from P614M in 2004 to P2.18B in 2007/2008. Likewise, its Net Worth jumped from P1.12B in 2004 to P5.95B in 2007. Total assets rose from P2.93B to P12.27B within the same period.

This is the financial strength, capacity and security that PhilNaRe offers you. It is continuing to do what is needed to make it your preferred reinsurer, a reinsurer that you want to deal with and not simply a reinsurer that you are required to cede some business to. Besides, PhilNaRe is perhaps the only reinsurer operating in the Philippine market that can truthfully and proudly claim “Here for life” and “Here to stay”.

Accordingly, we will pursue and maintain our Customer Service approach. We aim to “deliver” our services to your company’s doorsteps whenever possible but you are of course most welcome to visit our offices. We have embarked on an ambitious integrated computerization program to make our operations and services more efficient. We want to build, sustain and enhance a vibrant and fruitful partnership with all of our clients but such partnership obviously needs to be mutually beneficial. We have to balance our services to our clients with our obligations and responsibilities to our stockholders. It is for this reason that we are spending considerable time on resolving some ticklish issues such as receivables/payables and delayed submission of underwriting and accounting documents in order to smoothen our business relations with our clients. This is not just to clean up our respective books but also to ensure that there are no impediments to our settling your cash calls promptly, which is after all the true test of a reinsurer’s service. I assure you that even if we do come to your offices to discuss these matters, we will always do so with a smile. 

Going back to what I mentioned earlier as the need to reexamine our attitudes and mindset with regards the problems confronting the industry, allow me to quote some portions of a speech given by the late Sen. Robert F. Kennedy, brother of the late US President John F. Kennedy as these give us some new perspectives and fresh insights:

THERE IS, SAID AN ITALIAN PHILOSOPHER, NOTHING MORE DIFFCULT TO TAKE IN HAND, MORE PERILOUS TO CONDUCT, OR MORE UNCERTAIN IN ITS SUCCESS THAN TO TAKE THE LEAD IN THE INTRODUCTION OF A NEW ORDER OF THINGS.

FIRST, THERE IS THE DANGER OF FUTILITY, THE BELIEF THAT NOTHING ONE MAN OR ONE WOMAN CAN DO AGAINST THE ENORMOUS ARRAY OF THE WORLD’S ILLS, AGAINST THE MISERY AND IGNORANCE, INJUSTICE AND VIOLENCE. YET MANY OF THE WORLD’S GREATEST MOVEMENTS, OF THOUGHT AND ACTION, HAVE FLOWED FROM THE WORK OF A SINGLE MAN. FEW WILL HAVE THE GREATNESS TO BEND HISTORY ITSELF, BUT EACH OF US CAN WORK TO CHANGE A SMALL PORTION OF EVENTS, AND IN THE TOAL OF THOSE ACTS WILL BE WRITTEN THE HISTORY OF THIS GENERATION. IT IS FROM THE NUMBERLESS DIVERSE ACTS OF COURAGE AND BELIEF THAT HUMAN HISTORY IS SHAPED.

EACH TIME A MAN STANDS UP FOR AN IDEAL, OR ACTS TO IMPROVE THE LOT OF OTHERS, OR STRIKES OUT AGAINST INJUSTICE, HE SENDS FORTH A TINY RIPPLE OF HOPE AND CROSSING EACH OTHER FROM A MILLION DIFFERENT CENTERS OF ENERGY AN DARING, THOSE RIPPLES BUILD A CURRENT WHICH CAN SWEEP DOWNTHE MIGHTIEST WALLS OF OPPRESSION AND RESISTANCE.

THE SECOND DANGER IS THAT OF EXPEDIENCY: OF THOSE WHO SAY THAT HOPES AND BELIEFS MUST BEND BEFORE IMMEDIATE NECESSITIES.  (BUT THERE IS ) ALSO THE BELIEF THAT IDEALISM, HIGH ASPIRATIONS AND DEEP CONVICTIONS ARE NOT INCOMPATIBLE WITH THE MOST PRACTICAL AND EFFICIENT OF PROGRAMS – THAT THERE IS NO BASIC INCONSISTENCY BETWEEN IDEALS AND REALISTIC POSSIBILITIES, NO SEPARATION BETWEEN THE DEEPEST DESIRES OF HEART AND OF MIND ASND THE RATIONAL APPLICATIONOF HUMAN EFFORT TO HUMAN PROBLEMS. OF COURSE TO ADHERE TO STANDARDS, TO IDEALISM, TO VISION IN THE FACE OF IMMEDIATE DANGERS TAKES GREAT COURAGE AND TAKES SELF-CONFIDENCE. BUT WE ALSO KNOW THAT ONLY THOSE WHO DARE TIO FALL GREATLY CAN EVER  ACHIEVE GREATLY.

A THIRD DANGER IS TIMDITY. FEW MEN ARE WILLING TO BRAVE THE DISAPPROVAL OF THEIR FELLOWS, THE CENSURE OF THEIR COLLEAGUES, THE WRATH OF THEIR SOCIETY. MORAL COURAGE IS A RARER COMMODITY THAN BRAVERY IN BATTLE OR GREAT INTELLIGENCE. YET IT IS THE ONE ESSENTIAL VITAL QUALITY OF THOSE WHO SEEK TO CHANGE A WORLD WHICH YIELDS MOST PAINFULLY TO CHANGE.

FOR THE FORTUNATE AMONG US, THE FOURTH DANGER IS COMFORT, THE TEMPTATION TO FOLLOW THE EASY AND FAMILIAR PATHS OF PERSONAL AMBITION AND FINANCIAL SUCCESS SO GRANDLY SPREAD BEFORE THOSE WHO HAVE THE PRIVILEGE OF EDUCATION. EVERYONE HERE WILL ULTIMATELY BE JUDGED – AND ULTIMATELY JUDGE HIMSELF – ON THE EFFORT HE HAS CONTRIBUTED TO BUILDING A NEW WORLD SOCIETY AND THE EXTENT TO WHICH HIS IDEALS AND GOALS HAVE SHAPED THAT EFFORT.

In response to these passages, I believe that it is time for us in the industry to adopt what I refer to as 5 senses:

1.Sense of Urgency
The problems besetting the industry require our urgent response and action. We cannot continue to put off for tomorrow finding solutions to these problems hoping that either they sort themselves out or a knight in shining armor will come in to provide the solutions for us. So we must not be paralyzed into inaction, as I said earlier, simply because of the enormity of the problems or what we sense as the futility of our efforts.

2. Sense of Sacrifice
If we want to change the things that we see as wrong or ineffective, we must take the necessary steps to correct them. But in doing so we must be prepared to in a sense “shed some blood” for that is the price we may have to pay in pursuing what we believe will be for a greater good. Losing business in the short term should be acceptable if it means making more money from better business conditions in the long term. When NationalRe introduced minimum Cat rates several years ago, we did so with open eyes. We knew that we would not be able to get the whole market to agree nor convince foreign reinsurers writing business in the Philippine market to support our position. But we felt that the loss of some business was still worthwhile if we could at least do something to try to change the situation for the better. We did lose some business, from very good companies at that, but that was the price we knew we had to pay for what we believed in.

3. Sense of Ownership
We chose this industry. This is our industry. This is the industry that has given us our livelihood and fed, clothed and sheltered us and our families. Why shouldn’t we exert every effort to take good care of it and protect it from self-destruction? Why kill the goose that lays the golden eggs? In Tagalog, we can say “ Atin ito, alagaan natin ito, panatilihin nating maayos at masagana ito.

4. Sense of Community
Having chosen this industry, we are all in this together. We sink or swim together. Whatever we do, or perhaps even more importantly, whatever we don’t do, will affect the rest. The success of one is the success of all just as the failure of one may lead to the failure of all.
 
5. Sense of Legacy
What do we want to bequeath to the younger generation of insurance professionals who will come after us and who may even include our own children, relatives and friends? Do we want to leave them with an industry that they can build on and bring to greater heights? Or do we want them to curse us for leaving behind an industry in tatters, in danger of collapse that they will have to spend a great deal of time and effort to fix before they can even benefit from it as we have?

To conclude, one of my friends in the US asked me before I left for the Philippines, “are you not jumping from the frying pan into the fire” by going back? I just smiled and replied., “I am not sure but what I think I can be sure of is that if I do my best and leave the rest to the One above, I may succeed”. 

Besides, I have now found a prayer that can guide me in what I have to do. It is a prayer composed by St. Francis and I have paraphrased it as follows:

LORD GIVE ME THE COURAGE AND STRENGTH TO CHANGE THE THINGS I CAN, THE SERENITY AND GRACE TO ACCEPT WHAT I CAN’T … AND THE WISDOM TO KNOW THE DIFFERENCE.

Thank you very much and have a pleasant afternoon ahead.