Disaster insurance prices

Product pricing is always a difficult task. Vehicles, goods, and even food products can add the cost of raw materials, labor, and other items to the total cost. But pricing services and other intangibles is a big challenge. How to calculate the cost of an airline ticket, franchise fees, honoraria and other services? How do you protect the price? How do insurance companies calculate the price of a fire policy that protects properties from basic hazards such as fire, lightning, and similar hazards? The process is long and tedious. Many factors are taken into account, such as the structure and location of the object to be insured, wind conditions, claims experience and other relevant factors. A property insurer and insurance broker friend of mine said he wishes he could be like fortune tellers who can predict when and where typhoons, floods and other disasters will happen.

The Philippine insurance industry has been around for a very long time and should be considered the expert in property and casualty insurance pricing. But there is no such requirement. Changes happen every day, especially climate change. About 15 typhoons hit the Philippines each year, and the number appears to be increasing. We had the storm surges, the big typhoons that cause a lot of flooding in several places in the country. Earthquakes have occurred in multiple locations in Mindanao, Quezon and even Bicol provinces! Our weather experts have warned us of stronger ones so we can prepare if they do happen. However, we hope and pray that we are spared what they call the “Big One”.

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The price of protection has skyrocketed worldwide and supply is beginning to dwindle due to climate change. Our own government has recognized the importance of this issue and set up its own climate commission under the office of the President. The Commission’s task is to develop strategies and measures to combat the catastrophic effects of climate change. Among those identified are sea level rise, extreme rainfall, coastal erosion, the increasing frequency and severity of tropical cyclones, among others.

In this scenario, the insurance industry has decided to establish and implement the Philippine Insurance Catastrophe Insurance Facility (PCIF). The insurance industry and regulator want to provide maximum protection against catastrophic hazards such as typhoons, floods and earthquakes, ideally for the entire population of the country. For this reason, tariffs need to be reviewed to make them more risk-sensitive and sustainable. Minimum rates need to be mandated so that price competition is controlled and acceptable to the global reinsurance market. Given the risks and the frequency with which they occur, reinsurance will not come cheap.

Referring to House Resolution 632, introduced by Rep. Wilbert T. Lee at the 19th Congress, directing the relevant House Committee to conduct “an investigation in support of legislation into the abrupt, unreasonable and untimely increase in premium rates to carry out for catastrophe insurance”, … (italics mine). It is unfair to accuse the Insurance Commission, the PCIF and the insurance industry in general of being abrupt and unreasonable in this regulation. The industry body, the Philippine Insurers and Reinsurers Association, with the support of actuarial experts and global reinsurers, has conducted a long and serious review and study of these rates. Understandably, consultations with consumer organizations and the insurance public are difficult due to the technical issues involved. Insurance pricing cannot be compared to the pricing of commodities such as sugar, onions and agricultural produce.

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We hope that Congress will schedule another hearing with disaster risk experts invited. We also propose that representatives from the Climate Commission and the Ministry of Environment and Natural Resources be invited to provide the data based on their research and experience. This will be a good opportunity for our legislators to recognize insurance’s role in protecting our employees and their property.