Philippine Catastrophe Insurance Facility (PCIF) means less risk ceded to reinsurers (to begin)

The Philippines is expecting to have a new private sector catastrophe insurance risk pooling facility in operation this quarter, with the initial launch of the Philippine Catastrophe Insurance Facility (PCIF) expected in Q1 2021.

The Philippines Insurance Commission said that the new Philippine Catastrophe Insurance Facility (PCIF) will be the first private sector focused disaster risk financing initiative of scale, allowing all insurers to pool their disaster risks and therefore benefit from efficiencies.

Commissioner Dennis Funa explained that the PCIF has been established by the Insurance Commission, working alongside the National Reinsurance Corp. of the Philippines (Nat Re) and the Philippine Insurers and Reinsurers’ Association (PIRA).

Through the facility, non-life insurers will be able to cede a portion of their catastrophe risks, with the results being a more diversified and larger pool, which will allow the facility to benefit from economies of scale.

However, rather than seeking international reinsurance for this pool of catastrophe risk, the idea is to allow the PCIF to share the pooled risks back to the non-life insurers.

The idea is to help the insurers more efficiently manage their catastrophe exposures, presumably by giving them a slice of the more diversified pool instead of their own more concentrated risk portfolio, which the Commission believes will boost their capacity to take in more catastrophe risks.

“We recognize the significant role that the non-life insurance industry should play in ensuring the Philippines’ catastrophe resilience and in bridging the catastrophe insurance gap that we need to urgently address as our country is among the most vulnerable to the onslaught of natural calamities,” Funa said.

“The PCIF also aims to create a more risk-appropriate rating environment that would ensure sustainable catastrophe premium rates and provide the public wider access to catastrophe insurance protection,” Funa further explained.

The strategy is designed to see more risk stay onshore in the Philippines, along with the risk premium, rather than being transferred internationally to global reinsurance companies.

This goes against a lot of the theories around management of catastrophe risk, with most in the industry believing that retaining all the risk within a country can actually be negative when major disaster strike.

But the strategy of pooling and mixing the risks, then sharing a pro-rate slice of that pool back does have some merit.

The question is what happens when the pool becomes so large that catastrophe risk concentrations build-up and insurers would normally benefit from reinsurance protection.

But at this point, perhaps the Philippine Catastrophe Insurance Facility (PCIF) could look to the capital markets for reinsurance, such as in catastrophe bond form, perhaps benefiting from the appetite of the capital markets and economies of scale to cede a layer of risk from the PCIF more economically.

It’s an interesting model being taken by the Philippines, quite distinct from other regions where catastrophe risk pools aggregate the exposure to then cede it to reinsurance capital more cost effectively.

“The goal of the PCIF is to pool resources available in the country to keep most of the funds here and enable non-life insurers to grow the premium base, which would then allow them to expand the range of catastrophe insurance products available to Filipinos,” the Commission said.

Which does suggest that, in time, as the premium base grows, there will come a point where collective reinsurance will be the only solution, to prevent the PCIF from building up too much exposure.

So perhaps the idea here is to aggregate risk, mix, benefit from diversification and share, then reinsure some in the future as the risk pool develops and gains greater scale.