RATINGS AGENCY AM Best gave a stable outlook to the local nonlife insurance sector, citing robust long-term growth prospects, firms’ higher minimum net worth requirement and wider adoption of technology.

AM Best said in a report released on Thursday that a stable outlook means the ratings body expects market trends will have a “neutral influence” on local nonlife insurers over the next 12 months.

“Our outlook is stable, underpinned by long-term growth prospects and positive regulatory developments,” it said.

The long-term outlook shows the industry still has solid growth prospects, supported by the country’s rising gross domestic product per capita, to drive demand and the insurance penetration rate.

AM Best noted that the increased minimum net worth requirement of regulator Insurance Commission (IC) means many nonlife insurers, especially mid-tier companies, have to carry out fundraising exercises or consolidate to meet the mandated P1.3 billion by 2022.

“AM Best notes that without additional fundraising actions, about half of the direct nonlife insurers in the market will not be able to meet the P1.3 billion capital requirement by the stipulated deadline,” it said.

Smaller firms will struggle to find investors given their niche business models and small premium bases, the agency said.

“As such, AM Best expects the appetite for M&A (mergers and acquisitions) activity involving smaller nonlife insurance companies to be low, making it probable that a number of these companies may be ordered to wind up in the event they cannot meet the minimum net worth requirement by 2022,” it added.

The ratings firm said the increased minimum net worth requirement is a “credit positive” for the industry as it is expected to improve its overall mid-term prospects by strengthening companies’ capital positions.

The IC’s move to allow the remote selling of insurance products could also boost the sector’s growth as it gives firms a chance to widen their customer reach and distribute higher value policies digitally.

“In AM Best’s view, while capital management and regulatory support can help the insurance market survive the pandemic, it is digital transformation that will enable the insurers to recover and remain competitive. Nonetheless, the increased use of digital solutions and interfaces also present new risks for insurers to manage, including technology and cyber risks, which will require robust security controls,” it said.

Despite the rosy outlook, the insurance ratings agency said downside risks remain for the sector, such as the impact of the ongoing global health crisis, the country’s high risk of natural disasters, and strong market competition.

AM Best said the ongoing coronavirus pandemic will continue to challenge the nonlife sector in the near term as the severe slowdown in the economy and weakening investment market conditions could affect insurers’ incomes.

“Although nonlife insurers have made progress in adapting to the current environment by bolstering their infrastructure and use of digital solutions to be able to operate in a remote manner, potential future waves of infection are likely to be met with further movement restrictions in the country,” it said. 

The Philippines being a disaster-prone country is also a risk for the sector, AM Best said. It said it expects the nonlife industry to improve its capacity for modeling and managing underwriting risks, including consideration of catastrophe risk accumulation, with the help of technology. The ratings agency said it will also monitor local firms’ ongoing partnerships with global reinsurers in managing these risks.

The IC has said it plans to launch the first Philippine Catastrophe Insurance Facility this year to help the nonlife sector better manage disaster-related exposures and expand the sector’s capacity to take on more risks. — Beatrice M. Laforga