STRUCTURING A PUBLIC-PRIVATE EARTHQUAKE INSURANCE COMPANY IN THE PHILIPPINES

1. STRUCTURING A PUBLIC-PRIVATE EARTHQUAKE INSURANCE COMPANY IN THE PHILIPPINES A PRESENTATION TO THE PHILIPPINES INSURANCE AND REINSURANCE ASSOCIATION MANILA, OCTOBER 2013

2. WHY EARTHQUAKE AND NOT OTHER PERILS • OF ALL THE NATURAL PERILS, EARTHQUAKE HAS THE MOST DEVASTATING EFFECT ON • THE MOST NUMBER OF PEOPLE • AND BUSINESSES • AND PROPERTIES • AND THE GOVERNMENT BALANCE SHEET • AND THE COUNTRY’S ENTIRE FINANCIAL SYSTEM

3. THE PHILIPPINES IS AMONGTHE COUNTRIES MOST VULNERABLE TO NATURAL HAZARDS: EARTHQUAKE RISK IN THE NCR CAN AFFECT UP TO 32.5% of GDP Philippines: Economic Exposure Modeled amount of GDP (Gross Domestic Product) present in hazard zones that are thereby subject to potential losses. EM-DAT: The OFDA/CRED International Disaster Database – www.emdat.be – UniversitéCatholique de Louvain, Brussels.

4. OBJECTIVE & DEFINITION OF THIS PROGRAM • TO PROVIDE A LEVEL OF INSURANCE TO THOSE FOR WHOM, CURRENTLY, EARTHQUAKE INSURANCE COVERAGE MAY NOT BE AVAILABLE OR WHO ARE NOT AWARE OF ITS EXISTENCE • TO RELIEVE, TO THE MAXIMUM EXTENT POSSIBLE, THE FINANCIAL BURDEN ON GOVERNMENT IN THE EVENT OF AN EARTHQUAKE DISASTER • TO PROTECT AND INSURE, TO THE MAXIMUM EXTENT POSSIBLE, LIABILITIES OF THE RETAIL BANKS OF THE PHILIPPINES I RESPECT OF MORTGAGES GRANTED TO THEIR CUSTOMERS IN THE DEFINED CONSUMER BRACKETS

5. WHAT DEFINES ‘MIDDLE CLASS & SME’? • A PRIVATE DWELLING, OCCUPIED AS SUCH, VALUED, BY PURCHASE PRICE OR OTHER PROFESSIONAL MEANS, WITHIN A RANGE OF PhP3 MILLION TO PhP12 MILLION.** • A SMALL OR MEDIUM SIZED BUSINESS ENTITY DEFINED AS SUCH UNDER THE PHILIPPINES FINANCIAL REPORTING STANDARDS FOR SMEs, EFFECTIVE 1 JANUARY 2010, THE HEADLINES OF WHICH ARE; • AN ENTITY HAVING TOTAL ASSETS OF BETWEEN PhP3 MILLION AND PhP350 MILLION OR TOTAL LIABILITIES OF BETWEEN PhP3MILLION AND PhP250 MILLION • NOT REQUIRED TO FILE FINANCIAL STATEMENTS UNDER SRC RULE 68.1 • NOT THE HOLDER OF A SECONDARY LICENSE • NOT A PUBLIC UTILITY ** **SUBJECT TO DISCUSSION AND AGREEMENT BY TECHNICAL COMMITTEE AND OTHERS

6. WHY ONLY MIDDLE CLASS & SMES? • OTHER GROUPS ARE CATERED FOR BY OTHER MARKETS; • THE LESS FORTUNATE CAN RELY ON SOME LEVEL OF GOVERNMENT SUPPORT IN THE EVENT OF DISASTER • THOSE WELL OFF HAVE ACCESS TO EITHER INSURANCE OR SELF FINANCING • AS DOES ‘BIG BUSINESS’ • THE MIDDLE CLASS HOME OWNER MAY HAVE ACCESS TO SOME LEVEL OF INSURANCE BUT TAKE UP AND AWARENESS ARE BOTH TOO LOW FOR FINANCIAL COMFORT.

7. WHY SHOULD THERE BE AN EARTHQUAKE PROGRAM? • GOVERNMENT SHOULD BE INVOLVED FOR THE COMMON GOOD AND PRUDENT FINANCIAL MANAGEMENT.THE PROGRAM CAN SAVE $BILLIONS ON THE GOVERNMENT BALANCE SHEET IN THE EVENT OF DISASTER. IT WILL NOT SOLVE ALL OF THE FINANCIAL STRAINS THAT A CATASTROPHE BRINGS BUT CAN HELP WITH IMMEDIATE FINANCIAL RELIEF. • THE INSURANCE INDUSTRY SHOULD BE INVOLVEDTO INCREASE PUBLIC AWARENESS OF THE BENEFITS OF INSURANCE, IN ORDER TO ENHANCE THE INDUSTRY’S PROFILE AND FOR ADDITIONAL FINANCIAL BENEFIT. • FINANCIAL INSTITUTIONS SHOULD BE INVOLVED TO PROTECT THEIR BALANCE SHEETS • THE PUBLIC SHOULD BE INVOLVED FOR PEACE OF MIND

8. WHAT WERE THE OPTIONS CONSIDERED • GOVERNMENT OWNED CATASTROPHE REINSURER. Compulsory cession from all local underwriters. • GOVERNMENT OWNED DIRECT INSURER. • PUBLIC / PRIVATE TRADITIONAL CO-INSURANCE POOL. Government managed. • PUBLIC / PRIVATE TRADITIONAL CO-INSURANCE POOL Independently managed. • PUBLIC / PRIVATE OWNED CATASTROPHE REINSURER. • PUBLIC / PRIVATE OWNED DIRECT INSURER. Local market participation through equity (voluntary) and distribution.

9. GOVERNMENT OWNED ENTITIES • THE PRIMARY OBJECTIVE OF THE PROGRAM IS TO TAKE FINANCIAL RISK OFF THE GOVERNMENT BALANCE SHEET. • FOR THIS REASON ALONE, THE OPTIONS OF A GOVERNMENT WHOLLY OWNED INSURER / REINSURER WERE DISCOUNTED. • IN ADDITION, HOWEVER, SUCH SCHEMES COULD ALSO • DILUTE GROSS AND NET PREMIUM INCOME TO THE LOCAL MARKET • CREATE SUSPICION OF SELECTIVE ‘TAX RAISING’ AMONGST THE PUBLIC • REQUIRE SIGNIFICANT ADDITIONAL AUDIT AND COMPLIANCE TRAILS • CREATE POLITICAL CHALLENGES REGARDING CLAIMS SETTLEMENT IN THE EVENT OF A DISASTER

10. TRADITIONAL CO-INSURANCE POOLS • A PUBLIC / PRIVATE CO-INSURANCE POOL WHICH WAS MANAGED BY A GOVERNMENT ENTITY WAS CONSIDERED TO BE UNWIELDY AND ADMINISTRATIVELY COMPLEX. • THE GOVERNMENT AGENCIES INVOLVED AGREED WITH THIS VIEW • IN ADDITION, THE MARKET, THROUGH PIRA COULD NOT ACCEPT A SITUATION WHERE THEIR FUNDS AND RISKS WERE MANAGED BY A THIRD PARTY. • A STRONG CASE FOR A PRIVATELY MANAGED POOL (SIMILAR TO THE EXISTING MACHINERY POOL)WAS MADE BUT, AFTER CONSIDERABLE DISCUSSION, WAS DISCOUNTED.

11. REASONS FOR DISCOUNTING A PUBLIC / PRIVATE POOL MANAGED BY THE MARKET • A CATASTROPHE POOL IS DIFFERENT FROM A ‘NORMAL’ POOL WHERE ATTRITIONAL LOSSES ARE ROUTINELY PAYABLE AND THERE CAN BE A CLEAR ACTUARIAL (PREMIUM / CLAIMS/ RESERVES/ INVESTMENT) TREND FOR RATING. • BECAUSE OF THE RISK CAPITAL INVOLVED, CATASTROPHE POOLS REQUIRE AN INTERNATIONAL CREDIT RATING TO OBTAIN REINSURANCE SUPPORT. • IN JUNE, 2013, THE CREDIT RATING AGENCIES WHICH WOULD SPECIFICALLY PRECLUDE THE ESTABLISHMENT OF AN INTERNATIONALLY ACCEPTABLE POOL IN THE PHILIPPINES AND WOULD PLACE TOO GREAT A BURDEN ON THE INDIVIDUAL MEMBERS.

12. THE REVISED DEFINITION OF A ‘POOL’ ‘........ANY ENTITY, AGENT OR CONTRACTUAL AGREEMENT THAT PROVIDES A MECHANISM FOR COLLECTIVE ACCEPTANCE AND SHARING, EQUAL OR OTHERWISE, OF INSURANCE RISK AMONGST ITS MEMBERS. THE MEMBERS (WHICH CAN ALSO BE REFERRED TO AS OWNERS OR SHAREHOLDERS) ARE THE ULTIMATE GUARANTORS OF THE POOL, ASSUMING ALL LIABILITIES ARISING FROM THE POOLING ARRANGEMENTS.

13. PUBLIC / PRIVATE REINSURANCE COMPANY • THIS OPTION WAS CONSIDERED CAREFULLY AND AT LENGTH BUT WAS FINALLY DISCOUNTED. • WITH THE EXPECTED INCREASE IN BUSINESS BROUGHT ABOUT BY COMPULSORY INSURANCE, MANY OF THE DIRECT INSURERS WITH A SMALLER CAPITAL BASE (AND EVEN MANY OF THE LARGER ONES) WOULD STRUGGLE TO MAINTAIN MARGINS OF SOLVENCY / RBC REQUIREMENTS • A DOMESTIC REINSURER IS JUST ANOTHER ‘LINK IN THE CHAIN • LACK OF INTERNATIONAL CREDIT RATING WOULD PRECLUDE MANY LOCAL INSURERS FROM EQUITY PARTICIPATION • THERE COULD BE ANOMALIES IN CLAIMS SETTLEMENT IN THE EVENT OF A CATASTROPHE

14. PUBLIC / PRIVATE DIRECT INSURER • A NEW, HIGHLY CAPITALISED, MONO-LINE DIRECT CATASTROPHE INSURER STANDING ALONG SIDE THE EXISTING INSURANCE MARKET CAN PROVIDE THE SECURITY REQUIRED BY THE INSURING PUBLIC • IT WILL RELIEVE THE EXISTING MARKET OF CAPITAL AND SOLVENCY CONCERNS IN WRITING AN INCREASED VOLUME OF BUSINESS • BY UTILISING EXISTING DISTRIBUTION CHANNELS, IT WILL COMPENSATE THE MARKET THE MARKET FOR LOSS OF GWPI BY INCREASING NET PROFITABLILITY THROUGH COMMSSIONS AND PORTFOLIO TRANSFER FEES • THERE WILL BE SPEED AND UNIFORMITY IN CLAIMS PAYMENTS • EQUITY PARTICIPATION OPPORTUNITIES • LIMITED GOVERNMENT PARTICIPATION TO ASSIST IN CREDIT RATING • ANOTHER EXAMPPLE OF PHILIPPINES ECONOMIC MATURITY

15. THE WAY FORWARD – WORKING SUB-GROUPS AND RESPONSIBILITIES • LEGAL – DRAFTING AND MANAGEMENT OF COMPULSORY INSURANCE LEGISLATION AND NEW INSURANCE COMMISSION & ANY OTHER NECESSARY REGULATION • FINANCIAL – THE ROLE OF ADB. CAPITAL AND STRUCTURE, CREDIT RATING, RATING AND ACTUARIAL, ERM & CORPORATE GOVERNANCE • TECHNICAL – POLICY COVERAGE, WORDINGS, REINSURANCE & PORTFOLIO TRANSFER • DISTRIBUTION – USE OF EXISTING CHANNELS, DIRECT MARKETING, CONSUMER EDUCATION, DRMM & RECOVERY

16. Board of Directors Management Team REINSURANCE PROGRAM EQUITY PARTICIPATION FROM LOCAL & INTERNATIONAL PRIVATE SECTOR EQ Insurance Company of the Philippines (EPIC) ADB PARTICIPATION THROUGH /FOR/WITH GOVERNMENT AS DEEMED APPROPRIATE Compulsory Earthquake Insurance Policy 100% Distributor MARKET TARGETTED: RESIDENTIAL & SME RISKS PRIVATE Insurance Companies Local companies and their shareholders may be invited to participate as equity stakeholders Local insurers may be recognised in policies / certificates of insurance ALL Building Owners Shall be Required By LAW to be insured Against Earthquake

17. (EVEN) IF YOU LIVE ABOVE THE PROPERTY THRESHOLDONE SINGLE STROKE OF FATEONE ACCIDENT, CALAMITY OR CRISISCAN SEND YOU FALLING(BACK) THROUGH THE CRACKSSENATOR ‘SONNY’ ANGARA, APRIL 2013THANK YOU FOR COMING TODAY.