Recognizing the dangers of undercutting premium rates, the Insurance Commission ordered recently all insurance companies to observe the minimum prescribed rates in insuring their houses and other properties against natural calamities.
In his circular number 21-2010, Insurance Commissioner Santiago Ranada said undercutting rates would jeopardize the financial solvency of insurance companies and their ability to settle claims.
He also noted that the top insurance companies in the country relative to their property insurance portfolio have already agreed not to undercut rates and signed a “declaration of mutual covenant and undertaking” wherein they pledged to observe the prescribed rates for natural perils.
The Insurance Commission prescribes a minimum rate of 0.10 percent of the total insured amount for natural risks such as earthquakes and another 0.05 percent for typhoon and flood. These rates are added to the basic property insurance that usually covers only fire and lightning.
In the past, insurance companies were undercutting premium rates or virtually giving away the coverage for these risks for free just to get a bigger chunk of the business. Such a practice, according to Ranada, endangers the industry in the long run because it could lead to non-payment of claims by certain insurance companies due to lack of reserved funds.
In the same circular, Ranada deputized the Philippine Insurers and Reinsurers Association (PIRA) to monitor compliance and report violations.
PIRA is the umbrella organization of 85 non-life insurance companies in the Philippines.
PIRA Chairman Michael Rellosa said Ranada’s circular is beneficial to all, especially to the insuring public which relies on insurance as a tool in protecting their most precious assets such as their houses and its contents.
“By observing the correct rates, insurance companies can ensure that they will have enough funds to pay their clients if and when a natural calamity strikes,” he said.
The insurance industry paid more than P15 billion last year due to floods caused by typhoons Ondoy and Pepeng.
Rellosa noted that the public does not need to worry about the financial capability of the industry as it is strictly regulated by the Insurance Commission.
“The Philippine insurance industry is one of the most tightly regulated in the world. The only reason why a minimum rate is enforced is to prevent a bad practice from becoming a habit which in the long run can affect the ability of some companies to pay claims,” he said.
“Insurance is a device where people who face a common peril contribute to a common fund, out of which those who suffer a loss due to such peril are indemnified. We have to ensure that the common fund is enough to pay for a catastrophe such as another Ondoy or worse a major earthquake,” he added.’
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