MANILA, Philippines - Credit rating agency Fitch expects mergers and acquisitions in the Philippine insurance industry, amid stiff competition.
In a report on the Philippine insurance sector, Fitch said the local market is "saturated and competitive with a tendency towards predatory pricing."
"Fitch expects the market to be hit by a wave of M&A, especially for those insurers that fail to meet the minimum capital requirements by the stipulated deadlines with the tightened capital regime, coupled with stiff competition. Robust macroeconomic conditions and potential premium growth are also some of the favorable factors that would spur foreign investors to embark upon M&A activity," it said.
Fitch said more insurers, whose profits have come under pressure, "will exit or merge with rivals in the next few years." This after the Department of Finance's move last June 2012 to raise capital thresholds on insurers operating in the Philippines to bolster overall industry capitalization.
Fitch said the Philippines' insurance sector has enough room for premium growth, but the non-life sector’s "moderate" growth is expected to continue due to higher claims from catastrophes and heavy taxes.
On the other hand, life insurance has better prospects due to low penetration rate, loss ended bancassurance rules, and increasing urbanization.
However, Fitch said the greatest risk faced by Filipino insurers is "catastrophe" risk. The Philippines was ranked the third most disaster-stricken country in the world in the 2012 World Disaster Report.
"Fitch views catastrophe risk as the most significant risk faced by Filipino insurers, and it is therefore no less than crucial for companies, industry and government to strengthen their catastrophe risk management structure.
It noted that natural hazards, if improperly managed, can create volatility in the underwriting performance of individual insurance companies.
The Insurance Commission last December said the total claims from super typhoon "Yolanda" would likely result in a net loss for the non-life sector in the fourth quarter of 2013.
"Yet Fitch believes that the disaster is unlikely to cripple overall industry growth – given the stellar premium growth posted by the life sector in 9M13, and the Philippines’ very low penetration rate," Fitch said.