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Facing the risk of unpredictable, natural disasters

(Article published in the May26,2003 issue of TODAY, Business Section)

The Philippines is no stranger to natural disasters.  Most Filipinos have personal memories of catastrophes that happened during their lifetime.  Mount Pinatubo, BaguioHyatt Hotel, Ruby Tower and Typhoon Dading are household names that remind us of how much we are at the mercy of Mother Nature’s unpredictable caprice. The land of the morning has time and again become, when natural calamities struck, land of mourning; the pearl of the orient seas has often, by the seas, been disoriented. Geography, of course, has a lot to do with it.

The country is traversed by a long line of volcanoes from Alaska to Japan, known as the “ring of fire”; we have 220 volcanoes dormant for the time being, but 22 of which could at any unguarded time spring to activity, as Mt. Pinatubo did in 1991.  Mayon and Taal every now and then give out ominous smoke, frequently reminding us that flaming rocks swirl underneath their gentle slopes and placid lakes.  

Our mountain ranges, long the poet’s symbols of constancy and permanence, belie the shifting plates under the soil we walk on.  Because the country is along a major earthquake fault, we have an average of 887 tremors yearly, some of which in a matter of seconds had brought down homes and buildings built by a lifetime of toil and sacrifice, crushing dreams and dreamers in blind rage. 

 










From May to December, about 20 typhoons form every year in the Pacific Ocean and rip through our eastern coasts and, going west-north-west through our nation’s belly, leave a wake of flood and famine, before exiting to the China Sea.   

Despite our significant exposure to the risk of natural disasters, however, we do not have an efficient and systematic way of spreading that risk and managing the consequences of its occurrence.  Because catastrophes, almost by definition, do not occur frequently, although our country has had more than its global share in recent times, they are not among our national priorities (we would rather waste time and effort in charter change or “cha cha”) and great is the temptation among our official planners to succumb to the allures of “bahala na”.  To date, as far as I know, we primarily rely on government to initially provide humanitarian relief as soon as catastrophes occur and, after government resources have run out and the charitable organizations have done their corporeal acts of mercy, we opt to leave the victims to their own devices in rebuilding their lives and picking up the pieces.  Such a system of coping, however, is a sad commentary on how far we have gone, as a nation, in nurturing our nation and ensuring its survival.  

While victims can be expected to have made some provisions for slight to moderate changes in the temper of Mother Nature, not any one, not even the wealthiest of us, nor the country as a whole can absorb without debilitating injury the full impact of a major catastrophe.  Imagine, for instance, what the consequences and implications would be if, heaven forbid, a strong earthquake, similar to Kobe’s, were to bring down just one third of all the homes and the major high rise buildings in all of Metro Manila.  Set aside, for a moment, if we could, the weeping for the dead ones.  Still, government, with its yawning budget deficit even in these “normal” times, would be hardly capable of spending spend money in amounts anywhere near the magnitudes needed to put back the political and commercial capital city on its feet.  The private sector as it stands now, on the other hand, would be too stunned not only by the impact of the physical damage on its property, but, and more so, by the financial disruption and chaos such a disaster would bring.  Indeed, we are far from being prepared to meet the challenge of a catastrophe should it, heaven forbid, occur in the near term. 

Fortunately, some have given the matter some thought and are seriously studying the feasibility of promoting in the Philippines what is known as “catastrophe insurance”. Eugene N. Gurenko, member of the World Bank mission that came to town recently for a look-see of the situation and the source of my data on catastrophe insurance programs elsewhere, tells me over lunch that several local insurers are mulling over the idea of a catastrophe insurance pool among themselves.  The pool is meant to address the structural weakness in our present non-life insurance market that is marked by minuscule catastrophe coverage of residences most of which are funded by borrowed funds and by  limited risk bearing capacity of the domestic market resulting in dependence on international insurers for claim paying capacity, exposing the payors, in turn, to the notorious volatility of the international reinsurance premium rates. 

Government intervention, whether we like it or not, is essential to moving the concept from mere analysis (which has often ended in paralysis) to implementation.  Our government itself may not be in a position to provide full funding support, but that is not peculiar to our country.  Other countries, with governments as impoverished as ours, have encouraged and, in fact, participated in varying programs intended to face the challenges of their local insurance markets in insuring the risk of national disasters. 

Among the more well-known programs that we can consult are the Turkey Catastrophy Insurance Pool against earthquake; the Catastrophe Naturelles in France against all natural disasters except for windstorm, ice and snow; the Japanese Earthquake Reinsurance Company  against earthquake, tsunami and volcanic damage, the Earthquake Commission in New Zealand against earthquake, tsunami, volcanic damage and landslide; the Norsk Naturskadepool in Norway against floods, storms, earthquakes, avalanches, and tidal waves, the Consorciode Compensacion de Seguros in Spain, against earthquake, tidal waves, floods, volcanic eruptions and cyclonic storms, and the Taiwan Residential Earthquake Insurance Pool against earthquake.  In the United States there is Florida Hurricane Catastrophe Fund, the Hawaii Huricane Relief Fund and the California Earthquake Authority. California looks interesting since it is from California that we copied our insurance law. 

There are obvious similarities in these programs of other countries.  They concentrate on specific natural hazards; they have a regional focus; coverage is mainly for dwelling and their contents; premium rates tend to reflect characteristics of the risk, though some solidarity is attained by cross-subsidies from better risks to worse risks; generally, no direct government subsidy is involved; mitigation is not a major feature; and sales and servicing are done through the existing network of private insurance companies. 

A major point of interest for us is what role the government is to play in the pool.  The experience of other countries supports the idea of giving government a strong say in the management of the pool, from being the manager of the pool, as in the case of France and California to merely having a strong representation in the privately dominated board.  But the unique and crucial role the government is made to play is that of a “re-insurer of last resort”.  This means that the government is called upon to guaranty all claims in excess of the paying capacity of the pool.  Despite government credibility being at its present low ebb, government, we have to recognize, is still the only institution that can fulfill the promise of security made by catastrophe insurance, because of its unequalled capacity to tax and borrow, which really is merely postponed taxation. 

There are other major issues that must be faced before the pool is finally set up, --such as whether coverage should be compulsory or voluntary; how to make premium rates affordable; whether coverage should extend beyond home and its contents to business establishments and business interruption; level of reinsurance to be purchased, etc., but the store of international experience on catastrophe insurance is available for us to consult and draw wisdom from.  I am, of course, not suggesting here a study-observation tour for legislators during their session recess at the expense of the taxpayer; but, if they can convince AGILE to finance it, I will, naturally, not object. 

Regardless of how the eventual design of the country’s catastrophe insurance pool is arrived at, however, there is no doubt that the country stands to benefit from its establishment.  The pool would increase the risk absorbing capacity of the local insurers, reduce the adverse impact of natural disasters on homeowners and their lenders, minimize the financial cost of the government’s relief and reconstruction duties, and raise the capacity of the domestic insurance industry to the next level, expanding both its coverage and deepening its penetration.

A long and difficult road still lies ahead on the way to providing our people with affordable catastrophe insurance.  But take it the country must, if we really want security for ourselves and our loved ones.  Not taking that long and difficult road would itself be, for us and our children and our children’s children, a catastrophe of major proportions.       
     

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