An in-depth analysis done by the Insurance Commission (IC) on the financial status of the Philippine Crop Insurance Corp. (PCIC) shows that the latter’s high net retention rate or number of policies it currently has on hand places it at risk of suffering heavy losses once major catastrophic events occur, which would eventually be shouldered by the taxpayers.

Given this precarious financial position, the IC has recommended that the PCIC revisit its overall risk management program and include reinsurance among its risk transfer mechanisms to better manage its risks and avoid the scenario of heavy capital infusions from the government to cover possibly large-scale losses in the future.

The IC noted that as “early as 2010, the PCIC stopped ceding its risk to the NRCP (National Reinsurance Corp. of the Philippines).”

It said the PCIC also has relatively low investment income because the very high concentration of its assets are in “Cash in Bank and Time Deposits, averaging around 40 percent of the total assets in the past years.”

“If the PCIC will continue this practice, the Philippine Government is expected to infuse more capital to the PCIC for it to survive should there be large-scale losses which will affect most of its insured,” the IC said in its report submitted to Finance Secretary and PCIC Chairman Carlos Dominguez.

Comparing PCIC’s business practices with the Agriculture Insurance Company of India Limited (AIC), the Commission said that while both companies incurred relatively high operating expenses from 2018 to 2019, “it is noteworthy to mention that, for PCIC, it is the net underwriting income that absorbed these expenses while for AIC, the huge investment income covered these expenses.”

AIC is deemed as the most comparable to the PCIC, based on research by the IC Benchmarking Team.

The IC noted that in India, the government has entered into a public-private partnership for its livestock insurance, and adopted a pure market-based model for its private weather index insurance.

Other countries like Vietnam, Nepal, Pakistan, Mongolia, Indonesia, China, Japan and the Republic of Korea have also adopted the PPP models for crop and livestock insurance.

Meanwhile, there were identified countries with at least two models adopted in agricultural insurance, namely Bangladesh, Nepal, Pakistan, Sri Lanka, and Vietnam.

As part of the recommendation from the review based on a report from the World Bank, the PCIC should involve the private market and should create an enabling environment for the development of private agricultural insurance. The main role of the private insurer is to correct any market imperfections that could hamper the emergence of a competitive private insurance market.

The IC also pointed out that the PCIC uses an account naming system in its financial statements not specific to an organization engaged in insurance, which makes its insurance operations difficult to comprehend.

“Premiums Earned are recorded as Service Income, whereas the Claims and Underwriting Expenses are presented as Direct Costs. The Net Assistance/Subsidy Account is presented confusingly, it is deducted from the Gross Insurance Premium Subsidy, and then added back to Net Income/(Loss) after tax,” the IC said.

The Commission recommended that the PCIC adopt IC regulations in relation to the “naming convention, presentation, and calculation as regards the preparation of their financial statements” as it could not determine if the firm has been complying with the Philippine Financial Reporting Standards (PFRS) for insurance companies.

In its report, the IC noted that the PCIC issued several board resolutions from 2018 to 2020 providing subsidies to small farmers and fisherfolk whose names are not included in the Registry System for Basic Sectors in Agriculture (RSBSA).

“According to PCIC, the existing database does not include all small farmers and fisherfolk in the country. Hence, subsidy was provided even to those not included in the RSBSA. However, the said justification was not reflected in the pertinent Board Resolutions and/or corresponding Minutes,” the IC said.

PCIC’s Manuals of Operations have also not been updated to reflect the revisions to PCIC’s policy forms and guidelines since 2011, the IC said.

“Significant differences have been noted between the pertinent Board Resolutions, and the policy forms and guidelines transmitted by PCIC for review,” the IC said.

The IC also noted that PCIC engages in lines of insurance other than crop insurance, such as credit life, term life, fire insurance, and personal accident.

It said the PCIC used as a basis for engaging in other lines of insurance its revised charter and corresponding approvals of its board.

“However, the pertinent Board Resolutions relative to PCIC’s issuing these products, as well as the corresponding basis for adopting such Resolutions, have not been submitted for review,” the IC said.

As for the pricing of its insurance products, the IC said PCIC needs to revisit its Risk Premium Rate (RPR) assumptions used in pricing the products as these may be deemed “inadequate, unreasonable, and inappropriate.”

“The Claims to RPR Ratio for the Rice and Corn Insurance Programs, which comprise 70 percent and 79 percent of premium production in 2019 and 2020, exceed 100 percent since 2018. Hence, RPR for said products are deemed inadequate. However due to the excess provision for the Administrative Cost as well as the provision for surplus reserve or profit, the Rice and Corn Insurance seems profitable,” the IC said.

It found out that the PCIC does not conduct a regular review of the premium rates of its products vis-a-vis its claim experience.

Hence, the IC recommended that the PCIC develop a Product Governance Framework that shall include, among others, product monitoring and review guidelines containing the parameters/criteria for re-pricing of products.

The IC said, “PCIC should consider engaging the services of an IC-accredited actuary in the development and pricing of its products.”

Regarding the actuarial valuation of PCIC’s reserve liabilities, the IC noted that PCIC does not set up claims reserves for incurred but Not Reported Claims. The IC also said that “The appropriateness of the method for computing the Unearned Premium Reserves (UPR) for some products offered seems questionable.”

The IC recommended that PCIC consider adopting the IC’s regulatory frameworks for life and non-life insurance and engage the services of an IC accredited actuary in performing the valuation of its actuarial reserve liabilities.

Compared to other countries, the PCIC’s agricultural insurance coverage is only limited to the cost of production input unlike in other countries where they cover the actual output of agricultural products, the IC noted.

“In Vietnam, agricultural insurance for all risks covers the actual losses caused by any risk, except for those excluded, in the agreement of the agricultural insurance contracts. This practice will enable Agri-insurance providers to meet the farmers’ real risks exposures,” the IC said.

Moreover, based on a World Bank (WB) report, the PCIC’s traditional indemnity-based insurance is only applicable to large commercial farmers and not suitable for small farmers because of operational challenges and expensive loss assessment procedures, the IC said.

“It is only for large farms that the monitoring costs and close supervision it entails become acceptable relative to premiums. In the Philippine context, a significant portion is small farmers with farms greater than 7 hectares only account for 1.8 percent of number of farms and 22.2 percent of area in the country,” the IC added.

It recommended that the PCIC revisit its products and consider other types of insurance in other countries such as index-based or parametric insurance.

“This may be the more suitable product in our case considering we have predominantly small farmers,” the IC said.

The IC also observed that the charter of PCIC was last revised in 1995 while some laws on agricultural insurance in the Asia and the Pacific region were revised recently.

This makes PCIC’s charter 15 to 25 years behind some countries with similar public sector-based Agri-insurance providers like Bangladesh, Vietnam, and India, the IC noted.

A separate analysis done by the Bureau of the Treasury (BTR) showed that PCIC’s operations are “costly”.

“Operating cost annually for the 5- year period amounts to P536.44 million with an average growth in PS (Personnel Services) of 8 percent and 24 percent in MOOE (Maintenance and Other Operating Expenses) with a combined growth rate of 18 percent. For every peso income it generated (before subsidy), it is already spending an average of P0.71 (excluding Direct Costs and Financial and Non-Cash Expenses). Further, as compared to GSIS and SSS operating cost over its total expenses of 5 percent, PCIC is high at 15 percent,” the BTr said.

The BTr also said that as admitted by the PCIC, its claims adjusters are not duly licensed by the IC, but are agriculture graduates hired by the firm and trained in-house to assess damages on their various lines of insurance.

It also pointed out that for the past 5 years, loss ratio for the PCIC’s seven regular insurance products have been increasing from 56 percent in 2016, and jumped to 69 percent by 2020 or an annual average of 65 percent.

“Of the insurance lines, rice crop accounts for the biggest loss of which in 2019, loss ratio of 97 percent almost ate up the premium receipts,” the BTr said.

The IC has submitted the above findings to the DOF on May 7, 2021. The DOF and the IC have held three meetings with the PCIC to help it address the issues and monitor its implementation of the IC’s recommendations.

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