Via Arvie Itliong

i A STRATEGIC MANAGEMENT PAPER ON AA INSURANCE SYSTEM (AIS) GENERAL INSURANCE A Strategic Management Paper Presented to the Faculty of the GRADUATE SCHOOL OF COLEGIO DE SAN JUAN DE LETRAN Intramuros, Manila In Partial Fulfillment Of the Requirements for the Degree Master in Business Administration Via Arvie A. Itliong January 2018 ii APPROVAL SHEET In partial fulfillment of the requirements for the degree MASTER OF BUSINESS ADMINISTRATION, this Strategic Management Paper entitled “A STRATEGIC MANAGEMENT PAPER ON AAA INSURANCE SYSTEM (AIS) GENERAL INSURANCE” prepared and submitted by Via Arvie A. Itliong is hereby recommended for admission to the Oral Examination. PROF. FERNANDO V. TRINIDAD III, DBA Adviser Approved by the Tribunal at the Oral Examination conducted on January 28, 2018, with the grade of PASSED. THE EXAMINING TRIBUNAL PROF. IGNATIUS N. ANAGBOGU, Ph.D. Chairperson PROF. JACKSON J. TAN, PhD Member PROF. RODELIO L.BATHAN, DBA Member PROF. MARY ROSALEEN B. AGATON, DBA Member Approved and accepted as partial fulfillment of the requirements for the degree of MASTER OF BUSINESS ADMINISTRATION. EUNICE MARETH Q. AREOLA, Ph.D. HSG Dean. iii CERTIFICATE OF ORIGINALITY In recognition for ingenuity and preservation of individual work, I hereby declare that this Strategic Management Paper entitled “A STRATEGIC MANAGEMENT PAPER ON AAA INSURANCE SYSTEM (AIS) GENERAL INSURANCE” is a product of the researcher’s inquisitiveness founded on diverse theoretical and conceptual designs. Any portion of the content of the manuscript has never been previously published nor written by another except where due acknowledgement is made. Via Arvie A. Itliong (Candidate) ___________________ (Date) Concurred by: Prof. Fernando V. Trinidad III, DBA (Adviser) ___________________ (Date) Note: This certification verifies the NOVELTY and UNIQUENESS of the content of the completed written manuscript. Completed manuscripts (evaluated and approved by a panel experts) MUST carry this documentation. iv CERTIFICATE OF ENGLISH EDITING This is to certify that I have edited this Strategic Management Paper entitled: “A STRATEGIC MANAGEMENT PAPER ON AAA INSURANCE SYSTEM (AIS) GENERAL INSURANCE” prepared by Via Arvie A. Itliong and have found it thorough and acceptable with respect to grammar and composition. Prof. Erlinda A. Cayao, EdD Pamantasang ng Lungsod ng Maynila- v CERTIFICATE OF THE CERTIFIED PUBLIC ACCOUNTANT This is to certify that I have edited this Strategic Management Paper entitled: “A STRATEGIC MANAGEMENT PAPER ON AAA INSURANCE SYSTEM (AIS) GENERAL INSURANCE” prepared by Via Arvie A. Itliong and has checked the financial analysis/statement. Erickson Elijah Q. Espejo, CPA, MBA, CFMP AAA Insurance System- vi ACKNOWLEDGEMENTS First, I would like to thank God Almighty for the guidance He gave me during my wonderful journey in doing this strategic management paper. I would also like to thank my adviser Professor Fernando “Pong” Trinidad III for his endless support and time in helping me doing this paper. Without my adviser, I would not be able to attain this success. I like to acknowledge my panelists namely, Professor Ignatius N. Anagbogu, Professor Jackson J. Tan, Professor Rodelio L. Bathan, and Professor Mary Rosaleen B. Agaton for their valuable comments and suggestions to improve my paper and to make it more presentable and reliable. I would like to thank the Dean of the Graduate School of Colegio de San Juan de Letran, Professor Eunice Mareth Q. Areola for her support and for giving me an opportunity to do this strategic management paper. Finally, I must express my very profound gratitude to my family and to my fiancé for providing me with unfailing support and continuous encouragement throughout my study, research and writing this paper. This accomplishment would not have been possible without them. vii EXECUTIVE SUMMARY The purpose of this paper is to outline a strategic management approach for a government-owned corporation. AAA Insurance System (AIS) should strategically manage itself in a similar manner to become like a well-performing private corporation. Components of the approach were developed through assessment of the impact of opportunities, challenges, strengths and weaknesses. To keep the pace with the growing industry, AIS should benchmark itself with the non-life top players. In 1951, AIS was mandated to provide non-life insurance to government property, members and pensioners thus the market base is limited as compared to the private entity. Despite of this low market share of AIS, private non-life corporations questioned the existence of non-life products of AIS. Due to similarity of products there is a strong rivalry within few large players in the non-life thus some opt to lower their premium rates. Amidst this strong rivalry, AIS General Insurance seems to have a good competitive profile because of the financial position as its number one strength. On the other hand, the company’s weakness includes the inefficiency of handling claims and the variety of products. Based on the External Factor evaluation and Internal Factor evaluation, AIS GI has above-average strength and weakness with above-average responsiveness to threats and opportunities. This means that AIS does not maximize the use of internal factors to deal with the external issues. viii The main strategic issues that AIS faces includes the internal operation of which include slow processing of claims and disorganized staffing of marketing and general insurance department which deals with non-life product transactions. Based on the analysis of external and internal factors to form various matrices, AIS should focus on market penetration strategies to help achieve its objectives and address its strategic issues and develop the existing products to help increase the income from insurance. These strategies will enable AIS to keep pace with the current industry and deliver a return to the General Insurance Fund of the country. The challenge for government entities is to build customer focused strategies that will satisfy the government and stakeholders’ needs and provide products and services that level with the private players. While opportunities for improvement exist, the AIS’s strategic management design and processes is may be used as an example to improve the potential of other government organizations and become more responsive and more accountable. ix TABLE OF CONTENTS Title Page……………………………………………………………………………… Approval Sheet ……………………………………………………………………….. Certificate of Originality ……………………………………………………………… Certificate of English Editing………………………………………………………..... Certificate of the Certified Public Accountant………………………………………… Acknowledgement…………………………………………………………………….. Executive Summary…………………………………………………………………… Table of Contents……………………………………………………………………… List of Tables………………………………………………………………………….. List of Figures………………………………………………………………………..... List of Appendices…………………………………………………………………….. CHAPTER 1 INTRODUCTION Company History…………………………………………………… Management………………………………………………………… Organizational Structure……………………………………………. i ii iii iv v vi vii ix xi xii xiii 1 2 4 CHAPTER 2 RESEARCH DESIGN AND METHODOLOGY Methodology…………………………………………………………. 5 Scope and Limitations……………………………………………….. 6 CHAPTER 3 COMPARING MISSION AND VISION Mission and Vision…………………………………………………... Comments and Evaluation of Mission and Vision…………………... CHAPTER 4 EXTERNAL ANALYSIS General Statement…………………………………………………… Political and Legal…………………………………….…………. Economic……………………………………………….………... Social and Cultural……………………………………….……… Technological………………………………………….………… Environmental and Climate…………………………….………... Industry and Competitor Analysis Industry Analysis……………………………………….………... Market Size and Growth………………………………….……… Market Share Analysis…………………………………….…….. Market Mix………………………………………………….…… Market Segment…………………………………………….……. Factors Affecting the Cost of Doing Business…………….…….. Industry Financial Analysis ……………………………………... Problems in the Industry…………………………………………. Porter’s Five Forces Framework of Competitive Analysis 7 8 - x Rivalry of Competition…………………………………………... Potential for New Entrants………………………………………. Bargaining Power of Suppliers…………………………………... Bargaining Power of Buyers…………………………………….. Potential for Substitutes………………………………………….. Competitive Profile Matrix………………………………………. Critical Success Factors and Ratings…………………………….. Summary and Conclusion……………………………………………. External Factor Evaluation…………………………………………... - COMPANY ANALYSIS Human Resources Area……………………………………………… Marketing Area………………………………………………………. Production and Operations Area…………………………………….. Financial Performance……………………………………………….. Internal Factor Evaluation…………………………………………… - STRATEGY FORMULATION Strength-Weaknesses-Opportunity-Threat Matrix…………………... The Internal-External Matrix………………………………………… Strategic Position and Action Evaluation Matrix…………………… Grand Strategy Matrix……………………………………………….. Matrix Summary……………………………………………………... The Quantitative Strategy Planning Matrix…………………………. - OBJECTIVES, STRATEGIES, RECOMMENDATIONS AND ACTION PLANS Strategies and Financial Objectives………………………………….. Recommended Business and Organizational Strategies…………...… The Strategy Map……………………………………………………. Financial Projections and Overall Evaluation of the Strategies……... Departmental Programs……………………………………………… - STRATEGY EVALUATION MONITORING AND CONTROL Balance Scorecard…………………………………………………… 91 CONCLUDING REMARKS………………………………………. 93 References………………………………………………………………..…………… Curriculum Vitae……………………………………………………………..……… Appendices……………………………………………………………….…………… 95 98 99 CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 xi List of Tables Table- Board of Trustees…………………………………………………… Mission Statement Evaluation……………………………………… Vision Statement Evaluation……………………………………….. Insurance Density…………………………………………………... Gross Premiums Revenue of Non-life Insurance…………………... 2016 Gross Premiums Revenue of Non-Life Companies………….. Income Classes in the Income Distribution, Income Thresholds and Sizes of Income Classes in 2015……………………………………. Risk Exposure of Non-life Customer……………………………….. Non-life Industry Financial Highlights……………………………... Minimum Networth Requirement for Existing Non-life Companies Porter’s Five Forces Model – Non-Life Industry…………………... Competitive Profile Matrix…………………………………………. EFE Matrix…………………………………………………………. Financial Ratios…………………………………………………….. IFE Matrix…………………………………………………………... SWOT Matrix………………………………………………………. Space Matrix………………………………………………………... Summary of Matrices……………………………………………….. QSP Matrix…………………………………………………………. Projected Financial Performance…………………………………… Page- xii List of Figures Figure- AIS Organizational Chart…………………………………………. Global Terrorism Index 2016……………………………………… Gross Premiums Revenue as to Product Line………………………. Distribution Channel of Non-life Products…………………………. Non-life Insurance Costumer……………………………………….. Total Networth of Non-life Industry……………………………….. Loss Ratio as Presented by Line of Business…………………….… Sample Computation of Annual Premium for Personal Accident….. AIS’ Statement of Financial Performance………………………… IE Matrix……………………………………………………………. SPACE Matrix……………………………………………………… Grand Strategy Matrix……………………………………………… Page- xiii List of Appendices Appendix A B C D E AIS Financial Statements……………………………………... Insurance Commission Statistical Reports……………………... Malayan Insurance Financial Statements………………………. BPI/MS Financial Statements…………………………….…….. Pioneer Insurance Financial Statements………………………... Page- 1 Chapter 1 INTRODUCTION Company History To provide a defined benefit scheme for the government employees, AAA Insurance System (AIS) was created by the Commonwealth Act No. 186 on November 14, 1936. AIS as a government-owned and controlled corporation is mandated to provide and administer the following social security benefits for government employees: compulsory life insurance, optional life insurance, retirement benefits, disability benefits for work-related contingencies and death benefits. On September 1, 1951, the General Insurance Fund (GIF) by virtue of Republic Act 656 of the Property Insurance Law was established. The AIS is entrusted with the administration of the GIF and was authorized to issue insurance covers for all properties, contracts, rights of action and other insurance risks of the government including those in which the government has an insurable interest. In 1973, Presidential Decree No. 245 expanded the AIS’s insurance business by giving it the right to engage in all kinds of non-life insurance and reinsurance business, to issue policies denominated not only in peso but also in foreign currencies, and to issue surety and performance bonds. The AIS General Insurance (AIS GI) offers various non-life insurance products that provide protection to both institutional and individual clients. For institutional clients, AIS offers non-life insurance coverage such as fire, engineering, marine hull 2 and cargo, aviation, contractor’s all risk and bonds. For individual clients, including AIS members, pensioners and their dependents, offers GCare Plans, an umbrella of products that include Home Shield, Auto Shield and MyShield. AIS also offers compulsory third party liability (CTPL) insurance as part of its mandate to issue all forms of non-life insurance. AIS GI main office is located at the AIS Financial Center in Pasay City. To date, the AIS has 42 branch offices, 14 extension offices nationwide and 58 service desks to cater non-life insurance operation. Management The corporate powers and functions of AIS are vested in and exercised by the Board of Trustees (BOT) composed of the President and General Manager (PGM) and eight other members appointed by the President of the Philippines, one (1) of whom shall be either the President of the Philippine Public School Teachers Association (PPSTA) or the President of the Philippine Association of School Superintendents (PASS), another two (2) shall represent the leading organizations or associations of government employees/retirees, another four (4) from the banking, finance, investment and insurance sectors, and one(1) recognized member of the legal profession who at the time of appointment is also a member of AIS. Under the BOT and PGM, there is a Senior Vice President and a Vice President that deals with the operation of AIS GI. 3 Table 1 Board of Trustees Chairman: President and General Manager: Trustees: Vacant Jesus Clint O. Aranas Wilfredo C. Maldia Jocelyn De Guzman Cabreza Lt.Gen. Alan R. Luga Dr. Kahar H. Macasayon, Al-Hadj Anthony B. Sasin Nina Ricci Ynares - Chiongbian 4 Organizational Structure Figure 1 AIS Organizational Chart The AIS workforce consists of 3,131 employees, 52% of whom are in the Head Office while the remaining 48% are in the branches. 5 Chapter 2 RESEARCH DESIGN AND METHODOLOGY Methodology The data used in the external and internal analysis of the non-life insurance industry were obtained through various internet and website sources which include AIS.gov.ph, insurance.gov.ph, pirainc.org, psa.pgv.ph and bsp.gov.ph. General news, current events, and trends were sourced from credible online publications such as Philippine Daily Inquirer, Manila Bulletin, Philippine Star, Manila Standard, The Manila Times, and ABS-CBN News. Data from the Insurance Commission (IC) of the Philippines which includes the Key Insurance Indicators for the years 2012 to 2016, official circulars and ranking of accredited entities were referenced extensively for the analysis of non-life industry. The 2017 PIRA Fact Book from publications of the Philippine Insurers and Reinsurers Association (PIRA) was also used for the gathering of data in the industry. Financial information of key competitors of the company was obtained from their respective websites – www.bpims.com, www.malayan.com, www.pioneer.com.ph and portal of Securities and Exchange Commission. IC reports have a ranking of the non-life insurance companies with varying basis; these reports were used in the 6 comparison in the financial area. Likewise, AIS company data such us corporate background, products and services, annual reports, corporate governance, latest news and management profile were retrieved from AIS.gov.ph, the official website of AIS. Scope and Limitations The paper is limited to AIS General Insurance, the sector which offers non-life insurance products of AIS. The strategies that will be formulated in this study were based on the information that were obtained during September 2017 to January 2018. 7 Chapter 3 COMPARING MISSION AND VISION The AIS is committed to observe the mission and vision through the years. The mission and vision was revised and approve by the Board of Trustees last 2017. Mission Statement AIS is committed to provide social security and financial benefits to all government employees and their qualified dependents, satisfy the non-life insurance needs of the government maintain and strengthen the viability of the fund, and build an enduring partnership with its stakeholders. Vision Statement By 2022, AIS, a premier social insurance institution with a passion for providing excellent service to its members, pensioners, and other constituents, will be in the top three defined-benefit pension fund institutions in the ASEAN region. Quality Policy In the AAA Insurance System, we are committed to provide quality service to our members, pensioners and other constituents for all their social security benefits and non-life insurance needs. 8 The design of our Quality Management System (QMS) shall consider the context and strategic direction of our organization. Our systems and processes shall be regularly evaluated and improved for effectiveness, efficiency, and compliance with legal and other regulatory requirements. We will invest in the competence of our people through continued professional development. Core Values Professionalism Love of Country Integrity Service Excellence Spirituality Innovation Teamwork Comments and Evaluation on Mission and Vision Quality Policy and Core Values of the companies were also considered in the evaluation of mission and vision as these were also relevant in achieving the company’s goal. 9 Table 2 Mission Statement Evaluation Parameter Customers Products & services Markets Technology Concern for survival, growth, Yes / No If yes, which part of the statement “…to provide social security and financial Yes benefits to all government employees and their qualified dependents, satisfy the non-life insurance needs of the government… and build an enduring partnership with its stakeholders”. The AIS GI primary customers are the Government employees and pensioners. In this statement the stakeholders are the members of the AIS and interested parties such as government agencies. “…satisfy the non-life insurance needs of the Yes government…” The concern for product and services are evidently shown in this part of the statement. Products are life and non-life insurance benefits which they provide for their members. “…to provide social security and financial Yes benefits to all government employees and their qualified dependents, satisfy the non-life insurance needs of the government”. The market of the AIS is the employees of Philippine government, their qualified dependents and the government offices for the non-life insurance. The statement did not clearly exhibits the use or No the importance of technology in the performance of mission. But being innovative is included in the core values of AIS to attain the vision. It was also stated on the quality policy that the system of AIS shall be regularly evaluated and improved for effectiveness, efficiency, and compliance with legal and other regulatory requirements. “…maintain and strengthen the viability of the Yes fund…” 10 profitability Philosophy Yes Self-concept Yes Concern for employees No Concern for public image No Concern for nation building No The concern for survival, growth and profitability is evidently shown in this part of the statement. Financial viability should be able to sustain and strengthen to ensure that its members will still receive their benefits in the future. “…provide social security and financial benefits to all government employees and their qualified dependents… ” The company clearly manifests its concern for its members. This is the company’s primary objective to deliver its quality services and provide the needs of the members. “…satisfy the non-life insurance needs of the government maintain and strengthen the viability of the fund, and build an enduring partnership with its stakeholders…” The AIS will believe that they could achieve its goals on their members, to the fund and other stakeholders. They wanted to satisfy the needs of their members on both the life and non-life insurance. Also the prolonging of actuarial life of the institution. And to build a strong relationship with its stakeholders by providing quality service to them. Though the mission statement does not express the concern to its employees, it was included in the Quality Policy in which it states the “We will invest in the competence of our people through continued professional development.” The concern for public image was expressed in the core value of AIS such as professionalism, integrity, service excellence and spirituality though this was not explicitly written in the mission statement. One of the core values of AIS is the love of country, this represent the concern of AIS for nation building though this was not clearly stated in the mission statement. 11 Table 3 Vision Statement Evaluation Parameter Does it clearly answer the question: What do we want to become? Is it concise enough yet inspirational? Yes / No Yes Yes Is it aspirational? Yes Does it give clear indication as to when it should be attained? Yes Why The AIS vision statement expresses that the company would like to be in the top three defined-benefit pension fund institutions in the ASEAN region. The statement is concise enough to state the ultimate goal of the AIS and show that the company’s motivation is the customers which are the members, pensioners and constituents. The statement shows the eagerness of AIS to passionately provide excellent service to achieve its goal. AIS desires to attain the company’s vision by year 2022. 12 Chapter 4 EXTERNAL ANALYSIS This chapter will tackle the macro-environmental factors that have an impact to the non-life insurance industry and to AIS GI specifically. A. General Statement Political and Legal Tax Reform for Acceleration and Inclusion (TRAIN) The Department of Finance (DOF) has maintained that the Tax Reform for Acceleration and Inclusion (TRAIN) Act will benefit 99 percent of Filipino households because of its proposed income tax cuts for salaried workers plus the unconditional cash transfers for the country’s poorest families. The Insurance Commission (IC) is supporting the proposed TRAIN Act as it would make the system more financially inclusive and provide insurers the opportunity to cash in on the massive infrastructure build-up of the Duterte administration that will be partly funded by this tax reform package. IC Commissioner Dennis B. Funa said the TRAIN would increase the disposable income of Filipinos and would enable them to purchase insurance products, helping to make them more financially secure in the long term. He noted that TRAIN is characterized by low rates and a broader tax base, will enable the public to allocate their resources to financial products such as insurance products. The 13 TRAIN has also adverse effect on the petroleum products because of the adjusted fuel excise tax and will also have an impact on prices of expanding the value-added tax (VAT) base. The Philippine automotive industry experienced a growth in sales in 2017 mainly brought by the news that prices of motor vehicles would considerably go up once the new excise taxes under TRAIN are implemented. The Chamber of Automotive Manufacturers of the Philippines Inc. (CAMPI) estimated that November sales have already breached the 380,000-unit mark and is expected to exceed its 440,000 sales target for 2017. This boom in car sales translates to higher production in the motor car line of non-life insurance companies in the country. House Bill (HB) 3235 The IC pushed for the reduction of taxes levied on non-life insurers under the previous administration to put the sector at par with its neighbors. The regulator and non-life sector were earlier batting to cut taxes imposed on non-life insurance premiums to 8% from the current high of 27%, in a bid to increase asset coverage in the country. The insurance industry in the Philippines pays an almost 27% in various taxes from every insurance product. This factor makes the non-life insurance in the Philippines expensive. Taxes from non-life insurance holders are 12% VAT, a 12.5% documentary stamp tax, a 2% fire service tax, and a 0.15% to 0.75% local government tax. HB 3235 filed in the previous Congress eyed to trim taxes imposed on non-life insurance premiums to as low as 2% by exempting it from the 12% VAT plus a 14 documentary stamp tax ranging from P10 to P100 per year Non-life insurance taxes must be lower than equivalent taxes in the other ASEAN countries and must be affordable in the in the Philippines which is vulnerable to natural disasters. Regulation on Investment in Non-life Sector The IC has issued a circular allowing nonlife insurers to invest in real property that effectively allows them access to a new revenue stream. Such an avenue, however, had been capped at only 20 percent of insurer asset holdings. Under the guidelines, only those nonlife companies with a minimum net worth of P550 million, and have complied with the liquidity requirements of the IC, may invest in income-producing real properties. As traditional fixed-income investments have generated declining returns in the low-yield environment, this regulation will be an opportunity to every non-life companies to boost their capital. Insurance company should also consider the liquidity risk framework before venturing to the new investment. Liquidity risks relate to the possibility that an insurer is unable to fund its obligations as or when they fall due. Government Property Insurance Committee President Rodrigo Duterte has formed a committee that will craft policies to ensure that the key properties and assets of the government are adequately insured. The creation of the Inter-Agency Committee on Government Property Insurance is 15 contained in Administrative Order (AO) No. 4 issued on August 7. The Inter-Agency Committee on Government Property Insurance will formulate policies, rules and regulations to ensure that key properties, assets and other insurable interests of the government are insured comprehensively and adequately. The Department of Finance (DOF) will be the chairman of the committee while the Office of the Executive Secretary will serve as its co-chairman. Other members of the committee are the Budget department, the IC, and the AIS. The committee will consult other agencies and other stakeholders in the crafting of the policies. The committee will also develop the monitoring and reporting mechanisms to ensure that all key properties, assets, facilities and other insurable interests of the government are insured comprehensively and adequately. The creation of committee will increase the insuring key government properties, assets, facilities and other insurable interests. This Administrative Order is expected to bring higher premium revenue on general insurance of AIS. International Financial Reporting Standards (IFRS) 17 On May 18, 2017, the financial world welcomed the International Financial Reporting Standards 17 (IFRS 17), a new comprehensive accounting standard for insurance contracts covering recognition and measurement, presentation, and disclosure. IFRS 17 will become effective for annual reporting periods beginning on or after January 1, 2021. Early application is permitted. According to SyCip Gorres Velayo & Company (SGV & Co.), the new standard will bring out the most significant 16 change to accounting requirements ever undertaken by insurers in the Philippines, requiring companies to completely overhaul their financial statements and underlying actuarial models, financial reporting processes and systems. Economic Economic Growth in 2016 Accelerated to 6.8 percent The country continues to be one of the most dynamic countries in the East Asia region, with sound economic fundamentals and a globally recognized competitive workforce. Growth in 2016 accelerated to 6.8 percent year-on-year from 5.9 percent in 2015 on the back of upbeat domestic demand. Experts expect the growing middle class, the boom in business process outsourcing, and the boost in infrastructure spending to sustain the country's economy. The Philippines remains among the fastest growing South East Asian economies in 2017. The growth in the economy implies the increase in the overall production of final goods and services in the Philippines. This will bring more necessity for insurance coverage in every industry. The country’s economy is expected to remain a top regional performer with growth projected at 6.9 percent in 2017 and 2018. Non-Life Industry Growth Philippine non-life insurance industry total premiums surged by 16.24 percent to P41.6 billion from P35.8 billion in 2015. The growth was contributed by the good 17 performance of top non-life firms who posted significant increases in net premiums written, as well as the growing motor business in the Philippines. Data from the IC showed that 2016 non-life insurance density – the average amount spent on insurance by each individual in the country – increase by 13.5% from P 359.90 in 2015. Table 4 Insurance Density Insurance Density Life Insurance Non-Life Insurance 2013 2,084.00 1,- 2014 1,974.20 1,- 2015 2,286.00 1,- 2016 2,254.10 1,- Source:https://www.insurance.gov.ph/wp-content/uploads/2017/12/Key_Data_2016.pdf The industry is poised to grow even further as the economy continues to improve and as more and more Filipinos will gain the capacity to buy hard-earned assets. They will look for ways to protect these from factors they cannot control. This presents a growing appreciation of the important role of having insurance coverage. Social and Cultural Rising Threat of Terrorist Attack Terrorism is one of the major social issues in the Philippines. Terrorist attacks expose any person to the risk of incurring loss to life, limbs and property. According to a Global Terrorism Index 2016, the Philippines ranked 12th globally in terms of terrorism's impact due to an increase in the number of fatalities and terrorist activity. 18 Considering that the Philippines is considered as ‘high risk’ country in terms of likelihood of terrorism attack, the IC encourage insurance companies to develop life and non-life insurance products which specifically covers losses and damages resulting from acts of terrorism. Terrorist acts are often considered a "standard exclusion" in the typical property insurance policy. Insurance companies find it hard to cover such peril as the odds of terrorist attacks are very difficult to predict and the potential liability. Figure 2 Global Terrorism Index 2016 Source: http://economicsandpeace.org/wp-content/uploads/2016/11/Global-Terrorism-Index2016.2.pdf 19 Motor Vehicle Related Accidents According to the Philippine Statistics Authority (PSA), an average of 34 Filipinos die everyday due to vehicular collision. Data from the PNP’s Highway Patrol Group (PNP-HPG) showed that in 2014, there were 15,572 vehicular accidents resulting in 1,252 deaths but the numbers increased in 2015 with 24,565 accidents that resulted in 1,040 deaths. In the first four months of 2016, the PNP-HGP has already recorded 10,656 vehicular accidents in the whole country resulting in 549 deaths. With 99.95 percent of said accidents attributed to human error, such as bad turning, bad overtaking, over speeding, drunk driving, distracted driving, or the use of mobile phone while on the wheel, overloading, and avoiding animals, pedestrians, and other road hazards. The increase in road accidents is a threat to AIS since this risk is generally covered by motor car insurance policies which will likely increase the claim ratio of its motor vehicle insurance line. Higher claims costs for its motor product line will in turn bring up its total losses due to claims and result in lower income for the company. This seems to be supported by the fact that premiums earned from Motor Car Insurance increased by 14.24% only while the total claims increased by 22.77% from in 8,151.26 million in 2015 to 10,007.27 million in 2016. Filipinos’ Perception on Non-life Insurance Insurance penetration rate remained low at 2% in 2016, the Philippine Insurers and Reinsurers Association (PIRA) articulated that this is low as compared to other 20 industries. Although the economy has a major part in this aspect, the low insurance penetration is blamed mostly on the lack of awareness on the part of majority of Filipinos when it comes to the importance of insurance. The insurance industry in the country is more than a hundred years old, but about 12 percent of the growing Philippine population is insured. According to 2016 National Baseline Survey (NBS) on Financial Inclusion Report of Bangko Sentral ng Pilipinas (BSP), the most common reason for not having vehicle insurance, building insurance, cell phone insurance and microinsurance is the perceived lack of need for these types of insurance products. The NBS survery also shows that many Filipinos harbor a negative perception of insurance that it is just for the rich. Technological Cyber Insurance Experts in information technology security discovered that the Philippines is the 8th most vulnerable to attacks by malicious software or malware. The Philippines has a 19.2 percent encounter rate as of March 2017, according to the report. The findings were published on the 22nd volume of the bi-annual Microsoft Asia Pacific Security Intelligence Report (SIR). To protect local consumers from cyber-attacks such as the recent ransom ware, the IC is urging domestic insurers to come up with cyber insurance products. The cyber insurance market has a huge potential for growth since global demands are on the rise. The frequency of ransom ware and breach of data 21 is on the rise not only in the Philippines. At present, only AIG Philippines Insurance Inc. offers cyber insurance product in the Philippines. The lone cyber insurance product in the country offers protection against losses due to improper denial or approval of access to data or information, breach to a computer software, system or security, or theft of computer hardware, among others. On July 2016, sixty eight (68) government websites in the Philippines have been subjected to various forms of cyberattacks which included attempts of hacking and defacement, slowdowns and distributed denial of service attacks. Among those at the receiving end were agencies such as the Department of National Defense, Department of foreign Affairs and the Presidential Management Staff. With the emerging issue on data security in government websites, the government should also consider of having cyber insurance to cover the loss and damaged information in government offices. Growth of Internet Usage in the Philippines Internet usage has been steadily increasing from 2012 to 2016. As of July 1, 2016, there are 44.5 million internet users in the Philippines with penetration rate of 43.5 %. The continued growth will make powerful emerging web-based technologies more accessible and cost efficient for corporations. According to Digital Marketing Philippines, the average Filipino spends around 21.5 hours a week online and 96% of the internet users have social media accounts. This is an opportunity for AIS GI and other non-life insurer. Currently, some of non-life insurers’ website have online 22 premium calculator which helps target customer to compute the possible premium of car or fire insurance. Environmental and Climate Vulnerability of the Philippines to Natural Catastrophes According to climate scientists, intensity changes in land-falling typhoons are great concern to East and Southeast Asian countries. Global Climate Risk Index expressed that ten (10) countries most affected in the past two decades feature mainly emerging economies in Asia which includes Philippines. Rising proportion of landfalling typhoons and climate change in the country is a concern of AIS and Non-life insurance industry. These environmental issues expected to impact significantly on property claims to non-life insurer. In 2016, the Climate Change Commission has urged the country’s non-life insurance sector to come up with strategies to help manage loss and damaged associated with adverse effects of climate change. The industry should need to work with local government units to deploy weather-indexed insurance initiative. Issues with insurance also play a big part in post-calamity recovery and reconstruction. Michael Rellosa, the deputy chairman of the Philippine Insurers and Reinsurers Association (PIRA), explained that government property insured with the AIS are not automatically insured for typhoons and may be grossly underinsured. The World Bank has also entered into a reinsurance agreement with AIS to provide $206 million or about P10.6 billion in coverage for government assets and 23 local government units from natural disasters especially those agencies affected by earthquakes and typhoons as well as losses from major typhoons of twenty five (25) provinces. However, recent calamities that affect the different part of the countries may have also helped people realize the value of insurance. In the long run, this may help increase the demand for insurance products. This positive effect may eventually compensate for the higher losses due to claims. B. Industry and Competitor Analysis B.1 Industry Analysis Market Size and Growth The Philippine non-life industry has experienced a reduction in the number of players, mainly because of the higher net worth requirement of the government as amended by RA 10607. As of June 2017, the number of non-life insurance companies granted Certificates of Authority by the IC is down to 63, from 69 in year 2016. According to PIRA, the non-life industry including AIS GI scores a Gross Premiums Revenue of P81 billion in 2016, a 7.66% growth, as compared to 75.2 billion in 2015. 24 Table 5 Gross Premiums Revenue of Non-life Insurance (in Million Pesos) 2014 % Inc./ (Dec.) 2015 % Inc./ (Dec.) 2016 % Inc./ (Dec.) 25,-,-,- Fire Insurance 6,561.02 -2 6,-,183.87 -6.27 Marine & Aviation Insurance 18,-,-,- Motor Car Insurance 15,-,-,- Others Total 66,-,-,- Source: http://www.pirainc.org/index.php/pirafactbookleft?download=14:2017-pira-fact-book Market Share Analysis Table 6 2016 Gross Premiums Revenue of Non-Life Companies (in Million Pesos) Rank Company- Malayan lnsurance Company, lnc Prudential Gtee. & Assce., lnc. Pioneer lnsurance & Surety Corporation BPI/MS lnsurance Corporation Charter Ping An lns. Co (Philippine Charter) FPG lnsurance Co., lnc. (Federal Phoenix) Standard lnsurance Company, lnc. AIG Phil. lns. Company (Chartis Phils., lnc.) AIS General Insurance Other Non-life Insurers Gross Premium Revenue GPR 8,713.43 7,246.80 7,033.85 5,623.18 4,904.24 4,129.68 3,214.09 2,578.35 2,-,-,019.87 Market Share 10.75% 8.94% 8.68% 6.94% 6.05% 5.10% 3.97% 3.18% 3.10% 43.28% Source: https://www.insurance.gov.ph/wp-content/uploads/2017/12/Gross-PremiumsWritten-of-Non-Life-Insurance-Companies_Year-2016.pdf 25 PIRA Fact book shows non-life Gross Premiums Revenue written for 2016, including AIS GI, reached P81,019.87 million. According IC list of private non-life insurance, top ten insurance players represent a portion of 59.46% of industry in terms of gross premium revenue. Market Mix Non-life insurers offer almost the same products but coverage varies from each product and insurer. Total premiums for non-life insurance in 2016 is comprised of most basic non-life insurance products offered by insurers are motor car insurance, fire insurance and marine and aviation insurance (Figure 3). Other non-life insurance products are casualty and suretyship. Casualty product line covers a broad range of non-life risks: engineering, personal accident, health, general business liabilities. Suretyship is a special line in non-life insurance that offers financial guarantee. Through the issuance of surety bonds, an insurer guarantees a 3rd party that it will assume the responsibility of its client in the event that the latter is not able to perform its obligation. 26 25% 29% Fire Insurance Marine Insurance & Aviation 38% 8% Motor Car Insurance Others Figure 3 Gross Premiums Revenue as to Product Line Source: http://www.pirainc.org/index.php/pirafactbookleft Distribution of products involves direct and indirect process. The direct channels for insurance products are its branches, agents, client or company’s brokers, and banks. The indirect business of insurance companies is normally coursed through other insurance companies known as reinsurance. 27 Branch Office Direct Agent and Broker Non-life Insurance Products Banks Indirect Other Insurance Companies Figure 4 Distribution Channel of Non-life Products The marketing and promotion of non-life insurance products traditionally rely on the relationship with brokers and agents. Most insurance company leverages on the advantage of partnering with other company in the country such as bank and car dealer. Non-life companies also strategize to promote by doing digital marketing through social media and do event sponsorship. Non-life product premium rates are based on risk evaluation assessment which considers various factors such as age and location of the property, value of the property and historical data. On top of these considerations, the IC has issued an order instructing non-life insurance companies to observe the minimum prescribed rates in insuring properties for typhoon, earthquake and flood. 28 Market Segment Figure 5 Non-life Insurance Costumer Generally, customers of non-life products may be segmented according to the risk exposure of individuals and business entities. Individual Individual consumer may be classified as low and middle to high income earners. Based on the Family Income and Expenditure Survey (FIES) of Philippine 29 Statistics Authority, low income earners are those with income between the poverty line that has a range of monthly family income of Php 7,890 to Php 15,780 per month. All individuals are exposed to health and accident risks and low-income earners usually avail insurance associated to these casualty risks. Middle to high income earners ranges a monthly income of Php 15,780 to at least Php 118,350. Aside from casualty risk, Middle to high income earners are usually exposed to motor car risk, fire and allied risk. Table 7 Income Classes in the Income Distribution, Income Thresholds and Sizes of Income Classes in 2015 Income Class Range of Monthly Income (per month) Size of Class (i.e. number of households) Poor Less than Php 7,890 4.2 million 19.54% Low Income Between Php 7,890 to Php 15,780 7.1 million 33.04% Lower Middle Income Between Php 15,780 to Php 31,560 5.8 million Middle Income Between Php 31,560 to Php 78,900 3.6 million 45.93% Upper Middle Income Between Php 78,900 to Php 118,350 470 thousand High Income at least 118,350 320 thousand 1.49% Source: Family Income Expenditure Survey (FIES), Philippine Statistics Authority Business Non-life products are not geared towards any specific business sector. Businesses, on the other hand, are exposed to risks such as fire, engineering, marine, 30 aviation and motor car. Businesses may also have the need for surety when engaging in contracts or other activities that require financial guarantee. Table 8 Risk Exposure of Businesses and Individuals Risk Exposure Market Segment Motor Car Individuals and Businesses Fire and Allied Perils Individuals and Businesses Suretyship Businesses Marine & Aviation Businesses Health and Personal Accident (Casualty) Individuals Miscellaneous Individuals (Casualty) and Businesses Engineering (Casualty) Businesses Total Premiums Earned Description Individuals needing coverage for private vehicle risks and businesses needing coverage for motor vehicles used in business operations or directly for business. Individuals and business needing coverage for residential property, warehouse and commercial properties that are exposed to fire, earthquake, typhoon and flood risks. Businesses needing financial guarantee that it can perform its obligations Businesses needing coverage for marine and aviation transportation risks. Individuals including migrant workers needing coverage for risk of losses from death or disablement due to unforeseen incidents and health risks from diseases Special risk or property risks that needs insurance coverage such as gadget and golfers insurance, cyber-insurance Businesses needing coverage risks involved in construction work or civil engineering projects. Value (in Php Billion) 17.32 % Value Share 50.4% 5.15 15.0% 2.40 7.0% 1.96 5.7% 4.40 12.8% 2.20 6.4% 0.95 2.8% 34.38 31 Market segmentation helps insurance companies to analyze the potential of each segment or which product should be developed. Based on the risk exposure of non-life customers, the value of insurance products for motor car and fire risk are 50.4% and 15% respectively. It is considered to be the most important non-life product segment as this historically contributes most of the gross premium. The value share is high on these products because these products are being offered to both individual and business entities. It would be a good marketing strategy to have non-life products based on the needs of both individuals and businesses. Factors Affecting the Cost of Doing Business Reforms have continued, and the recent changes have had a significant and positive impact on the sector. The Amended Insurance Code, also known as Republic Act 10607, was passed in 2013. Under the code, Net worth was increased to P550 million with an end-2016 deadline. The figure is to rise to P900 million by the end of 2019 and P1.3 billion by the end of 2022. Before this round of reforms, the capital level had been set at P50 million, though attempts had been made since 2006 to increase it to the P250 million mark. Industry Financial Analysis Financial strength has continued to grow in non-life industry despite the reduction of players. Based on numbers from the IC, the industry has 19 companies 32 with P2 billion in assets, while 20 companies have assets amounting to over P1 billion. As for the networth, the Philippine non-life insurance industry, including AIS, has registered a growth of 13.90 percent – from P88,477.66 million in 2015 to P100,780.45 million in 2016. Table 9 Non-life Industry Financial Highlights (in Million Pesos) 2014 % Inc./ (Dec.) 2015 % Inc./ (Dec.) 2016 % Inc./ (Dec.) Assets 194,529.68 0.12 195,288.50 0.39 197,405.97 1.08 Liability 109,182.54 (5.52) 106,810.83 (2.17) 96,625.53 (9.54) Networth 85,347.14 8.39 88,477.66 3.67 100,780.45 13.90 Source: http://www.pirainc.org/index.php/pirafactbookleft?download=14:2017-pira-fact-book Almost half of this total net worth of the industry is accounted for by only 13 companies with more than P1 billion each. These companies are already past the ongoing capital build-up program that will reach its completion by 2022. With higher capitalization, it is only natural that the industry would also register higher production. 33 Figure 6 Total Networth of Non-life Industry Source: http://www.pirainc.org/index.php/pirafactbookleft?download=14:2017-pira-fact-book The industry was able to post a net income of P5,898.80 million net income for 2016 including AIS this was 19.44% higher over previous years’ P4,938.66 million. However, fifteen (15) among registered non-life insurance companies registered a net loss at the end of 2016, with the biggest loser logging more than a billion pesos in losses. In terms of losses, PIRA data revealed that the industry registered an overall loss ratio of 37.37 percent in 2016, higher than the 36.95 percent it logged in 2015. This loss ratio was influenced by the rise in losses in Fire insurance (45.67 percent) and Motor Car insurance (49.85 percent). 34 Figure 7 Loss Ratio as Presented by Line of Business Source: http://www.pirainc.org/index.php/pirafactbookleft?download=14:2017-pira-fact-book Problems in the Industry The number one challenge being faced by insurers in the country is the growing natural catastrophe risks due to climate change. The Philippines is a naturally risky country. Located in the so-called typhoon belt, it is visited by an average of 20 cyclones every year, five or six of which cause considerable damage. The country has dozens of active volcanoes that erupt from time to time. And, as if these were not enough, the Philippines is crisscrossed by major tectonic fault lines that pose imminent dangers in terms of cataclysmic earthquakes and tsunamis. In part as a result of the push towards higher capital, the sector has been consolidating. In 2010 the non-life segment had 87 companies, according to the IC. 35 By the end of 2015 it had a total of 69. The IC has been actively engaging with the sector. It wants mergers, or other solutions to the capital shortfalls, and it is ensuring the sector is aware of that fact. At the end of 2015 the regulator issued a directive calling for insurance companies to submit their plans for capital-raising. The commissioner noted in August 2016 that some companies were seeking fresh investment, while others were choosing consolidation. The IC reminded them again at the end of 2016 that they need to meet the new capital requirements. Despite years of efforts to boost capital, the sector remains short of the targets being set. Many companies are under the prescribed levels, and it is not clear how they will reach them in time. At the end of 2015, 26 non-life insurers were at P250 million in capital and one was below. Only five companies were above the P550 million required one year later. B.2 Porter’s Five Forces Framework of Competitive Analysis Rivalry of Competition – High The Philippine insurance industry is a competitive market. As of 2016, the IC listed sixty nine (69) regulated private Non-life entities but because of the increase in the capital requirement, five non-life insurance companies have already signified their intent to exit the industry, while eight players are preparing to do mergers. Most of the companies decided to shut down as they cannot comply with 36 the increase in capital required under the Insurance Code. The amended Insurance Code of the Philippines, existing insurers, for their part, must have a paid-up capital of at least P550 million by December 2016, P900 million by December 2019 and P1.3 billion by December 2022. The increase in capital requirement affects the nonlife insurance industry. The imposition of higher capitalization requirement would be beneficial to the insuring public and enable our country’s insurance industry to compete with ASEAN counterparts as well. The similarity of products in the industry is the main factor that influences the level of competition within non-life industry. Though AIS GI as a government institution was not included in the IC’s list of published regulated entities, it is still bound by the Commission’s rules and mandate. Private Non-life Insurers have also asked the IC to investigate the move of AIS to offer certain insurance products such as Motor Vehicle insurance, personal accident insurance and fire insurance as this would encroach into the market of the private sector since AIS is exempted from taxes, it would have "an undue competitive advantage" over private firms who offer similar insurance schemes. The AIS GI market is the government institutions and individual clients which include AIS members, pensioners and their dependents. The AIS’ members, pensioners and their dependents are not obliged to insure their properties with the AIS GI thus it is a challenge for the AIS to have these target market to avail the AIS products and compete with Private Non-life companies. 37 Table 10 Minimum Networth Requirement for Existing Non-life Companies Required Minimum Networth Php. 250 Million Compliance Date on or before December 31, 2013 Php. 550 Million on or before December 31, 2016 Php. 900 Million on or before December 31, 2019 Php. 1,300 Million on or before December 31, 2022 Potential for New Entrants – Low One of the barriers to be faced by the new entrants is the high capital requirement by the amended RA 10607. To do business in the non-life insurance industry in the Philippines, new players should have at least a paid-up capital equal to one billion pesos (P1,000,000,000.00) and be able to maintain P550 million net worth and required to add P350 million by December 31, 2022. To compete with the existing non-life insurance company, new entrants should have offer a number of products and employ qualified personnel that are knowledgeable in the industry. The possible threat that may arise is the entry of established financial institution, such as banks, in the insurance industry. Bargaining Power of Suppliers – Moderate The insurance industry does not need raw materials for their products and services. A supplier of office supplies does not pose a strong threat to the insurance 38 industry since these items have a large number of suppliers. On the other a hand, the supplier of service which is the human capital such as broker, underwriter and adjuster have a strong bargaining power. If a talented insurance underwriter is working for a smaller insurance company, there is the chance that person will be enticed away by larger companies looking to move into a particular market. Reinsurer may also be considered as supplier of the non-life industry. Non-life companies, as ceding company, spread the risk of mostly huge policy account and purchase insurance for what was underwritten to reinsurer. Ceding companies pay reinsurance premiums to reinsurers in exchange for the latter’s absorbing a portion of the risk that the ceding company underwrote. Although there may be a lot of insurance companies willing to enter reinsurance agreements, ceding companies have to be careful on the reinsurers they partner up with. The bargaining power of these suppliers is considered to be moderate due to the dependency that insurers have on them. Bargaining Power of Buyers – High The similarity of non-life product features and price between insurers affect the choice of individual policy holder. Clients can easily switch to other company after the contract term of the policy. Large corporate clients pose a lot more bargaining power with non-life insurance. These large companies may negotiate with 39 the insurance provider on what may be included on the policy coverage. In addition, all government involvement or exposure in corporations, partnerships, joint ventures, associations, and the like is mandated to obtain their insurances and bonds from AIS. Potential for Substitutes – Low Saving is the alternative to insurance products. Conservative type of people tends to set aside their savings to compensate the damage or loss on their property in the case of unforeseeable event. The threat of this substitute does not merely affect the industry. Public are more aware to have separate funds for savings and availing insurance for their property and health. Table 11 Porter’s Five Forces Model – Non-Life Industry Force Conclusion Rivalry of Competition High Potential for New Entrants Low Bargaining Power of Suppliers Moderate Bargaining Power of Buyers High Potential for Substitutes Low Competitive Profile Matrix 40 The three (3) identified key competitor of AIS GI are BPI/MS Insurance Corporation, Malayan Insurance Company, Inc., and Pioneer Insurance and Surety Corporation. These insurance companies are on top of the list of non-life in the industry based on the Gross Premium Written Revenue and ranking list published by the IC in 2016. Key Competitors BPI/MS Insurance Corporation 2016 Gross Premium Revenue 2016 Market Share 7,033,849,190 8.68% BPI/MS is a joint venture of the Bank of the Philippine Islands (BPI), one of the country's most respected banking institutions, and Mitsui Sumitomo Insurance Company, one of the largest non-life insurance companies in Japan. BPI/MS was ranked top 4 in non-life insurer in terms of Gross Premium Written (GPW). BPI/MS is one of the best examples of financial institution making its way to insurance industry. BPI support the financial strength of BPI/MS as fifty-one percent of the company is owned by BPI, one of the most financially sound bank in the Philippine. As reported in the BPI/MS 2016 Annual Report, the company has sixteen (16) offices including the home offices and branches. Malayan Insurance Company, Inc. 41 2016 Gross Premium Revenue 2016 Market Share 8,713,430,-% Malayan Insurance Co. Inc. (Malayan) is the flagship company of the Malayan group of insurance companies. According to industry figures released by the IC, Malayan Insurance is ranked no. 1 non-life insurer in terms of GPW and net premiums written (NPW) in 2016 over 68 other insurers in the country. Malayan Insurance Co., Inc. has secured its position as a leader in the non-life insurance industry since 1970. Non-life insurance protection is at the heart of Malayan's diversified operations. The insurance risks it covers include fire, marine, motorcar, miscellaneous casualty and personal accident, and surety. Malayan uses the following distribution channels: brokers, agents, bancassurance, dealerships and it has 36 branches nationwide Pioneer Insurance and Surety Corp. 2016 Gross Premium Revenue 2016 Market Share 7,033,849,190 8.68% Pioneer Insurance Group (PIG) is engaged in providing both life and non-life insurance in the country. Pioneer Insurance & Surety Corporation (Pioneer) was founded 1954 and acts as the flagship company of the (PIG). Pioneer has 13 branches nationwide and its own website platform like Malayan and BPI/MS. In 2016, Pioneer reported P14 millions of networth, top among non-life insurers. 42 Critical Success Factors and Ratings Strong Financial Position – as measured by Networth of at least 550 million pesos. 30% Both consumers and investors should concern themselves with the insurer's quality and strength of financial position. The continuity of the business depends on the stability of financial position and this will assure stakeholders that an insurer will meet its existing obligation. Since the IC also requires an additional capital by the end of 2019, the companies will be ranked as to networth with the set amount of 550 million pesos. For these reasons, this Critical Success Factor (CSF) is given a weight of 30%. AIS GI Networth (in Million Peso) 26,764.60 Pioneer 14,463.11 3 Malayan 3,841.50 2 BPI/MS 2,400.60 1 Rating in CPM 4 Data retrieved from IC Report on Private Non-life companies’ shows that Pioneer has P14 billions of networth followed by Malayan with P3 billion and top four (4) among non-life industry is BPI/MS. Based on Key Statistical Data for 2012 – 2016 that was also released by IC, AIS GI networth was 26 billion. This report was based on the submitted unaudited quarterly statement by the non-life insurance company to IC. 43 Accessibility of Offices – with at least ten (10) servicing branch offices nationwide. 20% This factor was given a weight of 20% for this will measure convenience for the clients. Having many offices will also give an opportunity to further expand their market. AIS GI receives a rating of 4 for this CSF. Clients of AIS GI can have their transaction done on 42 branches of AIS all over the Philippines. In terms of number of branch offices all over the country, Malayan has 36 branches nationwide. Malayan has bancassurance partner with RCBC Bank which may cross-sell their non-life products. Since RCBC has more than 400 branches in the country, the partnership increases the network of Malayan Insurance. AIS Malayan receives a rating of 3. BPI M/S has 16 branches nationwide and also has maintained a strong presence in all major lines because of bancassurance with BPI. It was rated 2 since it was third to the highest in terms of number of offices while Pioneer receives a rating of 1 for it only have 13 branches in the country. Efficient Processing of Claims – as measured by the number of days of approval of claims and requirements needed in filing claims. 18% 44 This factor was given a significance of 18% because it influences the company’s reputation to its policy holder. It is only when the claims is paid that the policyholder gets to test or experience the reliability of the indemnity protection that they paid for. The number of days of release of claims or Letter of Authority (LOA) for Motor car insurance claim was assessed to know the company’s rank. In general, non-life insurers have documentary requirements to approve a claim and it is very important to have it submitted completely. For the record of the claims department of all car insurance companies in the Philippines, day 1 starts upon the submission of the complete claims of documents. Upon the submission, the insurance company will then issue a LOA. Accredited car repair shop will only commence with the repair once the LOA has been released. Turnaround time for motor car claims approval depends on the severity of the damage and completeness of documents. Malayan was ranked as the highest as the standard release of the LOA ranges from three to seven working days. Policy holder of Malayan may file claims and submit digital copy of required documents through their website. BPI/MS estimated release of LOA is five to seven working days while Pioneer may took up to five to ten days. The release of LOA still varies upon the assessment of the company. AIS GI has the longest number of days, with fifteen to thirty working days, to approve the claims and was ranked as the lowest in this CSF. 45 Online Marketing and Services – based on the company’s website, Social Media and mobile application. 15% Online service was considered as success factor for this is a form of distribution network. The company and competitor were rated according to the use of online platform such as company’s website, social media and mobile application to provide information and services. Insurers’ uses online platform to market insurance products this will disclose enough information for a consumer to make a decision about purchasing that product All of the four companies have websites wherein products being offered were advertised and have provided information. Malayan also has a log-in portal for their clients to view their account. Filing of claims is possible through Malayan’s website and the company offer a free insurance quote. Social media was also used to market Malayan’s product. For these reason, Malayan receives a rating of 4. AIS GI receives a rating of 3 to give credits to the interface of website which provide an online calculator for the computation of annual premium based on desired or estimated principal amount. 46 Pioneer, aside from having their product market on their website, uses Facebook as platform for the advertisement of products and Pioneer’s involvement in different social activity, thus rated 2 for this CSF. While BPI/MS does not have their own official social media page, it also has a website and products were being advertised in the Bank of the Philippine Islands’ social media page. Good Investment Management – efficient management of financial assets and properties based on investment income ratio. 10% This factor measures the ability of company to generate additional income to help cover claims and expenses. This was given a 10% rating. To measure the investment management ability of the company, investment income ratio is measured. This shows how good the company is in utilizing the premiums to gain additional income. The investment income ratio was computed by getting investment income as a percentage of net premiums earned. Data gathered is based on company’s respective 2015 Financial Report. AIS GI BPI/MS Malayan Pioneer Investment Income (in Million Peso) 394,665 219,185 561,340 343,491 Premiums Earned (in Million Peso) 3,467,082 2,194,015 3,054,121 1,754,249 Investment Income Ratio 11% 10% 18% 20% 47 Based on the ratio, Pioneer was given a rating of 4, which was followed by Malayan and AIS GI with ratings 3 and 2. And BPI/MS rating for CSF is 1 as the company has the lowest investment income ratio among the competitors. Variety of Products - Number of products being offered. 10% The range of product was considered and given a weight percentage of 7%. According to the Global Consumer Insurance Survey by Ernst & Young, 52% of the consumers prefer to buy from the same provider. The completeness of product offerings based on the lines identified by IC can help in adding to revenues through existing consumers who need another type of insurance. A broad range of products can also help insurers in becoming a top choice for prospective clients. This is given an importance weight of 7% as it has a considerable impact on the revenues. Pioneer was rated 4 because of its product innovation. It offers products for special risks like events and terrorism. While AIS rated as the lowest because it only have basic insurance products such as Aviation, Bonds, Marine and Cargo Hull, Property Floater for government offices and Fire, motor and personal accident insurance that cater individuals or government employees and retirees. 48 Table 12 Competitive Profile Matrix AIS Critical Success Factors Strong Financial Position Accessibility of Offices Efficient Processing of Claims Online Marketing and Services Good Investment Management Variety of Products Totals BPI/MS Malayan Pioneer Weight Rating Score Rating Score Rating Score Rating Score 0.30 4 1.20 1 0.30 2 0.60 3 0.90 0.20 4 0.80 2 0.40 3 0.60 1 0.20 0.18 1 0.18 3 0.54 4 0.72 2 0.36 0.15 3 0.45 1 0.15 4 0.60 2 0.30 0.10 2 0.20 1 0.10 3 0.30 4 0.40 0.07 1 0.07 2 0.14 3 0.21 4 0.28 1.00 Legend: 1 = major weakness; 2.90 2 = minor weakness; 1.63 3 = minor strength; 3.03 2.44 4 = major strength C. Summary and Conclusion Malayan Insurance Co., Inc. obtained the highest score in the Competitive Profile Matrix. Companies were rated based on the critical success factors as determined by the researcher. AIS GI gathers a high score next to Malayan Insurance. Strong Financial Position and Accessibility of the Office are the factors in which AIS GI excel. This reflect how financially stable the AIS is. Among critical success factors that were considered, variety of products is the major weakness of the company. AIS GI offers products that will be fit to the government offices and government individual employees thus it limit the possible product offering, such as OFW Insurance. 49 External Factor Evaluation (EFE) External factors were evaluated and classified as opportunity or threat to AIS GI. Table 13 EFE Matrix Opportunities 1. 2. 3. 4. 5. 6. Weight Rating Weighted Score 0.15 4 0.60 0.12 2 0.24 0.10 0.10 3 2 0.30 0.20 0.07 4 0.28 0.06 3 0.18 Weight Rating Increase in the Capital Requirement Increasing Cyber Threats Increasing Motor Car Claims due to Increase in Road Accidents Philippines' Vulnerability to Natural Catastrophes Rising Threat of Terrorist Attack Implementation of IFRS 17 for all Insurance Sector 0.10 0.08 4 1 Weighted Score 0.40 0.08 0.07 2 0.14 - 4 1 1 - TOTALS 1.00 Creation of the Inter-Agency Committee on Government Property Insurance IC allowed Non-life Insurers to Invest in Real Property Growth of Internet Usage in the Philippines Propose Tax Cut for Non-life Insurance Sector GDP growth rate forecasts by 6.9% in 2017 and 2018 Auto industry sales to hit 440,000 units in 2017 Threats 1. 2. 3. 4. 5. 6. 2.75 Opportunities Creation of the inter-agency committee on Government Property Insurance in 2017 is expected to affect the revenue of the AIS GI; this is to ensure that the key 50 properties, assets and other insurable interest of government are comprehensively and adequately insured. Based on the computed investment income ratio, AIS only gather 11% of income from the premiums earned. And since the government allowed that all non-life insurance may invest in the real properties, this is a right opportunity for the AIS to maximize possible fund that will continue to support the current and future claims in general insurance. AIS exhibits innovation when it was able to provide AIS Wireless Automated Processing System (GWAPS), a kiosk system where AIS members may do a transaction such as loan application, managing personal information and viewing of Statement of Account but this system was only limited for the use of Social Insurance product. Increase in the use of internet in the Philippines, shows an opportunity to engage in the online processing of non-life insurance transaction. Like Malayan Insurance, AIS GI may also innovate in claims processing by making it possible for the customers to apply claims through internet. The AIS is a VAT exempt entity thus the tax on non-life insurance products are lower than private non-life companies. Non-life products of AIS are subject to 12.5 % documentary stamp tax and other service tax. The propose tax cut in the Non-life insurance sector is an opportunity, not only for the AIS but for the whole non-life 51 insurance industry. This will make the non-life products more affordable and will bring possible increase in the insurance coverage. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. The growth in economy also brings growth in the sales of other industry such as Car sales. The auto industry is positively expecting that they will reach 440,000 units of car sales. This opportunity translates to higher motor car insurance coverage. AIS GI is aggressive in terms of trying to improve motor insurance products. In 2017, AIS Achieves ISO 9001:2015 Certification for motor vehicle claims processing. Threats Capital requirement for the year 2019 is P900 million pesos. This will force small players in the business to have an additional capital. Though this is a big factor in the non-life industry, AIS GI has a superior response for this requirement. Based on the IC Statistical report, AIS has 26 billion of networth thus this will suffice the compliance of requirement. Though AIS has enough networth, the company should still observe to comply and make strategic actions to bring more capital build up through profit. 52 Increase in cyber threats should be a concern of AIS GI. Philippine government offices are susceptible to cyber-attack. With the emerging issue on data security in government websites, the government should also consider of having cyber insurance to cover the loss and damaged information in government offices. The World Bank has entered into a reinsurance agreement with AIS to provide coverage for government assets and local government units from natural disasters. This policy arises because of the impact of extreme climate and weather related events in the Philippines for the past years. The vulnerability of Philippines to natural catastrophes affects the loss ratio of the non-life industry, but the AIS GI will minimally affected by this because of the agreement with World Bank. The rise on terrorist attack triggered the need for insurance cover against terrorism. Currently, there is only one company in the country that offers terrorism insurance. Terrorist acts are often considered a "standard exclusion" in the typical property insurance policy. Terrorist usually attack on public area and government establishment. Having a terrorism insurance product will be a big help to for government. 53 For the implementation of IFRS 17, this will somehow affect the company in terms of the financial reporting and computation of actuarial life. As a financially established company, AIS is confident to adopt the reporting standard. 54 Chapter 5 COMPANY ANALYSIS A. Human Resources Area The administration and management of personnel is the function of the Human Resource Office (HRO). One of these functions is the hiring of qualified personnel. Aside from Career Service Professional eligibility, relevant training is needed to be able to qualify to enter in the government service. AIS have an approved plantilla position of 3,131, out of this position only 3% (90) are allocated in the Insurance Group (IG), the group that deals in the non-life insurance operation. The IG has four (4) departments which consist of: Reinsurance Department with 28 personnel, Marketing Department which only have 15 personnel, Underwriting Department has 28 personnel and Claims Department consists of ten personnel. The HRO facilitates training based on the functionality. The HRO requires the employees to have at least eight hours of training every year. Training such as Insurance Claims Course and Basic Non-life Reinsurance Course is encouraged to be taken by the staff of IG. Because of the increasing volume of transaction in the non-life insurance, AIS is experiencing the lack of manpower. AIS hires Job-Order contract personnel to help 55 address this problem but because of the some limitations, like Signing Authority, these Job-Order personnel have limited tasks. B. Marketing Area The Marketing Department of AIS was created to serve as the marketing arm of the Insurance Group. Its general objective is the administration and management of the Group’s non-life insurance accounts. Specifically, it aims to: a.) identify and promptly provide all government properties with the proper risk analysis and adequate insurance cover; b.) and monitor and coordinate in the collection of all monies due the General Insurance Fund as and when these become due and demandable. Marketing Area of AIS may be assessed through one of the most important aspect of marketing – Marketing mix, which is composed of product, price, place and promotion. Product Since providing property insurance to the government is the main mandate of AIS GI, it offers product that are fit to the government agencies an Government – 56 owned corporation. For the institutional clients, AIS offers the following non-life insurance:  Aviation - provides protection against direct physical loss or damage arising out of the operations of an aircraft while it is in flight, taxiing, on the ground, or moored. It also includes third party liability, passenger personal accident, pilot and crew personal accident, including but not limited to war, hijacking, among others.  Bonds - Contracts of suretyship, where AIS as surety, guarantees the performance by another party, the principal, of an obligation or undertaking in favor of the government as the obligee. AIS issues different types of bonds such as Bidders Bond, Performance Bond, Surety Bond, Haulers Bond and Customs Bond.  Marine Cargo and Marine Hull - AIS insures all government cargoes in transit either by land (including dock storage), sea and air against loss or damage resulting from heavy weather, fire, lightning, explosion, grounding, stranding, collision, machinery damage, ranging, piracy, barratry, sue and labor. 57  Miscellaneous Line - Miscellaneous Insurance covers livestock, fidelity guarantee, comprehensive triple “D” (dishonesty, disappearance and destruction) and Comprehensive General Liability. The latter includes damages for death and care, loss of services resulting from bodily injury as well as damages for loss of use of property arising from property damage.  Property Floater - An insurance coverage designed to insure movable properties (mobile, heavy or contractors’ equipment) against direct physical loss or damage. AIS GI offer non-life products to AIS members, pensioners and their dependents. Unlike government offices, these individuals are not required to avail the non-life insurance products. For individual, AIS have the following GCare Plans, an umbrella of product of non-life insurance:  MyShield – Insurance for personal accident. A minimum coverage may range from Php50,000 to a maximum of Php5 million.  HomeShield - Provides insurance coverage against fire.  AutoShield - Provides a comprehensive insurance coverage for vehicles at 20% less than the prevailing rate in the market 58 Price AIS premium rates are based on risk evaluation assessment which considers various factors such as age and location of the property, value of the property and historical data. Since AIS is a tax exempt company, premiums on insurance plans are lower. For the P50,000 personal accident, annual premium rate will be P50. Figure 8 Sample Computation of Annual Premium for Personal Accident Place AIS has forty two (42) branch and satellite offices all over the Philippines. These branches serve as distribution channel of non-life product. Application and 59 filing of claims may be made in these offices. AIS also have a contact center where a customer may file report a claim but the filing should be done through submitting of required documents in the AIS offices. Promotion Corporate Communications Office is the functional group that deals with the information dissemination of the product of AIS. The company uses website as a platform to promote the products. Online quotation may be done through accessing the calculator. Promotion of non-life product is a weak area of the AIS GI. AIS has Member’s Hour, a television segment, which tackle AIS product information and issues but it is more focused on the Social Insurance products such as pensions, loans and dividends. C. Production and Operations Area Underwriting Underwriting involves the evaluation and acceptance of risks. AIS underwriting includes the assessment of the coverage, insured amount, and premium rates. Once term has been finalized, a policy will be issued to the customer. 60 Claims Processing of claims starts with the customer’s application. This also involves the assessment and validation of the incident and damages incurred. AIS branches mainly accept claims application but the processing is centralized and managed by Insurance Group in the head office. Since processing of claims is centralized, it has affected the turnaround time of the approval of claims. Reinsurance To limit the total loss that would experience in case of disaster, AIS GI spreads the risk by selling insurance policy to other non-life companies. AIS has a competitive bidding process in reinsurance, the company established a General Insurance Bids and Awards Committee (GIBAC) to deal with reinsurance of large contract. D. Financial Performance Financial Performance is critical on the survival and continuous growth of insurance companies. Information on financial performance of AIS GI is based from the submitted corporate audited financial statement of AIS. AIS GI operations and transactions are all reflected on the General Insurance Fund. In 2016, the AIS GI business posted net operating income of 2.60 billion, higher by 16% based on the 2.24 61 billion in 2015. Increase in total income by 34% was due mostly to the increase in Income from Financial Assets. Income from insurance likewise increased by 19% due mainly to the increase in General Insurance premiums. Total expenses increased by 55%, from 1.8 billion to 2.9 billion due mostly to the increase in expenses on general insurance claims and investment fees. AIS Management Fees was included in the part of the computation of total expenses. 6,000 5,000 in Million Pesos 4,000 3,000 2,000 1,000 0 2014 2015 2016 Total Income 5,013 4,134 5,532 Total Expense 2,625 1,896 2,932 Net Income 2,388 2,238 2,600 Figure 9 AIS’ Statement of Financial Performance Total assets increased by P1.62 billion or 5% from December 2015 to December 2016 due mostly to the increase of P7.16 billion in financial assets. Total liabilities decreased by P1.28 billion or 11% due mostly to the decrease in insurance 62 liabilities of P799 million resulting from the payment or processing of claims accrued in 2015. AIS’ solvency ratio is calculated by dividing available networth by the required minimum networth of Insurance Commission which is P550 million. This is an important measure in assessing the capital adequacy of an insurance company. It is also important that a non-life insurance company is liquid enough to cover claims since non-life insurance contract are generally short-term. In 2016, the computed current ratio of AIS GI is 2.44. Based on the details on financial performance, some of the relevant financial ratios are as follows: Table 14 Financial Ratios Ratio Net Profit Ratio Expense Ratio Debt to Equity Ratio Debt to Asset Ratio Return on Asset E. Internal Factor Evaluation (IFE) 2016 47% 2015 56% 38% 32% 24% 7% 28% 40% 29% 7% 63 The internal strengths and weakness of AIS GI in different functional areas were assessed and given a weight. The strengths and weaknesses are organized in IFE matrix was rate categorically – being minor or major strength and minor or major weakness. Table 15 IFE Matrix Strengths 1. Strong Financial Position Weight Rating 0.15 4 Weighted Score 0.60 2. Government-Owned Entity 0.13 4 0.52 3. Low Premium Rate 0.11 3 0.33 4. Website Platform and TV Program Segment 0.09 4 0.36 5. 42 Branch Offices nationwide 0.07 3 0.21 6. Insurance provider of properties of the government 0.05 4 0.20 Weaknesses 1. Inefficient of Product Awareness Weight Rating 0.10 1 Weighted Score 0.10 2. Slow Processing of Claims Approval 0.08 1 0.08 3. Highly Political Management 0.07 1 0.07 4. Lack of manpower for General Insurance Transaction 5. Limited Product offering 0.06 2 0.12 0.05 2 0.10 6. Products is limited to Government Offices, AIS members, pensioners and their dependents TOTALS 0.04 2 0.08 Strengths 1.00 2.77 64 One of the major strength of AIS GI is its strong financial position. Though AIS is a government-owned and controlled corporation, it does not receive subsidy from the Department of Budget and Management or National Government. Aside from the income from general insurance, AIS also have an income from the Social Insurance operations. It is important for an insurer to establish a sound financial position as the nature of business is managing the risk. Low-premium rate is the major strength of the AIS GI. Since AIS entity is exempted from VAT, it claims to have the lowest premium rate of non-life product in the market. This competitive advantage of having low premium rates was being opposed by the private non-life company. AIS also invested in the innovation and information technology infrastructure. It established a website and Television program to reach internet users especially those pensioners abroad. Having many branches that are strategically located in every region is also one of the major strength of AIS GI. Weaknesses 65 AIS approves claims through numerous processes, apart from this it also requires a number of documents to have the claims approved. This is because of the centralized processing of claims in the head office. Another drawback is the lack of manpower. The rise in claims mirrors the rise in non-life transactions but it was only being handled by 3% of the total manpower of the AIS. Other weaknesses of AIS GI are that the market limited to government offices and AIS member only and it offers limited variation of products. 66 Chapter 6 STRATEGY FORMULATION The Strength-Weaknesses-Opportunity-Threat (SWOT) Matrix SWOT matrix is used to structure a strategic planning tool. This will be based on the evaluation of strengths, weaknesses, opportunities and threats involved in a AIS GI. The SWOT analysis is a matching tool, where in the following will be matched, the (SO) Strength-Opportunity, (WO) Weakness-Opportunity, (ST) Strength-Threats, and the (WT) Weaknesses-Threats. SO Strategy AIS should utilize its resources to exploit external opportunity to industry. One of these opportunities is the growth of GDP, along with this economic growth is the increase of interest-rate-sensitive assets. AIS GI may have an additional investment to gather more return that will strengthen the financial position of the company. Another opportunity is the permission of IC to invest in real property. An insurance industry should be liquid and needs large amount of current asset to be able to cover any claims that may arise. But since it is the main business of insurer to spread the risk, it should also consider additional investment other than stocks and bonds. This will bring 67 additional income to company and will expand the value of assets as the value of property rise. Since AIS GI has over 42 branch offices in the Philippines and a website and other social media platform to reach the majority of the market. It would be best to take these advantages as a distribution channel to promote the product especially the motor car insurance. WO Strategy To improve company’s weaknesses it should take advantage of the opportunities in the environment. Since there is a rising non-life insurance-related transaction, it would be beneficial for the company to have an additional manpower to this. Aside from additional personnel, AIS GI may provide innovative services for the policyholders to accept claims application through website or online platform. This strategy will tap the internet users and will be able to process the claims efficiently. ST Strategy The strengths of the company should be used to reduce the impact of threats in the environment. The anticipated increase in motor car insurance claims and other nonlife transaction will bring bulk of work to the AIS GI. Decentralizing the processing of 68 claims to the branch offices to accommodate this increase in transaction should be the number one option to cater this threat. Aside from this, AIS GI should also strengthen the financial position to augment the rise of claims transaction. AIS may also develop Cyber Insurance for Government Offices to protect or compensate the government in the cyber-attack. WT Strategy Assessing the threats and weaknesses may bring a defensive tactics that aimed to reduce the risk of the business. Since AIS have limited product offering, it may develop property insurance with coverage on acts of nature and acts of terrorism. this product will cater not only government offices but individual clients also. The company should also streamline the processing of claims to accommodate non-life transaction. Streamlining may involve the decentralization of process in the branches, having marketing team in each branch and go “paperless” by accepting application through internet or email, just like Malayan insurance. 69 Table 16 SWOT Matrix Strengths 1. Strong Financial Position 2. Government-Owned Entity Opportunities 1. Creation of the InterAgency Committee on Government Property Insurance 2. IC allowed Non-life Insurers to Invest in Real Property 3. Growth of Internet Usage in the Philippines 4. Propose Tax Cut for Non-life Insurance Sector 5. GDP growth rate forecasts by 6.9% in 2017 and 2018 6. Auto industry sales to hit 440,000 units in 2017 Threats 1. Increase in the Capital Requirement 2. Increasing Cyber Threats 3. Increasing Motor Car Claims due to Increase in Road Accidents 4. Philippines' Vulnerability to Natural Catastrophes 5. Rising Threat of Terrorist Attack 6. Implementation of IFRS 17 for Insurance Sector 3. Low Premium Rate 4. Website Platform and TV Program Segment 5. 42 Branch Offices nationwide 6. Insurance provider of properties of the government SO Strategies (S5,O1,O6) Promote Motor Car Insurance in local government unit and individual customer. (S1,O2) Utilize assets for investment in Real property to further expand the investment income. (S1,O5) Invest in interest-ratesensitive assets as the interest rate is expected to increase along with the growth of GDP. (S4,O3) More product promotion on website and other social media platform to reach the majority of internet users. ST Strategies (S5,T3) Decentralize the processing of claims to the branch offices to accommodate the increase in motor car insurance claims and other GI transaction (S1,T3) Strengthen financial position to cover all current and future claims (S3,T2) Develop Cyber Insurance for Government Offices to protect or compensate the government in the cyber-attack Weaknesses 1. Inefficient of Product Awareness 2. Slow Processing of Claims Approval 3. Highly Political Management 4. Lack of manpower for General Insurance Transaction 5. Limited Product offering 6. Products is limited to AIS members WO Strategies (W4,O1,O6) Additional manpower to cater the possible increase in government property insurance and Motor car insurance. (W2,W4, O3 ) Go "paperless" by accepting claims application online. (W1,03,O6) Product awareness that will tapped internet users and carowners. (W6, O1) Maximize the coverage of non-life insurance in every Government Offices, GOCCs and individuals such as member, pensioner and their dependent. WT Strategies (W1,W6,T4,T5) Promote property insurance with coverage on acts of nature and acts of terrorism (W2,W6,T4) Aim for higher coverage of property insurance by having marketing team in each branch (W5,T2) Offer cyber-insurance government offices and governmentowned corporation (W4,T3) Streamline the processing of claims to accommodate motor car claims 70 The Internal-External (IE) Matrix The IE matrix was used to plot the AIS GI to analyze the current position of the AIS GI. The IE Matrix is based on the EFE matrix and IFE matrix. Strong The Total IFE Weighted Scores Average Weak 4.0 to 3.0 2.99 to 2.0 1.99 to 1.0 4.0 I II III 3.0 IV V VI VII VIII IX High The EFE Total Medium Weighted Scores 2.0 Low 1.0 Figure 10 IE Matrix IFE Score = 2.77 EFE Score = 2.75 The total calculated weight on the EFE matrix is 2.75 which points that the company has above-average internal strength and the total score calculated on the IFE 71 matrix is 2.77 which points at a company with above-average respond to external factors. The AIS GI falls within the average to medium cell specifically designated as “V” that indicates the hold and maintain strategy. In this case, the tactical strategy should focus on the market penetration and product development. Strategic Position and Action Evaluation (SPACE) Matrix The SPACE matrix is used to determine what type of strategy AIS should undertake. The analysis assesses the internal and external environment. Analysis on the external environment used two criteria, the Stability Position and the Industry Position. Financial Position and Competitive Position are the factors used to analyze the internal. Table 17 Space Matrix Internal Analysis: Financial Position (FP) Return on Investment (ROI) Gross Premium Growth Rate Liquidity Working Capital Financial and Operating leverage Financial Position (FP) Average Internal Analysis: Competitive Position (CP) Market Share Product Variety Premium Rate Technological know-how Control over Suppliers and Distributors - -6 -6 -2 -3 -2 Competitive Position (CP) Average -3.8 X-axis (Average CP + Average IP) = -.4 External Analysis: Stability Position (SP) Rate of Inflation Technological Changes Price range of competing products Competitive Pressure Risk involved in business Stability Position (SP) Average External Analysis: Industry Position (IP) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential -2 -1 -6 -2 -5 -3.2 2 6 2 2 5 Industry Position (IP) Average 3.4 Y-axis (Average FP + Average SP) = 1.8 72 FP Conservative Aggressive 3.5 3 X-axis Y-axis -0.4 1.8 - CP -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0.5 1 1.5 2 2.5 3 3.5 IP -0.5 -1 -1.5 -2 -2.5 -3 Defensive -3.5 SP Competitive Figure 11 SPACE Matrix Based on the analysis, AIS falls within the Conservative quadrant. The conservative position shows that the industry is stable with low growth rate and financially stable company, a critical factor is in the product competitiveness. The recommended strategies for the conservative profile are market penetration, market development, product development, and related diversification. Company should 73 protect its successful products and develop new ones and think of the possibilities of the penetration. Grand Strategy Matrix Market Growth – Rapid Faster growth is expected in the Philippine non-life insurance industry. Non-life firms recorded a double-digit growth of 19.4% in its net premiums written to P10.89 billion at end-March 2017. Competitive Position of AIS AIS is currently in a weak competitive position with only 3.10% market share compared to the market leader, Malayan, which has 10.75%. 74 Rapid Market Growth Quadrant II Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Weak Competitive Position Strong Competitive Position Quadrant III Quadrant IV Slow Market Growth Figure 12 Grand Strategy Matrix AIS falls within Quadrant II in the matrix. This highlights that the organization is weak competitive situation while there is growth in the industry. The organization should also try to find out the best way of change that can improve effectiveness. The recommended strategies are market development, market penetration, product development, horizontal integration, divestiture, and liquidation. 75 Matrix Summary Table 18 Summary of Matrices Strategies SWOT SPACE Market Penetration Product Development IE GRAND TOTAL X X X X 1 1 1 1 2 X X 4 4 X Diversification Divestiture Horizontal Integration Liquidation Market Development X X X X X X X All four matrices determined that AIS GI should use the market penetration strategy and product development strategy. The Quantitative Strategy Planning (QSP) Matrix QSP Matrix attempts to objectively select the best strategy using information derived from the matrices in the Input stage (CPM Matrix, EFE Matrix and IFE Matrix) and in the matching stage like SWOT, SPACE, IE, and Grand Matrices. 76 Table 19 QSP Matrix 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. Opportunities Creation of the Inter-Agency Committee on Government Property Insurance IC allowed Non-life Insurers to Invest in Real Property Growth of Internet Usage in the Philippines Propose Tax Cut for Non-life Insurance Sector GDP growth rate forecasts by 6.9% in 2017 and 2018 Auto industry sales to hit 440,000 units in 2017 Threats Increase in the Capital Requirement Increasing Cyber Threats Increasing Motor Car Claims due to Increase in Road Accidents Philippines' Vulnerability to Natural Catastrophes Rising Threat of Terrorist Attack Implementation of IFRS 17 for all Insurance Sector Strengths Strong Financial Position Government-Owned Entity Low Premium Rate Website Platform and TV Program Segment 42 Branch Offices nationwide Insurance provider of properties of the government Weaknesses Inefficient of Product Awareness Slow Processing of Claims Approval Highly Political Management Lack of manpower for General Insurance Transaction Limited Product offering Products is limited to Government Offices, AIS members, pensioners and their dependents TOTAL Market Penetration Product Development Weight 0.15 AS 4 TAS 0.60 AS 3 TAS 0.45 0.12 4 0.48 1 0.12 0.10 0.10 3 2 0.30 0.20 4 1 0.40 0.10 0.07 3 0.21 2 0.14 0.06 3 0.18 4 0.24 Weight- AS 2 3 3 TAS- AS 1 4 4 TAS- 0.06 2 0.12 3 0.18 0.05 0.04 3 2 0.15 0.08 4 1 0.20 0.04 Weight- AS 4 4 3 3 4 4 TAS- AS 3 2 4 4 3 3 TAS- Weight- AS 4 4 4 4 TAS- AS 3 3 3 3 TAS- 0.05 0.04 2 4 0.10 0.16 4 3 0.20 0.12 6.67 5.69 77 The QSP Matrix was done by rating each strategies based on the attractiveness of strengths, weaknesses, opportunities, and threats. The highest attractiveness score that may be obtained in this QSP Matrix is eight (8). The results of QSP Matrix for AIS GI revealed that the business should do a market penetration. Specifically, the summed total attractiveness score of 6.67 for market penetration strategy is more attractive than product development strategy. If resources become available, the company could implement both strategies. Market penetration strategy involves focusing on selling existing products or services into the existing markets to gain higher market share. This strategy may be considered because it carries the lowest amount of risk. 78 Chapter 7 OBJECTIVES, STRATEGIES, RECOMMENDATIONS and ACTION PLANS Strategy implementation summarizes all the analyzed results that needed for executing a strategic plan. It is the process where objectives and strategies are put into action via establishing program to create a series of new organization activities, budgeting, forecast financial needs, and handling day-to day details. A. Strategies and Financial Objectives 1. Increase Income from Insurance by 10% for the following three years AIS GI will target to increase premium revenue from insurance. This will allow the company to fund further growth and also help ensure its capacity to cover any sudden increases in losses due to claims, will help cover reinsurance expenses. This objective will address several strategic issues. In striving to increase the gross premium revenue the company will spread its risk exposure geographically and among a greater number of insurance buyers. In addition, the increase in revenue from premium will most likely increase the market share of the AIS GI. Through expanding the marketing function of AIS GI these financial objectives will help the 79 company remain profitable in the face of rising costs and decreasing premium revenue. 2. Establish a dynamic asset allocation and good investment framework AIS GI will aim for a yearly increase in income from investments of 10%. Funds are to be invested in stocks, bonds, derivate and properties. The income might also be used in system development that could further improve the operations. 3. At least 5% yearly increase in Net income Deliver unparalleled returns and stakeholder value AIS GI will aim for the yearly increase on Net Income through managing the increase in income from insurance and investment. Increase in income will have a corresponding expense. A systematic budget utilization process will be implemented in the system. B. Recommended Business Strategies Based on the QSP Matrix, to take a focused approach to general insurance with disciplined process and efficient claims handling, two of the most attractive strategies 80 for AIS are market penetration and product development. Suitable strategies based on the SWOT analysis are: Market Penetration 1. Augment existing online and media channel capability to increase product awareness Given the opportunity in online platform, AIS should employ aggressive digital marketing to increase non-life product awareness. AIS have website, social media page and a TV segment program that are currently available to AIS but these media channels were being used to promote and focus on the Social Insurance product of the AIS. Through this strategy, AIS can reach wider audience as compared to traditional way of posting product information in the branch offices. To maximize the yield on this marketing initiative, AIS should develop the facility to allow customers to purchase motor car insurance, home insurance and other non-life products for convenience and accessibility of the products. 81 2. Expand marketing function in every branch offices AIS has a network of 42 branch offices strategically spread throughout the country but the marketing function is just located in the head office. The company can utilize these branch offices to establish a marketing manager for general insurance to promote non-life product to the government offices that are located in the area or to AIS members and pensioners. Aside from this, the marketing manager or team may also do the monitoring of the productivity of their branch in terms of number of policyholder. The company should also ensure that branch offices have the necessary authority and resources to implement this strategy because this will mean additional personnel in the workforce of the company. 3. Increase the number of policyholders by 20% Increasing policyholder will support the strategy of increasing the income from insurance for this will bring more premium revenue. The AIS’ low market share indicates a significant amount of room for growth. 82 Product Development Since market penetration is one of the strategies suggested by most of the matrices, this will involve on focusing selling existing products or services into the existing markets which are the government offices, government employees and pensioners. The AIS GI has limited market base as compared to the private entity thus it only offers products that are suitable for the existing market. On the other hand, products of AIS should be developed for additional benefits to the customer. Product development may involve modification of existing product to satisfy the customers. The following product development were determined based on the external factors, these development were also being pushed by the Insurance Commission to cater the existing risks. 1. Offer property insurance covering losses and damages from acts of terrorism A terrorist attack can cause physical damage to buildings, building contents, vehicles and other property owned by a business especially properties that are owned by the government that is usually the target of the terrorist. Terrorism insurance provides coverage to individuals and businesses for potential losses due to acts of terrorism. AIS GI will evaluate the premium pricing to adjust the rate based on the risk of the product. 83 2. Develop cyber-insurance product This product will protect government offices and other companies that deal with the government from cyber risk. It will cover the breach of data, loss of revenue due to cyber-attack. Presently, only AIG insurance is offering cyber insurance. This product will help mostly the government website and application system that are vulnerable to cyber-attack. 3. Go paperless filing of application for claims To further improve the service of AIS GI, it will use the available channel to maximize the efficiency of processing of claims and provide convenience to the customer. Digital copy of the requirements may be send through the website platform, through this – the AIS GI may have an assessment to approve the claims. AIS may then contact the claimant to inform of the approval of the claims. In this way customer may file their claims wherever they are. Since asking a question through website is currently available in the AIS website, the Information Technology department may have a workaround process to add features for the submission of document for claims. 84 C. Recommended Organizational Strategies The recommended organizational strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity. The strategies will necessitate the implementation of several changes in AIS current organizational structure. 1. Molding competent employees in obtaining highest insurance qualification Employees within the functional divisions of an organization tend to perform a specialized set of tasks. AIS GI should have a qualified understanding in the non-life products and knowledge in the underwriting. The behavior and competence of the employees affect the success of the organization. Strategic implementation requires support through training and seminar, discipline, motivation and hard work from all manager and employees. 2. Rationalize AIS GI structure and decentralize function to improve claims processing Since part of processing of claims is centralized in the head office of the AIS GI this affect the turnaround time of the approval or the release of LOA. To simplify the procedure, the following may be done: 85  Decentralization of claims processing to the branch offices, including the capacity building and training of concerned personnel  Updating the Manual of Signing Authority to be able the Managers in branch offices to sign the claims-related disbursement voucher 86 D. The Strategy Map 87 E. Financial Projections and Overall Evaluation of the Strategies General Assumptions 1. Aside from the effect of the involvement of AIS to the Property Insurance committee, the market penetration and product development strategies will increase the income from insurance by 10% following the increase in insurance expense by 10% and claims expense by 20%. 2. Good investment management will also bring 10% increase on the income on Financial Assets likewise investment expense will also increase by 10% every year for the next three years. 3. The Social Insurance Fund, being the administrator of the General Insurance Fund charges the administered funds with administration fees and marketing commissions, as follows:  10% administration fee based on the General Insurance net premiums retained;  20% marketing commission based on General Insurance net premiums retained 88 Table 20 Projected Financial Performance (in Million Pesos) 2016A 2017E 2018P 2019P 2020P INCOME Income from Insurance 4,442.49 5,375.58 5,913.14 6,504.45 7,154.90 Income from Financial Assets 1,033.29 1,169.97 1,286.97 1,415.66 1,557.23 55.91 426.48 447.80 492.58 566.47 TOTAL INCOME 5,531.69 6,972.03 7,647.91 8,412.70 9,278.60 EXPENSES Claims and Benefits 494.45 612.76 735.31 882.38 1,058.85 Insurance Expenses 1,630.13 2,552.78 2,808.06 3,088.86 3,397.75 0.41 0.39 0.43 0.47 0.52 TOTAL EXPENSES 2,124.99 3,165.93 3,543.80 3,971.71 4,457.12 OPERATING INCOME BEFORE AIS FEES AND COMMISSION 3,406.70 3,806.10 4,112.64 4,436.68 4,777.46 Administration Fee (268.92) (266.03) (292.63) (321.89) (354.08) Marketing Commission (537.84) (532.06) (638.47) (766.16) (919.40) AIS FEES AND COMMISSION (806.76) (798.09) (931.10) (1,088.06) (1,273.48) 2,599.95 3,008.01 3,-% 3,-% 3,-% Other Income Investment Expenses Add (Deduct): NET INCOME Projected Annual Growth F. Departmental Programs To implement the recommended strategies, departmental programs should be aligned with the objectives. 89 Human Resource Human Resource Department should prioritize the filling-up of the vacant position in the organization. This is to attain the highest level of productivity. Having a good staffing structure will minimize overtime expenses and will promote wellbeing in each employee. The Department should also see to it that employees have right training and seminar which is related to the personnel’s functionality. Marketing Area Marketing department should not only focus on the monitoring of government’s property insurance. With the help of Corporate Communications Office and Information Technology Service Office, advertisement or information dissemination of non-life product should be prioritized thru AIS website and AIS Member’ Hour TV Series. Operations Area Staff in the operations area should undertake a necessary training on technical and customer service. The objective of the company should cascade to everyone in the 90 branches and in the head office that are directly dealing with the customers to improve customer service and acquire product knowledge. Finance Area Financial Management Office and Controller Office also have a significant role in the implementation of strategies. Allocating resources and ensuring the return of investible funds should be the main concern of Finance Office. Performance of each functional group and growth of the company as a whole will reflect to the Financial Report and this will be monitored. Another function is to deliberately recommend to each Functional group on how they will maximize the resources and perform according to the allocated budget. 91 Chapter 8 STRATEGY EVALUATION MONITORING AND CONTROL The final stage in strategic management is strategy evaluation and control. All strategies are subject to future modification because internal and external factors are constantly changing. In the strategy evaluation and control process managers determine whether the chosen strategy is achieving the organization's objectives. To evaluate monitoring and control of the strategies, the balance scorecard is provided. Perspective Customer/ Stakeholder Financial Objective Measure Target Improve turnaround time in processing of claims Number of days of release of LOA No complaints on 8888 Citizens' Complaint Center Reported complaints 15 working days from the submission of complete documents zerocomplaints Deliver Returns Income from Insurance increase by 10% end of year Variance Report 80% Budget Utilization Net Income increase by 5% end of year Office Responsible General Insurance Office; Branch and Head Office Operations General Insurance Office; Branch and Head Office Operations; IT Services Office; Corporate Communications Office General Insurance Office; Branch and Head Office Operations; Finance Office 92 Perspective Internal Process Learning and Growth Objective Measure Target Office Responsible Create and implement a dynamic asset allocation and investment framework Develop and promote digital transformation Increase of Investible Funds increase by 10% end of year Finance Office; General Insurance Office; Branch and Head Office Operations; Completion of IT project Count of IT projects completed IT Services Office ISO Certification on each non-life product Number of ISO Certification at least 1 ISO certification at the end of the year General Insurance Office; Branch and Head Office Operations; IT Services Office; Corporate Communications Office; Finance Office Training for the employees Number of staff trained General Insurance Office; Branch and Head Office Operations; Human Resource Office Rationalize the General Insurance Workforce retention and recruitment of workforce in the General Insurance office 100% trained staff with at least with at least 16 hours training at the end of the year 100% restructured workforce by the end of 2018 Filling up of Vacant Position Number of Actual Employee versus Number of Plantilla Position at least 95% filled up position at the end of the year Human Resource Office General Insurance Office; Branch and Head Office Operations; Human Resource Office 93 Chapter 9 CONCLUDING REMARKS The government corporations in all service sectors in the country are pressed to justify their ability to deliver service excellence and competence. The AIS, as a government-owned and controlled corporation should not limit the organization to explore different ways to achieve its goal. The AIS should manage on how to improve customer value, maximize the use of resources and exercise greater fiscal responsibility The study considered several external factors that affect the non-life industry especially the AIS GI. The company’s strengths and weaknesses were assed to determine the appropriate strategies to be taken. Internal and external factors were used to formulate a business and organizational strategies. Various matrices exhibit that AIS GI is a conservative entity in nature. The company has adequate resources and potencies but it does not perform well in the industry as compared to the private nonlife corporations. Though AIS GI has limited market, the matrices suggest strategies to improve the current standing of AIS GI through market penetration and product development. AIS should be more assertive in marketing to penetrate more deeply into existing customer base which are the government offices, members and pensioners. 94 To further tap the existing market, it is necessary for AIS GI to expand its online capabilities to bring product awareness. The rationalization of the personnel and process to provide marketing function to each branch offices is another way to maximize its current market. Using these strategies, AIS may attain its financial objective of increasing of at least 5% Net Income in the following years and will be able to perform well in managing investment that will increase the income from investment of 10% yearly. As seen in this study, AIS may serves as an example to other government corporations in utilizing strategic management tools to provide superior level of products and customer services and deliver innovative service mechanisms despite inherent complexities within the public sector and may be at par with the top private non-life companies. 95 REFERENCES P. (2017, January 08). AIS Mandate. Retrieved December 22, 2017, from http://www.AIS.gov.ph/about-us/AIS-mandate-and-functions/ P. (2017, January 08). AIS Mandate. Retrieved December 22, 2017, from http://www.AIS.gov.ph/about-us/AIS-mandate-and-functions/ Mercurio, R. (n.d.). Car firms brace for impact of auto excise tax. Retrieved October 19, 2017, from http://www.philstar.com/business/2017/12/11/-/carfirms-brace-impact-auto-excise-tax Resane, A. M. (2017, August 27). IC backs proposed tax cut for non-life sector. Retrieved October 19, 2017, from http://bworldonline.com/ic-backs-proposedtax-cut-non-life-sector/ Rea Cu. (2017, September 14). Retrieved October 19, 2017, from https://businessmirror.com.ph/new-regulation-allows-nonlife-insurers-to-investin-real-property/ Romero, A. (n.d.). Duterte creates panel to ensure government assets are insured. Retrieved October 16, 2017, from http://www.philstar.com/headlines/2017/08/09/-/duterte-creates-panelensure-government-assets-are-insured Gregorio, X. (2017, November 9). 2017 PIRA FACT BOOK (R. J. Concepcion & J. M. Ocampo, Eds.). Retrieved January 4, 2018, from http://www.pirainc.org/index.php/pirafactbookleft? Key Data 2012 - 2016. (n.d.). Retrieved from https://www.insurance.gov.ph/wpcontent/uploads/2017/12/Key_Data_2016.pdf 96 Global Terrorism Index 2017. (n.d.). Retrieved November 30, 2017, from http://visionofhumanity.org/app/uploads/2017/11/Global-Terrorism-Index2017.pdf NATIONAL BASELINE SURVEY ON FINANCIAL INCLUSION. (n.d.). Retrieved December 13, 2017, from http://www.bsp.gov.ph/downloads/publications/2015/NBSFIFullReport.pdf Bayle, A. (n.d.). Philippines ranked 8th most vulnerable to malware attacks in Asia. Retrieved October 19, 2017, from http://technology.inquirer.net/67120/philippines-ranked-8th-most-vulnerable-tomalware-attacks-in-asia Steinbock, D. (2017, September 04). Global climate dissension is a risk to the Philippines. Retrieved October 19, 2017, from http://www.manilatimes.net/global-climate-dissension-risk-philippines/348502/ Ager, M. (n.d.). 10,000 vehicular accidents in first 4 months of 2016 - police. Retrieved December 20, 2017, from http://newsinfo.inquirer.net/821966/10000vehicular-accidents-in-first-4-months-of-2016-police Amended Insurance Code R.A. 10607. (n.d.). Retrieved October 19, 2017, from https://www.insurance.gov.ph/issuances/laws/amended-insurance-code/ Gross Premiums Written of Non Life Insurance Companies Year 2016. (2017). Retrieved October 19, 2017, from https://www.insurance.gov.ph/wpcontent/uploads/2017/12/Gross-Premiums-Written-of-Non-Life-InsuranceCompanies_Year-2016.pdf Insurance companies post flat total premium income in 2016. (n.d.). Retrieved December 30, 2017, from http://www.bworldonline.com/content.php?section=Finance&title=insurancecompanies-post-flat-total-premium-income-in-2016&id=140810 97 OTHER REFERENCES https://www.bpims.com/about/corporate-profile http://www.malayan.com/about/company-background http://www.pioneer.com.ph/about-us/corporate-governance https://www.insurance.gov.ph/statistics/statistical-report/ https://www.insurance.gov.ph/statistics/non-life/ http://www.pirainc.org 98 Curriculum Vitae VIA ARVIE A. ITLIONG Via Arvie A. Itliong completed her Bachelor of Science Major in Accountancy degree in 2009 from Divine Word College of San Jose, Occidental Mindoro. She is currently employed as Staff Officer I in the Financial Reporting and Monitoring Support Unit of the Controller Group at the AAA Insurance System Head Office, Pasay City. 99 Appendix A AIS Financial Statements 100 101 102 103 104 105 106 Appendix B Insurance Commission Statistical Reports 107 108 109 110 111 112 113 114 Appendix C Malayan Insurance Financial Statements 115 116 117 118 119 120 121 122 Appendix D BPI/MS Financial Statements 123 124 125 126 127 128 129 Appendix E Pioneer Insurance Financial Statements 130 131 132 133 134 135 136 137