Risk-based capital for non-life insurers urged

MANILA, Philippines - The Philippine Insurers and Reinsurers Association (PIRA), the trade organization of the country’s non-life insurance industry, is urging the Insurance Commission (IC) to implement the risk-based capital (RBC) framework.

The RBC means an insurance company must raise a certain amount of capital based on the amount of risk – or types of insurance products – it sells, to ensure its ability to pay claims. In the banking sector, it is roughly the equivalent of the risk-weighted capital adequacy ratio (CAR).

PIRA president Michael F. Rellosa said that insurers with a “small appetite for risks” need only raise capital commensurate to the products marketed under the RBC framework.

“This means that the amount of capital a company would be required to raise will be proportional to the amount of risks it wants to take,” he said at the opening of the ASEAN Insurance Council (AIC) meeting yesterday.

The Department of Finance (DOF) and the IC wants an increase in the paid-up capital of all insurers, as well as a RBC framework, to strengthen the industry, which should lead to better protection for the insuring public.

By the end of 2010, paid-up capital for life, non-life and reinsurance companies must not be less than P125 million or a net worth of P250 million. By 2015, capital must reach P500 million.

PIRA wants to do away with the paid-up capital requirement, with the RBC as the only guidance or benchmark.

Rellosa said the top 30 non-life insurance firms have a capital base well over P125-million level.

However, this poses a problem for the small ones – those writing only the third party liability (TPL) insurance for motor vehicles. Some small companies have been in existence for 50 years or even longer, mainly catering to risks like TPL for vehicles or insurance for equally small businesses.

“The insurance industry can be compared to the retail industry. There are big ones like hypermarts, and there are also ones that can be considered sari-sari stores. Under the RBC framework, these hypermarts and sari-sari stores can still co-exist and cater to their niche markets,” he explained.

Early this month, the IC reminded insurance companies of the scheduled increase in their capital base.

Deputy Commissioner Vida Chiong said that by the end of the year, “the paid-up capital must at least be equal to the amount previously scheduled for Dec. 31, 2009,” or equivalent to P125 million in paid-up capital.

Chiong said the order’s implementation – supposed to start in 2007 – was delayed for a year by virtue of a memorandum circular after insurers appealed they be given time to adjust to the new requirements.