DOF raises paid-up capital of insurers

MANILA, Philippines - The Department of Finance (DOF) is pushing through with the government’s plan to gradually increase insurers and reinsurers’ minimum paid-up capital and net worth, rejecting the appeal of insurance companies.

Finance Secretary Cesar Purisima said this is necessary to ensure that insurance companies will have the capacity to accept bigger risks.

However, Mario Valdes, general manager of the Philippine Insurers and Reinsurers Association (PIRA) has appealed to President Aquino to suspend the order’s implementation.

The order, issued by the DOF, mandates a hike in minimum paid-up capital for wholly Filipino-owned insurers to P175 million by Dec. 31, 2011.

“Insurance is a business of scale. It is highly capital intensive to be able to answer the substantial risks it confronts each business day,” Purisima said.

“Insurance companies should be solvent enough to guaranty the performance of their obligations to the insuring public. Their capital basis should be expanded to improve their retention ratios and promote less reliance on reinsurance,” he added.

Under the order, the amounts of increase differ depending on the size and composition of the company such as whether a company is wholly Filipino-owned, composed of foreign equity equal or less than 40 percent, or those with more than 40 percent but less than 60 percent.

The order states that the higher the foreign equity, the higher the required capitalization and net worth.

The aim of the capital build-up is to develop “bigger companies.” This, Purisima said would result in companies that have more capacity to accept risks and thus result in “greater protection to policy-owners.”

Furthermore, the Finance chief said capital build-up would also encourage merger and consolidation in the industry.

“Capital build-up will encourage merger and consolidation which a number of small life companies are now pursuing. In this context, increasing capital may not necessarily result to closure of companies as it may even result to formation of bigger companies which may generate more employment opportunities,” Purisima said.

He also noted that the capital requirements for Filipino insurers are also very low compared with those mandated by other member-countries of the Association of South East Asian Nations (ASEAN).

The capital requirement of P175 million or $4.6 million is low compared to the requirement in Malaysia ($33 million); Singapore ($20 million), Indonesia ($12 million) and Thailand $6.44 million.