The public welfare comes first

The catch-up game in the insurance industry to hike paid-up capitalization may be wearing out small insurance companies that are having a hard time to comply with this most recent ruling of the Department of Finance, but it should all boil down to the good of the general public.

Last June 1, the DOF issued an order imposing another hike in the minimum paid-up capital of insurance and reinsurance companies to protect the insuring public and to also strengthen the integrity of the insurance industry.

The new minimum paid-up capitalization requires Filipino life and non-life insurance firms to raise P250 million by end 2012, P400 million by end 2014, P600 million by 2016 and P1 billion by end 2020.

As expected, those companies that fell short of the required amount by the end of the year were the first to take action – by all means they could possibly use. After all, if you were a company with a paid-up capitalization of only P50 million, the hurdle height would really seem insurmountable.

While there are a sizeable number of life insurance companies that are below the P250-million mark, there are considerably more in the non-life sector that will be affected.

Necessary measure

The Finance department and Insurance Commission, however, seem bent on pursuing the upgrades, and in the process, without doubt, seeing many of the smaller players merging with others or selling their businesses to bigger players.

It would really seem such as shock to see this change happen, especially for a company whose only sin has been its inability to match the new required capitalization. But in a business when the public’s money is put at risk, absolutely nothing can be left to chance.

These days, historical data that insurance companies had formerly found comfort in are being challenged by many financial changes and change patterns. Thus, it only becomes prudent for them to seek bolder measures to cope with the possible doubling or tripling of risks.

In this regard, the country’s financial regulators must not be harshly criticized for taking radical steps. Instead, insurance companies should be more concerned about forthcoming changes in business assumptions that could put their clients at risk, and ultimately, even their own businesses.

Learning from past mistakes

This had been the case with our pre-need industry a decade ago which should have seen early enough the problems that would come from deregulating tuition fees. In fact, the industry should have anticipated problems from such change even before this had happened.

But pre-need companies had become too obsessed with going after more clients and selling more education plans, thinking that the money they were raking in was going to be earning more for them – with no end in sight. How shortsighted they were.

We are all witnesses to the grim ending that this mania befell. Thousands of education policy holders are still holding contracts that are worthless; those that signed up for the insurance policies have seen their children graduate from college without receiving a single cent from these insurance companies. Or worse, some intended beneficiaries never completed their college education.

Sadly, government regulators had also not been able to act on the disaster even before it happened, or even immediately after it happened. Well, if it’s any consolation, we now know that pre-need companies need a firmer hand from the Insurance Commission, and not the Securities and Exchange Commission.

Moving on

We must be able to learn from the pre-need industry’s short-sightedness.

Painful as it may seem, some of the insurance companies that will not be able to hike their paid-up capital to P250 million by the end of the year will have to look at alternative ways to ensure that their policy holders will continue to be protected.

So far, mergers would seem the least painful course of action, just as what nine non-life insurance companies have earlier professed to do. Of course, this could mean that there will be lay-offs in the process, but this is something that can be managed with less pain.

In the global insurance industry, recent natural disasters such as widespread floods, super-strong hurricanes, gigantic tsunamis, and many other similar recent occurrences – plus their before-unseen effects such as nuclear plant meltdowns – have severely affected many companies’ profitability.

Like the banking industry, there have been an increasing number of formerly solid insurance firms that have encountered severe financial problems, even faced bankruptcy, thanks to totally unexpected events such as what happened in 2005 in the US with Hurricanes Katrina and Rita, or the tsunami that hit Japan in 2011.

Increased premiums

To survive the tougher environment, not just in terms of increased risks, but also the heightened competition from other companies, there is an increasing trend to raise premium payments. This is more apparent in the property insurance business, especially for those that have become more susceptible to natural disasters.

In the business of risk, where money is used to cover for possible accidents, the only way to prepare for the worst is to have enough money to cover for these. If this cannot be done, then an insurance company has no right to continue operating.

On the part of our regulators, there should be no backing down if they stand on firm ground that all these tougher measures are needed to prepare for the worst. After all, at the heart of all these moves is the need to protect your hard-earned money.

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