P100-M minimum capital starts Jan 2007

The Insurance Commission (IC) wants all insurers to have a minimum net worth capital of P100 million by end December. Likewise, the risk-based capital (RBC) formula for all insurers will also be adopted before the end of the year.

For new insurers, the commission will require a capital base of P1 billion (approximately $53 million).

"We want all the insurance companies to be financially sound to meet all claims of the insuring public. And we prefer that the other players consolidate themselves if they can not be at par," IC Commissioner Evangeline C. Escobillo said.

Escobillo insisted that most if not all life insurance companies would not find it difficult to meet the IC requirements for minimum capital. "The challenge will be with the non-life insurance firms."

There are nearly a 100 non-life insurers offering various forms of insurance protection for personal, fire, property, marine, and auto. Regulators argued that half that number would be more than sufficient to meet the needs of the insuring public as long as they were strongly capitalized and professionally run.

"They have to enhance their capital base or consolidate to strengthen the same," the commissioner added.

In contrast, life insurers numbering nearly 40 are capable of meeting the P100-million minimum capital requirement based on IC records.

Industry players have been ranking for a smaller P50-million minimum capital but the IC remained adamant.

The commission argued that the troubled pre-need industry is required to have a minimum capital of P100 million. And it further stressed that the insurance industry should be in a better position than its beleaguered cousin.

In general, the entire insurance industry embraced the RBC formula with variations for the two sectors.

The RBC formula is based on risk assumed by the insurer. The RBC formula is generally defined as the more the risks, the more products, the more capital required.

It is differentiated from the outright capital build-up originally proposed by the IC. The last time the industry raised its capital was in 2002 from P10 million to P50 million.

The RBC formula covers asset default risk, mortality/underwrting risk, interest rate/asset-liability management risk, general business risk, premiums, admitted assets and networth.

It likewise impacts on risk management practices. Similarly, the formula encourages using corporate bonds, aside from government securities, to back up liabilities while encouraging fewer insolvencies. The system discourages holding risky assets like properties while encouraing variable and pure protection products as "highly preferable."

"The RBC has far-reaching effects on solvency, risk management, and industry confidence. Straight capitalization can’t accomplish all these," regulators said.

For the non-life sector, there will be a difference in the mortality-underwriting risk as well as the casualty risks over mortality.

Looking at some of its Asian counterparts show that the trend is increasing the capital base of the industry and adoption of the RBC formula.

Malaysia imposed a minimum paid-up capital of $25 million versus the proposed $2 million by the IC on Philippine insurers. Full implementation of the RBC formula will be 2008 roughly the the same as the IC.

For new entrants, Malaysia requires a paid-up capital of roughly $25 million.

In Vietnam, it is $10 million, $1.3 million for Thailand, and $20 million in India.