The Insurance Commission (IC) will implement a P100-million networth capital for all insurance companies but decided to discontinue further capital increases. The original plan was to raise to P500-million networth capital for all insurers by 2010.
However, the IC will strictly implement the risk based capital (RBC) formula to ensure insurer’s ability to pay claims and build reserves for future claims.
IC Commissioner Eduardo T. Malinis prefers implementing paid-up capital increases in the future as the RBC will cover all investment and policy risks taken by the insurers.
“We will also retained the 150-percent risk weighting cover, and the 80-percent hurdle or compliance rate,” Malinis said, adding that the IC can be flexible as long as it does not go against the Department of Finance Order increasing capital.
It was learned that over 10 life and non-life insurers failed to comply with the P100-million capital requirement. Failure to comply will result in the non-issuance of a certificate of compliance resulting in cessation of operations. Unconfirmed reports indicate that 80-percent of delinquent insurers were from the non-life industry.
Earlier interviews with life insurers show that they prefer the RBC formula over further capital increases.
“A company that writes less risk should be allowed to have smaller fixed capital, and a company that writes more risk should be firmly required to have higher capital, either fixed capital or risk-based capital,” the Philippine Life Insurance Association (PLIA) said.
Both parties have agreed to conduct further dialogue on the specifics of the RBC formula.
The RBC formula covers asset default risk, mortality/underwriting 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 encouraging 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,” the IC said, adding that it is already an adopted international practice for financial institutions.
The policies-in-force of the life insurance industry grew by mere 1.27 percent in the past five years. However, most insurers have remained profitable with an average annual rate of on net worth of 18 percent.
PLIA claims however that half of the life insurers recorded a return on net worth of six percent or less. — Ted Torres