Anxious times for insurance industry

MANILA, Philippines - “The June bug, also known as June beetle, is the name for several large beetles seen in the United States during May and June. June bugs eat the young leaves of trees and plants. They deposit their eggs in the ground. The young larvae bury themselves in the soil in the autumn and stay there two years. They then come out in May or June as adult beetles.”

This June is promising to be an exciting, if not anxious, time particularly for the country’s insurance and pre-need industry. And like the June bug, something will spring out from the ground.

For the insurance industry, “springing out” will be the Department of Finance Department Order (DO) that will finally set the framework for a capital build-up program culminating in a minimum paid-up capital of P1 billion.

And when the “adult beetle goes about its business of eating young leaves,” the finance department and its line agency, the Insurance Commission (IC) will now refocus its attention on the ever-so-volatile pre-need industry.

“Let’s finish (the capital issue of) the insurance industry first before we address the capital issues of the pre-need industry,” IC deputy commissioner Vida T. Chiong said.

It has been a constant struggle on two fronts since the start of the year.

First, the life, non-life insurers as well as the only re-insurance firm, must prove that their minimum paid-up capital base is worth P175 million before the IC would issue their license to operate for fiscal year 2012-2012.

Last week, the IC admitted that not a few insurers might make the grade. Two to three life insurers are still below the mark and almost 20 non-life insurers. There are 117 insurance companies in the country, or 31 life insurance firms, 81 non-life insurers, one re-insurer, and four composite (life and non-life insurer).

There have been reports that several non-life insurers would seek a court injunction or temporary restraining order (TRO). The group of three to five non-life insurers wants to block the implementation of the P175-million capital requirement.

In so doing, the group would also be blocking the implementation of the proposed P1-billion capital ruling.

 It is not the first time that a group of non-life insurers “took up arms” against the regulators. Two IC commissioners were unceremoniously relieved when they attempted to implement positive reforms in the insurance industry.

 The other front is of course the DO that would set the P1-billion capital level. The existing regulations regarding the capitalization of the industry – DO 27-06-- will expire at the end of 2012. By then, the minimum paid up capital requirement will be pegged at P250 million.

“It was already delayed by one year,” IC Commissioner Emmanuel L. Dooc said. In end March, the draft DO was distributed to all the players for comment after a series of consultations with the industry.

Finance Secretary Cesar V. Purisima could not be persuaded to change his mind albeit he agreed to extend the implementation period from the original 2016 to 2018.

The DO increases the minimum paid up capital from P250 million to P1 billion by end 2016. Or a staggered increase of from P250 million end 2012 to P450 million the following year. Then it will be increased to P625 million by end 2014, P800 million in end 2015, and finally to P1 billion by December 2016.

After a consultation last month, the finance secretary agreed to move the 2016 deadline to 2018. Or theoretically, an annual increase of P125 million.

Former Budget Secretary Benjamin E. Diokno said that more practical increase in capital would be 20 percent every five years. But he believes that the finance department has the authority to require capital base changes to protect the policyholders and the industry.

“If the change in capitalization will be done every five years, then the 20-percent limit would assume an annual inflation rate of four percent. Inflation has been tame during the last three years; in fact, average inflation rate for the first three months of 2012 is only 3.1 percent,” Diokno said in a brief analysis on the capital issue.

Purisima, meanwhile, was willing to offer incentives to insurers that will initiate a merger, or for insurers attempting a consolidation.

Industry sources, however, said that there are certain “concessions” that may require amendments to existing laws governing the country’s insurance industry.

The regulators said it will expand the definition of capital, and that it would expand the list of allowable investments. But the latter “incentives” requires amendments to the existing Insurance Code.

Government is even mulling suspending the margin of solvency (MOS) during the capital build up period, and the formula for the risk-based capital (RBC) would be placed under review.

The margin of solvency is an excess on an insurer’s assets over its liabilities set by regulators.

It can be regarded as similar to capital adequacy ratio (CAR) or requirements for banks. It is essentially a minimum level of the solvency ratio that regulators use to ensure that the insurer is capable of meeting claims and still remain sustainable.

The RBC is a newer formula or measurement used to calculate the amount of risks (or products) of an insurer versus its capital and other resources.

But insurers claim that the higher the paid up capital, the higher the amount deducted from the total admitted assets, resulting in a poor or deficient margin of solvency.

While all these is going on, the pre-need industry waits anxiously for the outcome “like the young larvae buried in the soil in the autumn.”