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IC to implement improved risk-based capital system

MANILA, Philippines - The Insurance Commission (IC) is set to implement an improved risk-based capital system to further strengthen the local industry.

Insurance commissioner Dennis Funa said one of the challenges facing the insurance industry is the transition from the current risk-based capital (RBC) system to a new framework dubbed as RBC 2.

“In addition to the net worth requirement, we have the risk-based capitalization. All of these are geared towards strengthening the finances of insurance companies,” Funa told The STAR.

“Basically the main change here is the adjustment in risk charges on equities. Let’s say, in every company’s equities investment, there’s a certain percentage required as buffer,” Funa said.

The guidelines of the new framework are provided in IC’s circular letter 68, signed on Dec. 28 last year.

According to the circular, the new RBC framework is anchored towards three pillars.

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Pillar 1 includes the quantitative requirements in relation to the calculation of capital requirements and determination of eligible capital, the second consists of a supervisory review process, and the lastly, the disclosure of requirements to encourage market discipline.

The circular also provided the formula for RBC requirement or the total capital required in relation to the risks an insurance company is exposed to.

It also set a minimum RBC ratio of 100 percent for insurance companies.

The RBC ratio is equal to the total available capital divided by the RBC requirement of a company.

Companies that fail to meet the minimum RBC ratio are required to submit a report explaining the cause of failure and a management plan laying out the strategies of the firm to meet the required RBC ratio for the next quarter.

Funa earlier said the improvement of the risk-based capital framework, in addition to the increase in minimum capital requirement, would ensure the growth of the insurance industry.

He said the IC would also implement new financial regulatory requirements on financial reporting and valuation standards for policy reserves.

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