Non-life insurers mull legal action vs DOF order

MANILA, Philippines - The embattled non-life insurance industry is contemplating on taking legal or administrative actions to stop the Department of Finance (DOF) and the Insurance Commission (IC) from implementing a higher minimum paid-up capital requirement from the present P175-million level.

The sector consists of 84 insurers issuing protection policies for property, marine, automobile, and the like.

After meeting with Finance Secretary Cesar Purisima last Wednesday, members of the Philippine Insurers and Reinsurers Association (PIRA) the finance chief was steadfast against their request to suspend or revise Department Order (DO) 27-06 which enforces the capital buildup.

Thus, PIRA general manager Mario C. Valdes said they have already sought an audience with President Aquino to appeal their case.

Valdes added that if they would fail to get positive results after meeting with the President, the last recourse is to take legal action such as a court injunction. He, however, clarified that it would not be PIRA that would go to court but a number of their members acting on their own capacities.

PIRA has urged government to hold the minimum paid-up capital at P175 million, which must be met by end-March this year.

“We are against the continuing increases which is not the correct measure of solvency,” he said.

The capital build-up will reach P500 million within the next two years.

PIRA said it prefers the full adoption of the risk-based capital (RBC) formula, which is roughly the same as the risk-weighting formula used by banks. In simple terms, this prefers to an equivalent amount of capital for the number or complexity of products an insurer introduces.

Thus, an aggressive insurer will likely need a larger capital base for a larger number of insurance products, against an insurer that markets just one line.

“The correct measure of solvency is probably risk-based capital, but not the absolute amount increase in paid up capital. It does not make sense,” the PIRA official said.

PIRA admitted that almost half of its members have already adjusted their capita base to the P175-minimum requirement but expect that nearly 30 percent of the industry may not be able meet the March 31 deadline.

PIRA chairman and president Pedro P. Benedicto Jr. said that the minimum paid-up capital will negate provisions in the proposed Revised Insurance Code, or House Bill (HB) 4867. The proposed legislation may peg the capital to P125 million, the present capital required level, and adopt the risk-based capital (RBC) formula of determining the appropriate capital level.

“The abrupt and sweeping upward adjustment of capital would be a total indictment and persecution of the industry,” Benedicto said.

The smaller-capitalized companies would have to cough up substantial capital infusions under a business environment still plagued by an onerous tax structure, considered the highest in the region, he added.

“It is unfair and counter-productive to investments.”

The capital build-up started in early 2001 when the IC implemented a gradual increase from P10 million to P50 million. DOF Order 27-06, issued in 2006, implemented a multi-year increase in minimum paid-up capital for all insurance companies, starting from P50 million to P100 million. By 2014, all insurers and re-insurers must have a minimum paid-up capital of P250 million or a P500-million minimum statutory net worth.

Since last year, the IC has been encouraging insurers to consolidate similar to what is being done in the country’s banking system.