IC lowers risk charges on insurers’ infra investments

MANILA, Philippines — The Insurance Commission (IC) has lowered the risk charges for the infrastructure investments of insurance companies to encourage the industry to participate in the government’s massive infrastructure development efforts.

This is pursuant to IC Circular Letter No. 2019-19, which was recently signed by Insurance Commissioner Dennis Funa.

Under the new circular, debt and equity instruments related to infrastructure projects included in the Philippine Development Plan (PDP) are now recognized as a new classification of assets for insurance firms.

Subsequently, the circular provided lower capital charges for these type of assets, making infrastructure investments more attractive and cheaper for insurers, Funa said.

 “The risk calibration for debt instruments has been reduced to six percent, while the risk charges for investment in equity shares were likewise reduced to nine percent,” Funa said.

“This is a substantial improvement compared to the previous calibration. Before the issuance of this new circular letter, capital charges relating to investments in infrastructure projects were subject to risk calibration ranging between 1.25 percent to 24 percent for debt instruments and 40 percent to 55 percent for equity investments,” he added.

Under the previous regulation, the risk charges for debt and equity instruments had no distinction as to whether or not they are infrastructure-related.

Funa said the move to reduce risk charges on infrastructure investments was granted following the clamor of the insurance industry.

“Recognizing the ability of investments in infrastructure to drive economic growth in line with the priority of the government to narrow infrastructure investment gaps vis-à-vis the capacity of insurers to invest in long-term assets, I convened a committee to review the appropriate risk charges for this investment class with the goal of crafting a prudentially sound mechanism to facilitate investment in infrastructure and at the same time safeguarding the financial stability of insurers,” Funa said.

“The reduction in risk charges of investment in infrastructure projects of the government demonstrates the recognition by this commission that these investments exhibit better recovery rates than corporate debt and provide relatively stable long-term cash flow. As a result of the imposition of better capital charges, insurers will find it more attractive, easier, and cheaper to invest in infrastructure projects,” he added.

Considering the positive response of the IC to the industry’s call, Funa expressed hope that insurance companies would take advantage of the lower risk charges and utilize their capital for key infrastructure projects in the country.

The Duterte administration is embarking on a massive infrastructure buildup initiative, dubbed as the Build Build Build program.

The program includes 75 big-ticket infrastructure projects, and will require P8 trillion to P9 trillion in investments over the medium term.

In support of this program, the IC in December last year released Circular Letter No. 2018-74, which allowed insurance firms to invest in debt or equity instruments for infrastructure projects under PDP.

It allows insurers to participate in infrastructure projects through various capacities – as project proponents, financiers or sponsors, or operation and maintenance contractors.