Accounting shift inflates liabilities of state insurers

MANILA, Philippines — Liabilities held by state-run insurers ballooned to more than half of the country’s gross domestic product (GDP) in 2020 due to a shift in accounting practices that now covers actual and future claims, according to the Department of Finance.

DOF Secretary Carlos Dominguez said yesterday liabilities owned by the Social Security System (SSS), Government Service Insurance System (GSIS) and the Philippine Health Insurance Corp. (PhilHealth) soared from just P153.59 billion in 2019 to P9.94 trillion last year, or more than 55 percent of GDP.

In turn, the SSS, GSIS and PhilHealth recorded a combined net liability of P7.59 trillion as the agencies maintained an asset base of only P2.35 trillion.

Broken down, the SSS registered the highest liability of P6.77 trillion, while GSIS and PhilHealth came next with P2.04 trillion and P1.13 trillion, respectively. Also, the government insurers saw their combined equity flip to a loss of P7.59 trillion in 2020 from a net gain of P1.96 trillion in 2019.

However, Dominguez said the SSS, GSIS and PhilHealth would still sustain their operations, and that they face no risk of shutdown despite the sharp rise in liabilities. He said their liabilities grew last year because these agencies were forced to change their accounting practices.

Under the Philippine Finance Reporting Standards (PFRS) 4, insurers are required to set aside a reserve fund to cover for actual and future claims of their members.

Prior to adopting PFRS 4, the SSS, GSIS and PhilHealth only book a liability when a contributor applies for a benefit, while all premiums and fees collected are registered as income.

“As a result, their incomes were overstated while their liabilities were understated for several years,” Dominguez said, warning that this practice will only blur the decisions made by policymakers to sustain the state-owned insurers.

Citing studies made by the government, the finance chief disclosed that the SSS and GSIS can survive until 2054 and 2053, respectively.

PhilHealth faces the shortest fund life – up to only 2027 – as hospital claims made at the height of the COVID pandemic overwhelmed its financial capability.

Dominguez also warned against suspending any of the scheduled increase in premium rates as tabled by the Social Security Act of 2018. Under the law, contribution rates in the SSS went up to 13 percent this year, then will rise again to 14 percent in 2023 and 15 percent in 2025.

To address the liability exposure, Dominguez recommended that the three agencies invest their resources in a sovereign wealth fund, as practiced by Indonesia, Japan and Singapore, in a bid to maximize returns on investments.

On the other hand, Dominguez said the government can explore the option of transferring the collection mandate to the Bureau of Internal Revenue to rationalize the operations of the SSS, GSIS and PhilHealth.