Tight squeeze on insurers
Thanks to the restraining order issued by a Quezon City judge, the country’s insurance industry and the thousands of Filipinos it employs and on whose services it relies will live another day, or perhaps several more years.
It will be recalled that in 2006, then Finance Secretary Gary Teves issued Department Order 27-2206 requiring all insurance companies to maintain a minimum paid-up capital of P250 million by the end of 2012.
Last June, Finance Secretary Cesar Purisima, through Department Order 15-2012, reiterated that capital requirement and, in addition, ordered the insurers to raise their funding level to P400 million in 2014, P600 million in 2016, P800 million in 2018 and P1 billion in 2020.
According to finance officials, the capital build-up is necessary to protect the public and to enable local insurance companies to compete with their counterparts in the Asean in 2015 when financial services are scheduled to be liberalized in the region.
However, on Dec. 11, Judge Agustin Dizon ordered Purisima and Insurance Commissioner Emmanuel Dooc to hold in abeyance the implementation of DO 15-2012 until the complaint filed against them by several insurance companies questioning the validity of that order is resolved. This means, until the case is decided, one way or the other, or a higher court sets aside the injunction, all licensed insurance companies can continue to operate using whatever capital the Insurance Commission has earlier authorized them to maintain.
Such a simple understanding of the effects of the court order seems to have been lost on IC officials who insist that DO 27-2006 issued by Teves remains in effect because, in their opinion, the injunction covers only DO 15-2012 issued by Purisima. If that argument were raised by a layman or, at best, a first-year law student, it could easily be dismissed as a case of ignorance or lack of appreciation of the nuances of regulatory enforcement.
A close reading of DO 15-2012 shows that it is both a reiteration and an amendment of the earlier order issued by Teves. The subsequent Purisima order maintains the P250-million capital benchmark and, in the same breath, orders a graduated increase in capital in two-year increments. In effect, the Purisima order superseded that of Teves. To use the legalese that lawyers would apply to the instant situation, the latter order has become “functus oficio,” or “moot and academic.”
Thus, for all intents and purposes, the controlling order on capitalization of insurance companies is DO 15-2012, which the court has ordered not to be enforced until further instructions from it. If the IC thinks otherwise, it should file a motion for reconsideration or clarification with the trial court, or elevate the matter to the Court of Appeals. In the meantime, it has to stand down on the capital build-up issue under pain of being cited for contempt of court.
There is no question that insurance companies should beef up their financial muscle to be able to effectively and promptly meet their commitments to their clients. The need to maintain bigger kitties would be more critical when financial services are liberalized in 2015 in the Asean region. The insurance conglomerates in Singapore, Malaysia and Thailand would be allowed to offer their services in the Philippines and compete head to head with local insurers.
Depending on your perspective, this development, if it comes to fruition, will either be a boon to insurable parties (in terms of competitive premium rates) or a bane to local insurance companies because they have to match up to the competition.
But whether or not the P250-million minimum paid-up capital required of insurance companies to be able to do business in 2013 will meet the objective for which it was imposed is a big question mark.
In Metro Manila, Metro Cebu and Metro Davao, that amount may be considered reasonable and realistic. The level of business and commercial activities in these urban areas justify, if not require, a high level of financial liquidity to meet the insurance needs of business clients and high worth personal clients.
With the improved business climate and influx of foreign investments, the P250-million benchmark may even be insufficient. Major projects worth millions of dollars may even compel local insurance companies into tying up or entering into joint insurance arrangements with foreign insurance companies to be able to handle higher insurance risks.
What applies or holds in the country’s major urban areas does not necessarily hold true in other parts of the country. The less developed cities and provinces have insurance coverage needs that are different or lesser in monetary value than those in Metro Manila, Metro Cebu and Metro Davao. In “underdeveloped” business communities, insurance companies may only require, say, P50 million or lower, to be able to meet the insurance needs of their area of operations.
It would be a tremendous waste of money and resources for insurance companies in these areas to be required to keep P250 million in their coffers to be able to maintain their operations. The capital build-up order of Purisima should not be treated as a one-size-fits-all measure. The funding requirements of insurance companies should conform to and be responsive to the particular needs of the areas where the insurance companies want to do business.
A flexible capital build-up program will help businesses get the insurance coverage they need with the least cost and, at the same time, minimize dislocation in the employment ranks of the insurance industry.
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