All over the world for well over 300 years, banking and insurance have been kissing cousins. One can hardly exist without the other.

In this modern world of ours, the symbiotic relationship between banks and insurance companies is already taken for granted. You cannot take out a mortgage on your house unless you can file with the bank a fire insurance policy. You cannot open an import or export letter of credit unless you can get the goods insured under a marine insurance policy. You cannot take out a personal loan unless you can qualify for a life insurance policy. There is hardly a bank transaction that does not require some form of insurance.

For the insurance companies, banks are an excellent source of profitable business. This is why every insurance company wants to get into a bank’s list of accredited companies.

A new phenomenon in the Philippines is bancassurance, in which the relationship between a bank and an insurance company is downright incestuous. In the premises of a bank head or branch office, a little cubicle is tucked away on the side where an insurance company, a wholly owned subsidiary of the bank, transacts the business required of a borrower.

Bancassurance is a European practice. By law, American banks are not allowed to engage in bancassurance. In case of a controversial insurance claim, the borrower finds himself locked in the horns of a terrible conflict of interest. Whose side will the bank be on? If the bank presses its wholly owned insurance company to pay the claim, the bank is screwing itself. If the bank agrees with the insurance company to deny the claim, the bank is going against its own client.

Because of the financial meltdown now spreading all over the Western world, the question now is: how will the insurance companies fare?

When a bank closes (17 American banks—some of them were the largest in the United States—have been shut down), out goes one source of business for the insurance companies. No more assets and loans to insure. Group insurance on the staff has to be cancelled. Even the employees who are laid off might cancel their personal insurance policies, such as accident and health. They may even cash in their life insurance policies.

It looks like the Philippine banks have been able to weather the storm so far. But Finance Secretary Margarito Teves says the conflagration may spread here by late next year.

So far, there does not seem to be any appreciable drop in business in the insurance industry. But the drop is inevitable, as credit tightens imports and exports plummet, factories wind down and employees laid off.

The collapse of the housing market in the United States will not likely happen here. The loanable value of your house is computed by a bank at 40 percent of the market value of the house plus 60 percent of the market value of the lot. It is far-fetched for the market value to be less than the mortgage, as what happened in the States.

Somewhat similar to the subprime problem in the United States is our low-cost housing program. But this represents a small portion of total investments of Pag-IBIG Mutual Fund, the Government Service Insurance System (GSIS) and Social Security System (SSS).

The insurance industry does not invest much in real estate. By the rules of the Insurance Commission, less than 10 percent of investments are in real estate mortgages.

A major portion of investments are in local stocks and bonds. A severe drop in prices of an insurance company’s portfolio will have an immediate effect on the financial statement. In order to maintain the required margin of solvency of 110 percent in admitted assets as compared to net liabilities, the company must be prepared to put in fresh capital.

Otherwise, on the next annual examination of the Insurance Commission’s eagle-eyed auditors, the company may be slapped with the dreaded cease-and-desist order. This is the sword of Damocles hanging over the heads of insurance companies.

Previous columns:
MILF: The first step to peace (part 2) – 10/29/08
MILF: The first step to peace – 10/22/08
Philamlife – 10/16/08
GSIS law on foreign investments – 10/08/08
World War II veterans – 10/01/08

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