Further tightening of capital requirements on insurers eyed

The Insurance Commission is inclined to further tighten capital requirements imposed on insurance companies, citing the need to continue enhancing the industry’s competitiveness.

The capital requirements on insurers were raised last month with the enactment of the amended Insurance Code.

Insurance Commissioner Emmanuel Dooc, however, said it would be prudent to further tighten these requirements in the next few years.

In particular, Dooc said the regulator was poised to implement the risk-based system of capitalization. Under the system, insurance firms are required to set aside additional capital every time its risk exposure increases, such as when it expands or offer new products.

“Eventually we will be moving toward the risk-based approach of capitalization,” Dooc said.

According to Dooc, the pending integration of Southeast Asian economies in 2015 necessitates measures to improve the industry’s competitiveness. Having tighter capital requirements, he said, would help ensure that local insurance companies could better compete with their foreign counterparts.

Under the Asean (Association of Southeast Asian Nations) integration, barriers to trade and investments will be lifted to boost economic activities in the region. An expected consequence, however, is the potential shutdown of weak and small companies.

Dooc said that if a follow-up to the latest hike in capital requirements was implemented, insurance companies in the Philippines, particularly small industry players,  would be encouraged to expand or merge.

Last month, the amended Insurance Code took effect. One of its highlights was the provision for the increase in capital requirements.

The law grants the Insurance Commission the authority to further tighten capital requirements through the implementation of the risk-based system if deemed necessary.

Under the new law, the required net worth—defined as the sum of paid-up capital, retained earnings, unimpaired surplus and revalued assets—was set at P250 million this year, P550 million effective June 30, 2016, P900 million starting June 30, 2019 and P1.3 billion by June 30, 2022.