Big steal or borrow

The Aquino (Part II) administration apparently thinks it finally has the magic formula for our insurance companies to become, well, gigantic international insurance companies the size of whole continents.

Apparently we direly need gigantic international insurance companies, and so the DoF (finance department) came up with this formula: Just force them to grow and, if they do not, close them down.

It is creating unrest in the insurance industry, of course, particularly among the nonlife insurance companies belonging to an umbrella group called PLIA, or the Philippine Life Insurance Association.

Some 10 small nonlife insurance companies in PLIA already went to court, questioning the efficacy of the administration’s magic formula, claiming that instead of growing, about half of the insurance companies in the country would die.

The administration in effect is forcing insurance companies to become big, and they have to beg, steal or borrow so that they can raise their capital to P175 million—at the very least—by end of June this year, and then to raise it some more, making it jump so high to at least P1 billion, and all in just three years.

If they fail to raise the money to comply with the new capital, the Insurance Commission—known as IC in the insurance business—will close them down just like that, thank you.

From what I gathered, it has been Finance Secretary Cesar Purisima who had pushed for the new stiff rule. This may have basis. All of a sudden the Department of Finance even raised the capital requirement on its own.

The original order, issued way back in 2006 under the cute administration of Gloriaetta, only required an insurance company to have a minimum capital of P50 million initially, which should gradually increase to P500 million by 2015.

Under the Aquino (Part II) administration, the increase even became steeper at P175 million this year, accelerating to P1 billion by 2015. For the insurance companies, the capital requirement of the government became a moving target.

At the rate the administration is going, it is possible that the requirement will move up somewhere towards the stratosphere before 2015 comes.

To the insurance industry, anyway, the administration seems to have picked those figures from out of thin air. Really, the government does not have any scientific basis for those rather prohibitive figures.

In Singapore, in comparison, the monetary authority some years ago did a thorough study on that country’s insurance business. As expected, the authority released its findings to the industry.

The Singapore government actually wanted to find out the new practices in the industry, and how the authority could adopt their rules with those new practices.

Guess what—the Singapore authority did not limit its study to the desirable capitalization for the insurance industry. Actually, they paid more attention to such things as “risk management.” The authority called it “risk-focused approach to capital adequacy.”

In other words, their capital requirement on the insurance industry in Singapore was based on many factors other than just an arbitrary figure plucked from the air.

Now, neither the IC nor the DoF, and definitely not the Palace boys of our leader Benigno Simeon (aka BS), could show the industry any “study” to back up their steep capital prescription.

Basta, the insurance companies have to grow, or else…

Reports said that Purisima, nevertheless, has been telling the insurance industry that “small companies have no place in the insurance business.”

I searched high and low but I could not find the government’s explanation as to why a lot of our small insurance companies have been in existence for the past 30 to 50 years, growing on their own pace, without any major government intervention that would force them to close shop, and they are still operating quite profitably today.

Really, where in the world is the proof that small companies cannot survive in the insurance business? The most successful companies in the country—in the whole wide world, for that matter—actually started small.

The SM group, for instance, started as a 50-square-meter shoe store on Carriedo street in Manila, and its founder, Henry “Tatang” Sy, is proclaimed as the richest man in the country today. The world-famous “Nike” brand started with its founder selling rubber shoes from the trunk of his car. “Starbucks” was only a mom-and-pop coffee shop several years ago. The giant “Jollibee” some 40 years ago was only an ice cream parlor in Cubao, Quezon City.

If indeed small companies do not have a place in the insurance business, we have to study our “small” insurance companies to find out what made them tick these past decades despite being “small.” Hopefully other small enterprises can learn from them.

By the way, “small” is a relative term. Actually, the so-called small insurance companies have paid up capital of P125 million.

Anyway, those small companies—those that went to court to question the Aquino (Part II) administration formula for growth—said that they have not been remiss in paying their obligations to their customers in all the decades of their being in the business.

They are also saying that, at the high levels required by the administration, their capital would be a waste of resources. Why? Because the local market is just too “small.” Well, at least the segment of the markets that those “small” insurance companies are targeting to serve!

Questions thus arise: Does every local insurance company need to become a gigantic international insurance company? Is there really a market for everybody that big?

In arguing against the growth formula of the Aquino (Part II) administration, the industry has been saying that, precisely, the insurance business thrives on its ability to share risks among insurance companies.

In short, you do not have to be big to serve the needs of a lot of clients in the country today. There is room for insurance companies with capital of P125 million.

Precisely, those same companies do not want to become gigantic international insurance companies, because they do not want to compete against other companies in Singapore or the United States.

They are happy to serve their market niche here, looking forward to a natural pace of growth together with their clientele.

In the end, the insurance business is not all about the size of capital. The business relies on the trust that was developed through the years between the companies and their clients. At our level down here, the relationship between the insurance company and its client is more “personal.”

What the small companies are not saying, perhaps because they fear retaliation from the Aquino (Part II) administration, is this: The hefty capital requirement will be good for another kind of insurance companies—the “multinationals.”

Already, foreign insurance firms operating here are seeing growth spurts of more than 30 percent a year. Apparently, they are still not happy. They need the government to kill the small guys to monopolize the business.