The Department of Finance (DoF) has ordered insurance firms to raise further their capitalization every two years to reach P1 billion by 2020.
It issued Department Order No. 15-2012 despite stiff opposition from some industry players, especially smaller ones who claimed that the particular market they served did not warrant such capital size.
In fact, at least 10 non-life insurers have asked the Quezon City regional trial court to stop a similar DoF order, the provisions of which the new one was building on.
In a 70-page complaint, the plaintiffs said that because of that order—DO No. 27-2006—they now face the threat of having to close their businesses because compliance with the requirements to substantially raise their capitalization was “almost impossible.”
Despite the complaint, the new order requires existing insurance companies to have at least P400 million by 2014, P600 million by 2016, P800 million by 2018 and P1 billion by 2020.
Also, reinsurers—companies that insure the insurers—are required to have double the amount, or P2 billion, while those engaged solely in micro-insurance should have at least P500 million.
Further, DO 15-2012 does not allow any new company to operate without meeting the minimum capital requirement that applies to their function—be it insurance, reinsurance or micro-insurance.
Purisima said in a statement that DO 15-2012 “was the result of several consultations conducted by the (DoF) and the Insurance Commission with industry players.”
On the other hand, the order gives leeway for a deferment of the new capitalization requirement for those companies undergoing merger and consolidation or those that will meet the risk-based capital (RBC) hurdle rate of 150 percent. The RBC measures the relationship among factors that include fixed income securities, equity securities, credit risk, loss reserves and net written premiums.
The capital build-up program will “foster greater efficiencies and deeper market penetration,” Purisima said.
Citing World Bank data, the finance chief said the Philippine insurance industry was lagging behind its peers in Southeast Asia in terms of required capitalization and insurance premiums as a percentage of gross domestic product.