Deputy Commissioner for Legal Services Insurance Commission, Manila
One of the important aspects of insurance regulation is the prescription of a capital regime that ensures the solvency of insurance companies; that is, the ability of said companies to pay all future claims of their respective policyholders. This is why leading organisations that prescribe insurance regulatory standards, such as the International Association of Insurance Supervisors (IAIS), place much importance on the regulators’ duty to develop progressive capital regime frameworks that adapt to the ever-changing financial environment and promote protection of the insuring public.
The Philippine insurance industry capital regime is rooted in legislation. For the first time in the history of the Philippine insurance regulation, Act 2427 (the ‘Insurance Act’), which was promulgated on 11 December 1914, it provided for statutory capital requirements. Under Section 196 of the Insurance Act, insurance companies were required to ‘have a subscribed capital stock equal to at least 250,000 Philippine pesos (Php), 50 per cent of which must be paid-up in cash prior to the issuance of any policy and the residue within 12 months from the date of filing its articles of incorporation.’ The subsequent legislation, specifically Act 1459, provided for the same statutory minimum paid-up capital requirements.
Considering the distinctive nature of the insurance industry, the statutory minimum capital requirement was increased to Php 2m with the issuance of Presidential Decree (PD) No 63 on 20 November 1972 that amended the Insurance Act. The same Decree gave the Secretary of Finance the authority to ‘increase such minimum paid-up capital stock, under such terms and conditions as he may impose, to an amount which, in his opinion, would be sufficient to reasonably assure the solvency of the company and the safety of the interests of the people.’ This allowed for a more flexible capital regime that is responsive to the prevalent financial environment at the time.
Subsequently, on 18 December 1974, PD No 612 (the ‘Insurance Code of the Philippines’) was signed into law. PD No 612 increased the minimum paid-up capital to Php 5m, which was subsequently increased to Php 50m, pursuant to Department Order (DO) No 116-93, dated 7 December 1993. During this regime, the Insurance Commission (IC) of the Philippines implemented the ‘margin of solvency’ requirement. Section 194 of the Insurance Code, which provides for said requirement, stated that:
‘Section 194. An insurance company doing business in the Philippines shall at all times maintain a margin of solvency which shall be an excess of the value of its admitted assets exclusive of its paid-up capital, in the case of a domestic company, or an excess of the value of its admitted assets in the Philippines, exclusive of its security deposits, in the case of a foreign company, over the amount of its liabilities, unearned premium and reinsurance reserves in the Philippines of at least two per mille of the total amount of its insurance in force as of the preceding calendar year on all policies, except term insurance, in the case of a life insurance company, or of at least ten per centum of the total amount of its net premium written during the preceding calendar year, in the case of a company other than a life insurance company; provided, that in either case, such margin shall in no event be less than five hundred thousand pesos.’
On 1 September 2006, the minimum paid-up capital requirement for insurance companies was increased again. DO No 27-06 increased the minimum paid-up capital to Php 250m, effective 31 December 2011. On 5 October 2006, the IC also released Insurance Memorandum Circular (IMC) No 7-2006 adopting the first Philippine Risk-Based Capital (RBC) Framework for general insurers.
A few years later, PD No 612 was superseded by Republic Act (RA) No 10607 (otherwise known as the ‘Amended Insurance Code of the Philippines’), which was promulgated on 15 August 2013. Under the Amended Insurance Code, new domestic insurance companies were required to put up paid-up capital of at least (Php 1bn. When the Amended Insurance Code was brought into force, existing insurance companies were required to have a minimum net worth of Php 250m as of 31 December 2013; Php 550m as of 31 December 2016; Php 900m as of 31 December 2019; and Php 1.3bn as of 31 December 2022.
Current Philippine capital regime regulations
In implementing the power of the Philippine Insurance Commissioner (PIC) to adopt solvency requirements based on internationally accepted solvency frameworks pursuant to Section 200 of the Amended Insurance Code, the IC pioneered a programme called the Regulatory Alignment Project (RAP), which started in 2015. The RAP covered three major areas of insurance regulation, particularly: the Financial Reporting Framework (FRF); Insurance Policy Reserve Requirements (IPRR); and the Risk-Based Capital 2 (‘RBC 2’) Framework. The RAP covered various statutory requirements under Sections 198, 200, 216, 219, and 220 of the Amended Insurance Code, in relation to the powers of the Philippine Insurance Commissioner under the same Code. The RAP was concluded in 2016. Consequently, the Circular Letters (CL) on FRF, IPRR and the RBC 2 Framework became effective and implemented beginning 1 January 2017. Likewise, the IC issued CL No 2016-69, which provided companies with various guidelines relative to the implementation of said CLs.
Currently, the present insurance industry capital regime provides for two solvency requirements: the minimum net worth requirement and the minimum RBC ratio requirement. As of the time of writing, insurance companies are required to possess a minimum net worth of Php 550m and a minimum RBC ratio of 100 per cent to be able to maintain a licence to do insurance business in the Philippines.
In addition to the requirements mentioned above, the IC likewise found that the development of a solvency assessment mechanism, based on consistent valuation of assets and liabilities, is integral to the accurate assessment of an insurance company’s financial condition. Thus, the FRF was instituted to align the current regulatory framework with international accounting standards (ie, the PFRS/IFRS). On the other hand, the consistent valuation of insurance liabilities aligned with generally accepted actuarial principles was institutionalised by the issuance of CL No 2016-66 with respect to the life insurance business and CL No 2016-67 with respect to the non-life insurance business.
In relation to these discussions, it may be noted that the National Association of Insurance Commissioners (NAIC) defined RBC as a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations considering its size and risk profile. Compared to the previous RBC framework, the RBC 2 Framework presently being observed is a forward-looking tool that serves as an ‘early warning system’, that enables the IC to take the appropriate and necessary regulatory intervention depending on a company’s RBC ratio.
The RBC 2 Framework adopted pursuant to CL No 2016-68 dated 28 December 2016 has a ‘three-pillar approach’:
Pillar 1: This includes the quantitative requirements in relation to the calculation of capital requirements and recognition of capital. As earlier stated, companies are currently required to maintain an RBC ratio of one hundred per cent;
Pillar 2: This covers governance and risk-management requirements. These requirements consist of a supervisory review process that may include a supervisory adjustment to capital; and
Pillar 3: This provides for certain disclosure requirements designed to encourage market discipline.
To date, the IC has issued the requirements for Pillar 1 and has yet to issue requirements for Pillars 2 and 3, respectively.
The RBC ratio is computed by dividing the insurance company’s total available capital with the RBC requirement. In computing the RBC requirement, credit risk, market risk, insurance liability risk, catastrophe risk and operational risk are multiplied to respective asset, liability, and income accounts. For life insurance companies, an additional risk charge is computed for surrender risk.
Transitioning to the RBC 2 Framework
Before transitioning into the new insurance industry capital regime, the IC consulted the industry and other stakeholders as regards the implementation of the RAP. Specifically, the development of the RBC 2 Framework underwent four phases. During the first phase, an industry-wide market assessment was made through a series of interviews and roundtable discussions. In the second phase, a parallel run was conducted and insurance companies were required to submit quarterly RBC reports in accordance with CL No 2015-31 dated 10 June 2015. During the third phase, an impact study was conducted, the parallel run submissions were analysed and risk charges were calibrated. During the fourth and final phase, the IC sought feedback from the industry and other stakeholders and made final calibrations to the RBC 2 Framework.
Salient features of the RBC 2 Framework
The RBC 2 Framework is characterised primarily by prompt corrective regulatory intervention. This is in line with the Philippine Insurance Commissioner’s power under Section 437 (m) of the Amended Insurance Code to inquire into the solvency and liquidity of insurance companies and enforce prompt corrective action. Under the Framework, the IC shall take an appropriate regulatory action depending on an insurance company’s RBC ratio.
There are four regulatory actions that the IC may take depending on the company’s RBC ratio:
if the company’s RBC ratio falls between 100 per cent to 125 per cent, a trend test is made to assess a company’s RBC ratio trend. Using extrapolation, the IC can quantitatively determine if the company’s RBC ratio will fall;
if the company’s RBC ratio falls between 75 per cent and 90 per cent, the company is required to submit a corrective action planto attain the required RBC ratio. The PIC will then determine if the plan addresses the problem, and if it does, the same will be approved for implementation;
if the company’s RBC ratio falls below 75 per cent but not less than 50 per cent, this event is called a ‘regulatory action event’. In this case, the IC will issue corrective orders for the company to meet the required RBC ratio; and
if the company’s RBC ratio falls below 50 per cent, the PIC is authorised to immediately put the company under mandatory control.
It should be emphasised that aside from the requirement of meeting the prescribed RBC ratio under this framework, companies must likewise comply with the statutory minimum net worth requirement at all times. The financial condition of the companies and compliance with said requirements are determined by the IC examiners based on the annual reports submitted by the companies every thirtieth day of April of the succeeding year. The results of the examinations or audit are published.
Under the current capital regime, both RBC and FRF reports are submitted within two months after every quarter, pursuant to CL No 2016-69 dated 28 December 2016. These reportorial requirements enable the IC to anticipate the companies’ insolvency and to impose the proper regulatory action/s in consequence.
Effect of new Philippine capital regime regulations and conclusion
In 2017, seven insurance companies have voluntarily surrendered their licences due to their inability to comply with the statutory minimum solvency requirements. These companies were issued ‘servicing’ licences to pay claims under a state of ‘run-off’. However, these companies are required to have positive net worth, respectively. As the statutory minimum solvency requirements continue to increase, Philippine insurance companies are compelled to comply with the same by putting up the required capital, by merging or acquiring other companies, or to voluntarily cease from doing business. Companies that will fail to comply with said requirements will inevitably be placed under conservatorship pursuant to Section 255 of the Amended Insurance Code, which may later progress into receivership or liquidation in accordance with Section 256 of the same Code.
The IC believes that these developments in the regulation of the Philippine insurance industry capital regime will nurture better consumer protection and financial stability of the insurance industry. True to its mandate, the IC continues to develop its regulatory frameworks to keep up with international standards as regards insurance regulation.
 PD No 63, Sec 15.
 RA No 10607, Sec 194.