Life insurers back risk-based capital formula

Life insurance companies in the country are in favor of adopting risk-based capital fromula rather than an outright increase in their capital.

The Philippine Life Insurance Association (PLIA) is, in fact, proposing a model patterned after the experience of their counterparts in the United States.

"The risk-based capital (RBC) formula is a viable, credible alternative to increased capitalization," the PLIA said in its proposal submitted to the Insurance Commission (IC) recently. "It is capital required of life insurance companies, based on risk assumed. The more the risks, the more capital required."

The PLIA proposes the adoption of the US RBC approach, which is also utilized by Taiwan and Japan. It said that the country has similar annual statement requirements, and a less difficult regulatory environment than the US. The RBC interacts with statutory requirements and appointed actuary rules.

The RBC formula covers asset default risk (C1), mortality/underwriting risk (C2), interest rate/asset-liability management risk (C3), and general business risk (C4).

Likewise, it takes into consideration premiums, admitted assets and net worth.

Following the formula proposed by PLIA, the RBC ratio is drawn serving as the the guiding rate for the industry regulator, with the RBC formula recommending the levels of regulatory intervention based on the ratio.

If the ratio is less than 200 percent, the company must submit a plan to correct the situation. If the ratio is less than 150 percent, the regulator must issue orders for correction to the company.

If the ratio is less than 100 percent, the regulator is highly recommended to take over operations of the troubled company, and if the ratio is less than 70 percent, the regulator should take over immediately.

The PLIA proposal pointed out that RBC directly impacts on risk management practices. It encourages using bonds, aside from government securities, to back up liabilities while encouraging fewer insolvencies. The system discourages holding risky assets like properties while encouraing variable and pure protection products as "highly preferable."

"The RBC has far-reaching effects on solvency, risk management, and industry confidence. Straight capitalization can’t accomplish all these," it said.

PLIA president Jose L. Cuisia Jr. said the RBC to be implemented would likely be a combination of several proposals.

"The industry is willing to increase its capital base after a longer period of time, and after we have developed a risk-based formula for the insurance industry," Cuisia said.

Insurance Commission(IC) Chairman Evangeline Escobillo favors the adoption of the RBC over directly raising the capital level.

"It is not partial to size but efficiency," Escobillo said. "The banking system has already adopted it and there are areas of cooperation there."

The IC will be holding a series of discussions within the year in the hope the new system is implemented starting the first quarter of next year.

Early this year, the IC informed the insurance industry of plans to implement a capital building program to strengthen the industry and bring it at par with its regional counterparts.

The country’s insurance industry is one of the lowest capitalized in the region. The last time the industry raised its minimum capital requirement was in 2002, from P10 million to P50 million.

The timetable requires life insurance companies to increase paid up capital from P50 million to P150 million by end 2005, to P300 million by end 2006, and P600 million by end 2007.

For non-life insurers, paid-up capital should grow from P50 million to P100 million by end 2005, to P200 million by end 2006, and to P300 million by end 2007.

For reinsurers, from P75 million to P350 million by end 2005, to P450 million by end 2006, and to P900 million by end 2007.