1. By: Marife Umali and Pearl Mabutas Term Paper Compliance of Phil. Non-Life Insurance Companies to Risk- Based Capital as Imposed by the Insurance Commission

2. Problem Statements  What is the current measurement being used by the Insurance Commission (IC) to monitor the capitalization of an insurance company with respect to its risk exposure?  What are the underlying factors of the Risk-Based Capital (RBC) requirement as formulated by IC?  What are the reasons why most of the non-life insurance companies are not complying with the RBC requirement?

3. Objectives  To know the possible adjustment in the RBC requirement.  To know the possible regulatory measure to ensure compliance of the RBC requirement.

4. Assumptions  Most of the non-life insurance companies are not complying with the RBC requirement.  Insurance Commission has no regulatory measure to ensure compliance of RBC requirement.  The RBC framework formulated by the Insurance Commission is not applicable in the Philippines

5. Scope and Limitations  Phil. Non-Life Insurance Industry  Compliant and Non-compliant Insurance Companies (Random Sampling)  Insurance Commission’s Regulation on Capitalization

6. Review of Related Literature  Capitalization Defined -Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual insurance companies). (Insurance Information Institute) -Equity interest of the owner in the business, e.i. the difference between asset and liability, also called equity or networth. (www.allbusiness.com) -The money contributed by the proprietors to an organization to enable it to function. (www.encyclopedia.com)

7. Review of Related Literature  Capitalization as Defined in the Insurance Industry -Is the cushion in a financial institution’s balance sheet that protects the interests of claimants of the company. -Specifically, for insurance companies, the role of capital is to provide assurance to policy holders that their claims will be honored. -The amount of capital an insurer requires should be related to the size of the potential losses the company could sustain under adverse circumstances.

8. Review of Related Literature  NAIC Risk Based Capital -Measures minimum amount of capital require to support overall business operations. -Considers the size and the degree of risk taken by the insurer.  Purposes of NAIC Risk Based Capital -Is to determine a level of required capital that varies from company to company in accordance with the deemed riskiness of each company. -Is to help regulators identify companies that are weakly capitalized before they actually become insolvent.

9. Review of Related Literature  Goals of NAIC Risk Based Capital -Universally recognized capital standard. -Protection against short term adverse deviations. -Prevents companies from taking extraordinary risks. -Assured interested parties that the risk of insolvency is low. -Authorize regulators to enforce compliance with more capital requirements.

10. Review of Related Literature  Components of RBC Framework -RBC formula that establishes a hypothetical minimum capital level that is compared to a company’s actual capital level. -RBC model law that grants automatic authority to the insurance regulator to take specific actions based on the level of impairment.

11. Review of Related Literature  RBC Formula _______________________ R0 + √R1 2 + R2 2 + R3 2 + R4 2 + R5 2  R0 – Asset Risk – Subsidiary Insurance Companies;  R1 – Asset Risk – Fixed Income;  R2 – Asset Risk – Equity;  R3 – Asset Risk – Credit;  R4 – Underwriting Risk – Reserves;  R5 – Underwriting Risk – Net Written Premium.  RBC is compared to TAC

12. Review of Related Literature  Total Adjusted Capital TAC = Capital and Surplus + AVR + 50% of dividend liability -AVR is included even though it shows as a liability on the balance sheet.  RBC Level of Action -Ratio between TAC and RBC determines the level of actions by the regulators.

13. Review of Related Literature  Different levels of actions -None. -Company Action Level… submit RBC plan -Regulatory Action Level… corrective actions -Authorized Control Level… regulatory actions -Mandatory Control Level… regulatory control

14. Review of Related Literature  Capitalization Requirement of Non-life Insurance Company New Insurance Company – Paid-up capital to at least Php75M and a contributed surplus fund of at least Php25M.  Increase of paid-up capital of existing Non-life Insurance Company – Php50M - Insurance Code of the Philippines Secs. 184-193 Title 1 – Insurance Companies: Organizations, Capitalization, and Authorization

15. Review of Related Literature Top Non-Life Insurance according to Paid-Up Capital 1. Malayan Insurance Company, Inc. 845,292,500.00 2. Standard Insurance Company, Inc. 600,000,000.00 3. Philam Insurance Company, Inc. 581,056,700.00 4. Mapfre Insular Insurance Corporation 500,000,000.00 5. UCPB General Insurance Co., Inc. 400,000,000.00 6. BPI/MS Insurance Corporation 350,000,000.00 7. New Hampshire Insurance Company 329,276,092.00 8. PNB General Insurers Company, Inc. 312,000,000.00 9. Pioneer Insurance & Surety Corporation 300,000,000.00 10. Alliedbankers Insurance Corporation 282,500,000.00

16. Review of Related Literature  RBC Framework as formulated by IC ______________________________________ RBC Requirement = √R1 2 + R2 2 + (0.5 * R3) 2 + (0.5 * R3 + R4) 2 + R5 2  R1 – Fixed Income Securities;  R2 – Equity Securities;  R3 – Credit Risk;  R4 – Loss Reserves;  R5 – Net Written Premiums.

17. Review of Related Literature  RBC Framework as formulated by IC RBC Ratio = Networth / RBC Requirement wherein: “Networth” shall include the company’s paid-up capital, contributed and contingency surplus and unassigned surplus.

18. Review of Related Literature RBC Ratio = YEventDescription 100% < Y <125%Trend Test Linear extrapolation if next year's ratio < 100%. If so, move to Company Action Event 75% < Y < 100%Company Action Submit RBC plan and financial projections. Company implements the plan. 50% < Y < 75%Regulatory Action IC authorized to examine company and issue Corrective Orders. 35% < Y < 50%Authorized Control IC authorized to take control of the company. Y < 35%Mandatory Control IC required to take control of the company.  Levels of Regulatory Intervention

19. R 1 Asset Risk – Fixed Income RBC Factor Bonds, Treasury Bills, Short-term Investments Government, domestic in local currency0% Government, in foreign currency1.6% Investment Grade Corporate/Government agency1.6% Below Investment Grade10.0% Near default30.0% Mortgage Loans in good standing (otherwise, 30.0%)10.0% Collateral, Guaranteed and Other Loans Of best security0% Adequately secured10.0% Others30.0% Cash (bank deposits at 0.3%, not in good standing at 20%)20.0% Security Fund0% Electronic Data Processing Machines, hardware20.0% Software10.0%

20. R 2 Asset Risk – Equity RBC Factor Stocks Common Stocks30.0% Preferred Stocks (Non-traded or rated at 30%)15.0% Real Estate Company-occupied, up to quota8.0% Company-occupied, above quota15.0% Investment Real Estate15.0% Foreclosed30.0% Other Investments20.0%

21. R 3 Asset Risk – Credit RBC Factor Premiums Receivable – Jumbo policies, Others at 30% 15.0% Premiums Due from Ceding Companies30.0% Premium Reserve / Loss Reserve withheld by Ceding Companies 30.0% Reinsurance Recoverable on Losses30.0% Other Reinsurance Accounts Receivable30.0% Commission Accounts / Notes Receivable10.0% Salvage Recoverable20.0% Investment Income Due and Accrued20.0% Other Assets20.0%

22. R 4 Underwriting Risk – Reserves RBC Factor Claims Reserves15.0% Excessive Growth Charge Loss / LAE Reserves45.0%

23. R 5 Underwriting Risk – Written Premium RBC Factor Net Premiums Written20.0% Excessive Growth Charge Net Premiums Written25.0%

24. Theoretical/Conceptual Framework IC Regulation IC RBC COMPLIANCE OF NON-LIFE INSURANCE INDUSTRY NON-LIFE INSURANCE INDUSTRY NAIC RBC Insurance Code Compliant Non-compliant adjustment

25. Methodology  Check records from Insurance Commission to know which non-life insurance companies are complying and not complying with the RBC requirement.  Conduct interview with the compliant and non-compliant companies to know their opinions on the RBC requirement as formulated by the Insurance Commission.  Check the submitted financial statement of the company to know the values behind the formula of the RBC requirement as formulated by the Insurance Commission.  Review the current regulatory measure being used by the Insurance Commission with respect to capitalization.  Review regulations under the Insurance Code of the Philippines with respect to capitalization.

26. References  Insurance Code of the Philippines, 1998 Edition  Insurance Commission 2007 Annual Report  Stone, C.A and Zissu, A., Global Risk Based Capital Regulation Volume II: Management and Funding Strategies  http://www.soa.org.files/pdf/08-RMTF RiskBasedCap.pdf  http://www.allbusiness.com  http://www.encyclopedia.com  http://www.iii.org  http://www.insurance.gov.ph/_@dmin/upload/reports/IMC%207-2006.pdf  http://www.naic.org/documents/committees_e_capad_RBCoverview.pdf