From the News! – Your Daily News

Honesto General
Philippine Daily Inquirer

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IN THE FACE of this worldwide financial meltdown, a life insurance company has to grapple with its own unique problems.

If you own a factory with a heavy loan on it, and you are hopelessly unable to keep up the amortization, the bank could foreclose on the mortgage and take over your property. You lose your asset, it is true, but your liability is wiped out as well. You are bankrupt, but you could say you are clean.

In a life insurance company, a loss in assets does not result in any corresponding cut in liabilities. The company might lose everything it owns, but it will still be burdened by what it owes. This accounting anomaly stems from this undeniable fact: clients, who have paid premiums with hard-earned cash, and are holding on to valid long-term insurance policies, will continue to die, get disabled or retire to a ripe old age.

When the value of a company’s portfolio of stocks and bonds plummet, the hole must be plugged right away with fresh capital. The insurance commissioner in New York has ordered such giants as Metropolitan Life to raise fresh capital to cover the drop in assets.

This business phenomenon is also the result of the level premium system. In the earliest days of life insurance in England, companies sold one-year policies only. Every time you renewed the policy, you paid a higher premium, in line with your age. As you neared middle age, at precisely the time when your earning capacity might be weakening, and when you needed the insurance the most, your premium became prohibitive. To solve this problem, the level premium system was devised.

If you buy a 20-year endowment policy, you will pay the same premium yearly for 20 years. This means that, in the early years, you will be paying more premiums than are needed, so that, in the later years, you will be paying less. All figures are actuarially computed.

This excess premium you pay in the early years is the reserve. To keep the premium low, and in fairness to you, this reserve is guaranteed to earn at a certain rate. Nowadays, earnings on the reserve are set at about 8 percent compounded annually.

The reserve, and all premium collections for that matter, is held in trust by the company. Because of the trust character of the funds, the Insurance Code has very strict rules on how the funds should be invested. Always, earnings are sacrificed at the altar of safety.

When actual investment earnings are less than required, the company loses money, because it has to continue paying out benefits contracted for under the policies and established on the assumption that the reserves would earn at a certain fixed rate.

The boast of the Government Service Insurance System that it earned over P1.2 billion on its foreign investments of $600 million is bad news for members. The earnings rate is only 5+ percent, well below the statutory minimum. This rate will not even cover administrative expenses.

I suspect, and I stress this is merely a suspicion, the sale of Meralco shares on a three-year installment plan was cooked up because the GSIS is having some problems in its cash flow.

A few years back, the largest Japanese life insurance company collapsed because its investment earnings for some time had been below the statutory threshold.

The mathematical underpinnings of insurance, particularly life insurance, are unrelenting, inscrutable and unforgiving. A company can fool around with them only at great peril.

Zinnia B. Dela Peña
Philippine Star

Amid a difficult environment marked by soaring prices of gas and food, the country’s pre-need industry reported a 21.4 percent drop in sales in the first six months of the year to P7.8 billion from P9.92 billion a year earlier, according to data culled by the Securities and Exchange Commission’s Non-Traditional Securities Department.

The number of plans sold to the public, on the other hand, rose 9.16 percent to 124,928 from 114,443 the same period a year earlier.

Sales of pension plans declined 36.34 percent to P3.94 billion from P6.19 billion as the number of units sold decreased 22 percent to 40,313 from 51,697.

Sales of education plans likewise dropped 46.31 percent to P967.54 million from P1.8 billion. The number of plans sold declined 56.06 percent to 5,644 from 12,845.

Life plans, on the other hand, registered a 49.75 percent rise in sales to P2.89 billion from P1.93 billion as the number of plans sold jumped 58.26 percent.

Initial collections, the first payment made by the planholder upon purchase of a plan depending on his or her mode of payment, reached P750.98 million or 34.88 percent lower than the previous year’s P1.15 billion.

In June alone, pre-need sales amounted to P1.4 billion, down 19.14 percent from P1.74 billion. This even as the number of plans sold grew 15.6 percent to 21,083.

Ted P. Torres
Philippine Star

Total premium collections registered by the country’s life insurance industry in 2007 reached P74.125 billion, up 34 percent from P55.3 billion in 2006.

Based on official figures released by the Insurance Commission recently, Philippine American Life and General Insurance Co. (Philamlife) topped the list of life insurance companies in terms of assets and total premiums in 2007.

Philamlife reported assets worth P108.3 billion and premiums worth P16.8 billion.

Sun Life of Canada (Phils.) Inc. was second best in assets worth P66.9 billion, but third in terms of premiums worth P13.1 billion.

AXA Philippines reported total premiums of P16.3 billion, the second highest, although it remained fourth in terms of assets at P33 billion.

Insular Life Assurance Corp. reported premiums worth P7.69 billion and assets worth P57.1 billion. Pru Life Insurance Corp. of UK accounted for P5.1 billion in terms of premiums and P12 billion in terms of assets.

Manufacturers Life Insurance Co. reported premiums of P3.5 billion and assets worth P9.8 billion. Ayala Life Assurance Inc. reported premiums worth P1.74 billion and assets of P12 billion.

Great Pacific Life Assurance Corp. reported premiums of P1.43 billion last year and assets worth P5.94 billion.

Generali Pilipinas Life Assurance Co. reported premiums of P1.45 billion and assets of P5.9 billion in 2007. New York Life Insurance (Philippines) Inc. reported premiums of P967 million and assets worth P2.3 billion.

Meanwhile, PGA Sompo Japan Insurance reported a positive net income of P6.88 million in the first three months of 2008 based on preliminary data from the Insurance Commission.

Manila Times

The chief of the state pension fund named companies that allegedly compose a cartel in a sector of the country’s insurance industry.

Winston Garcia, the president and general manager of Government Service Insurance System, or GSIS, on Wednesday identified the members of the cartel as Great Domestic Insurance, BF General Insurance Corp., Plaridel Surety and Insurance, Security Pacific Assurance, Far-Eastern Surety, Pacific Union Insurance, Standard Insurance, South Sea Surety and Insurance, People’s General Insurance and Acropolis Central Guarantee.

These firms also allegedly corner the insurance sector involving compulsory third-party liability, or CTPL, an insurance policy that shoulders any possible damage resulting from a person’s use of his car. The sector is said to be worth P3 billion a year.

The 10 companies, according to Garcia, control about 70 percent to 75 percent of the insurance business in the Philippines.

He said Acropolis is defunct but still sells policies. He added that its owners are being investigated.

“There are 110 insurance companies in the country, and if most of the insurance business is only controlled by eight to 10 firms, what do you call them? All of them, apparently charge the same overpriced CTPL insurance policy. Instead of P575, they charge P900 to P970 per vehicle,” he told reporters during a press briefing.

He called these companies “not a monopoly but an abusive cartel, which GSIS is trying to break up.”

Philippine Insurers and Reinsurers Association (Pira) earlier said it was the government pension fund that was trying to monopolize the country’s compulsory third-party liability sector. The charge arose when the Department of Transportation and Communications picked GSIS as sole provider of such insurance policies to car owners.

Pira last week filed a motion for reconsideration on the selection made by the Transportation department before the Makati Regional Trial Court.

It said the department naming GSIS as the only provider of the compulsory third-party liability policies amounted to creating a “monopoly,” which is banned by the Constitution. The court dismissed the petition.

“Aside from being patently unconstitutional, a monopoly is always detrimental to public welfare because it robs consumers of their freedom to choose,” said Fortunato Peralta, the deputy general manager of Pira.

Reaction to graft case

Meanwhile, Malacañang also on Wednesday denied illegally holding P1-billion unassigned surplus of the Government Insurance Fund, saying President Gloria Arroyo already remitted the money to the national treasury.

Executive Secretary Eduardo Ermita said GSIS remitted in December 2004 to the national government P1 billion through President Arroyo, but the amount was turned over by the President to the Bureau of Treasury.

“We have the official receipt number of the check. Some say it was lost but it is covered under the law and it is already with the [Treasury bureau],” Ermita added. “There is no anomaly.”

He said the cases filed against Garcia over the allegedly illegal remittance may be part of a black propaganda because of Garcia’s advocacy to lower power rates.

“I believe that he can be cleared if it reaches the proper forum which is the Office of the Ombudsman. Let’s face the music in the Ombudsman,” Ermita added.

Despite the two cases filed on Tuesday by three separate parties accusing the GSIS chief of corruption and other criminal and administrative charges, Ermita said Garcia still enjoys the “confidence” of the President and he will stay at the state pension fund.

– Chino S. Leyco, James Konstantin Galvez and Angelo S. Samonte

Likha C. Cuevas-Miel
Manila Times

FACED with a tough economic environment and lingering public ill will caused by the failure of some of its big players, the pre-need industry may suffer a further shakeup, with some companies likely to fold up, according to the Securities and Exchange Commission (SEC).

Based on the data obtained by The Manila Times from the SEC, 5 pre-need companies failed to renew licenses due to slow sales or their falling short of the minimum capitalization requirement.

At present the government requires a single-plan pre-need company to have at least P50 million in capitalization to support its business. The SEC also requires a minimum capitalization of P75 million for a two-plan company, and P100 million for a three-plan firm.

According to the SEC Non-Traditional Securities and Instruments Department (SEC-NTD), Classic Plans Inc., which sells pension plans, failed to comply with the requirements for renewing its license.

Eduplan (Philippines) Inc. and Millenium Plans Inc. opted not to renew their licenses and decided to pursue “voluntary liquidation,” The SEC-NTD said Eduplan cited slow sales while Millenium, which sells educational and pension plans, “was not interested in pre-need anymore.”

Also joining the list is Primeplan International Corp., which suffered from capital deficiency and other compliance issues, thus barring it from applying for a license to sell pension plans.

Primanila Plans Inc. also failed to get a license since it didn’t comply with the requirements. The SEC issued a cease and desist order, restraining the company from selling pension products to the public, Commissioner Jesus Enrique Martinez said.

The operating environment has become tougher in the aftermath of the industry crash several years ago. “If you notice there is like a purging process and I think the purging has probably taken effect, which has been hit now by circumstances in the general economic trend, which has fallen into only one—it’s just uncertain,” Martinez said.

Because of this uncertainty, people turn to other forms of investments like land and other instruments. In addition, other investments instruments like variable insurance products have begun encroaching into the pre-need’s traditional business, he said.

“There is more an effect [of] the variable life insurance contract with the pre-need because you already have it riding many times on the insurance contract. And when you talk about the face value [of a] pre-need plan, they might as well go to the variable insurance contract. It doesn’t tell you that they’re going to bury you but it can produce you the money for that purpose,” the SEC official said.

“The only products that are selling these days are the life plans because people realize that it is very expensive to die,” he said, citing services-oriented plans which include wakes, preparation, body pick-ups, cremation plan and the like.

In April, pre-need sales grew by a quarter from last year due to the surge in demand for life plans, with total plans sold across all pre-need products rising 25.2 percent to 17,806 from a year ago. Life plans led the growth with a 63.1-percent jump to 13,015 year on year. Education plans continued its decline of 27 percent to 677 while sales of pension plans also contracted by 22.7 percent to 4,114.

Philippine Star

The country’s life insurers want the retention of the risk-based capital (RBC) framework but insists that the networth capital build-up formula be suspended.

The Philippine Life Insurance Association (PLIA) argues that majority of the 26-licensed life insurers have already attained the risk cover of 150 percent as prescribed by Insurance Memorandum Circular (IMC) 6-2006. Likewise, the prescribed industry hurdle rate of 80 percent had been achieved.

PLIA president Gregorio D. Mercado explained that 23 of the 26 life insurers displayed 150 percent or more risk cover at the end of 2006.

“And our initial estimates indicate that we have also surpassed the hurdle rate of 85 percent required by the IC order covering the 2007 period,” Mercado, who is also the president of the Philippine Prudential Life Insurance Co., added.

The Insurance Commission (IC) is reportedly reviewing anew the records of the insurers for the period 2006.

Meanwhile, PLIA wants the Department of Finance (DOF) to revoke Insurance Memorandum Circular (IMC) 10-2006 which integrated the RBC and capital build-up formula.

Under the existing rules, all insurers are required to increase their networth capital from P50 million to P100 million in 2006. Minimum networth capital would amount to P500 million per insurer by end 2010.

However, conditions under IMC 10-2006 allow a temporary suspension of the annual increase in capital, if the industry can reflect that 80 percent have a risk cover of at least 150 percent.

“The RBC substantially minimizes the risk of company insolvency since it requires capital that is commensurate to the risks of a life insurance company. Systematically increasing the surplus unduly increases the cost of capital of a life insurance company,” PLIA argued.

So far, the DOF remained firm in implementing both the IC and its own regulations.

“The finance department wants the insurance industry to be at par with its regional counterparts in terms of capital and competitiveness. It also wants the industry to consolidate in the face of a still weak economy, and hope that the remaining capable players increase the number of insured in the population,” IC officials said.

Meanwhile, initial reports indicate that almost half of the country’s 96 non-life insurers were unable to comply with 150-percent risk cover, as well as the 80-percent hurdle ratio.

IC regulations indicate that a sector (life or non-life sector) achieves the hurdle will be exempt from the next annual capital increase. The insurers however that failed to meet the 150-percent risk cover would have to implement the capital build-up as well achieve the minimum risk cover.

Failure to achieve the RBC formula or the required minimum capital, will result in the suspension or non-issuance of the annual IC certificate to operate.

– Ted Torres