3 years lead time for capital hike urged

A respected economist says insurance companies need at least three years as a “reasonable transition time” to meet the P175 million minimum paid-up capitalization of the Department of Finance (DOF).

In a paper issued recently, former Budget Secretary Benjamin Diokno said 60 of out 86 firms – or 7 out of 10 insurance companies – have capitalization of less than P175 million and he said these companies will be put under stress as the paid-up capitalization requirement is raised to P175 million by the end of this month.

“A transition period of three years (from 2012 to 2015) appears reasonable to give existing firms to adjust,” Diokno said. He noted that the companies with less than P175 million capitalization have a more than even chance of raising the appropriate capital to make their businesses viable if given the three-year lead time.

It will be recalled that the DOF had warned insurance companies that if they fail to meet the P175 minimum capital required by its Department Order 27-2006 by end of this month then they will not be issued a license to operate.

Department Order 27-2006 has been labelled as “oppressive” by insurance companies  and 10 of them already filed a petition with the Quezon City Regional Trial Court to issue a temporary restraining order stopping its implementation.

Diokno said a very high capitalization requirement, say at P500 million as the DOF had announced, will be disruptive of the smooth operations of the insurance industry if implemented without the benefit of a transition period.

“In terms of paid-up capital, only five (companies) will be compliant (to the P500 million) with another six likely to be able to raise the capitalization requirement. In terms of net worth, the picture appears more dismal: only two of 86 firms will be compliant,” the former Budget chief said.

Diokno added that he supports the move of the insurance industry to revise the 1978 Insurance Code. Among the revisions the industry is seeking to make in the Code is to limit the power of the Finance Secretary to increase the minimum paid-up capital of companies.

“I fully support the proposal giving the Secretary of Finance, upon the recommendation of the Insurance Commissioner, the authority to adjust the capitalization requirement every five years, provided that any given increment should not, at any given instance, exceed 20 percent,” Diokno said.

“The proposal is a sound one. Five years is long enough period for any firm to plan in advance,” he said. “Economic conditions change and the industry has to be kept responsive to these changes in the interest of protecting policyholders and the public. But this has to be balanced by ensuring policy consistency. The business sector should be protected against the whims and caprices of politicians and bureaucrats. Secretary Purisima, who is known for his competence and probity, will not be Secretary of Finance forever. There is no guarantee that his replacement will have the same qualities,” Diokno said.

The University of the Philippies professor also considered the “20 percent” cap in the required capital increase every five years as “reasonable” since it only assumes an annual inflation rate of 4 percent which is a little higher than the present inflation rate of 3.1 percent.