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By: Marife Umali and Pearl Mabutas

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

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By: Marife Umali and Pearl Mabutas

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

  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 + √R12 + R22 + R32 + R42 + R52 • 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

  16. Review of Related Literature • RBC Framework as formulated by IC ______________________________________ RBC Requirement = √R12 + R22 + (0.5 * R3)2 + (0.5 * R3 + R4)2 + R52 • 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 • Levels of Regulatory Intervention

  19. R1 Asset Risk – Fixed Income

  20. R2 Asset Risk – Equity

  21. R3 Asset Risk – Credit

  22. R4 Underwriting Risk – Reserves

  23. R5 Underwriting Risk – Written Premium

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

  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

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