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The Business of Insurance

In some way banking sector and insurance sector are quite similar aspects in the sense that
they are really highly regulated because they do have important role in the economy.
Insurance companies 1. moral responsibility to provide a mechanism whereby people will
suffer their losses less. The purpose of insurance is to compensate or indemnify for that
loss. In the process, when talk about risk distributing, where we said the whole business of
insurance what characterizes it from a guaranty or suretyship agreement is its a risk-
distribution where you get a pool of people together who are exposed to the same risk or so
agreeing to contribute to a fund from which one can claim payment in case of suffering. In
the process the law has seen it as important a role today so that it made up its mind that it
will interfere into this area so that the industry is held and the people have a reliable source
of indemnity in the case of their loss. So, it's a very regulated industry. It’s not something
you can leave. Regulations affect how they do business.

Insurance Companies

Note that there was a change in from the old law it allowed individuals and that was
removed. Now only juridical entities can become insurer. They become insurers in the
sense of being able to do the insurance business and therefore get a license or authority
from the insurance commission. Doing insurance business is defined in Section 2. If you are
habitually engaged in it or something like it, then you can be considered as being in the
insurance business and if you do that without authorization that's not permissible. GR.
Insurance Corp cannot transact insurance in the Philippines unless they get a certificate of
authority from the Insurance Commission. In that first statement you can already see that it
is important to the state. In order to get that cert. of authority from the insurance commision
GR. satisfy both financial and moral standards. Financial standards are the capitalization
requirements. You have to have substance because this business calls for you to be able to
answer people's needs. You have to have the wherewithal to be able to address those
situations. You must also fulfill integrity requirements. Those particular standards extends
also to the officers and directors, so if you know anyone who is a director in an inurance
company, you can be assured that the state has considered him a person of integrity. The
law also provides for. They want to make sure that the industry is abov board. What are the
ways by which things could go wrong? Example: I'm an insurance company and I've agreed
to pay open policies for fire insurance, so when a house burns let's adjust or calculate the
amount of the loss. If I were the one also the one how much your loss is what's my interest?
My interest is to make sure the value that is lowest possible.

The Code also provides for avoidance of conflict of interest situation. You have a provision
that says insurance companies cannot be insurance adjusters because the insurance
adjusters are the persons who sets the amount of the loss. Related to capitalization
requirement, Insurance Companies are also required to put up a security deposit. You must
be solvent. To ensure solvency there are certain things that the law also considers like you
cannot declare dividends unless minimum paid up capital and requirements are met. The
idea is we won't allow you to just dissipate your income check because you have them.
Assets, they have to have a 1. certain asset level and the 2. quality of those asset, so can
insurance companies lend money? If any people pay premium of a million peso each, as
insurance company I have 10 million pesos. It's supposed to pay for somebody who suffers
a damage. What if none of the perils occur? Then the insurance company has 10 Million.
Next year another 10 people comes to me and I earn 10 million. That keeps growing and in
fact because it's a risk assumption. There's a chance that it might not happen. So, risks can
happen and cannot happen. It is the case that insurance companies can accumulate a lot of
assets and therefore, they can invest or lend it.

The law also provides requirements so you just dont get any kind of loan, any kind of
investments. They have to be investments that are called admitted assets. Meaning there
are quality requirements. The kind of assets that they have it must be quality. In terms of,
assets and investments and lending. While, they are allowed to do that, there are a lot of
technical provisions that they have to be approved and to be of a certain kind and
sometimes they have to be secured with collateral. All to make sure that you are financially
sound.

GR. Foreign insurance companies can make an investment. In fact a lot of companies and
financial advisers they know that insurance companies have a lot of money. So when other
corporations need to raise capital and they can no longer raise funds from banks because
of single borrower limit. They go to insurance companies and borrow from them. But, they
have to undergo this process of making sure that approval is given by the Commission
because insurance companies are so regulated.

To ensure the ability of insurance companies to pay, there is also a set of reserve
requirements. Reserve requirement is you set aside or you reserve. It's like with banks, you
deposit your money and whenever you need your money you may withdraw it anytime. The
state wants to make sure that insurance companies have money to pay the insured. That's
the whole idea of having reserve requirements.

There's a portion which talks about limit of a single risk. You cannot use your entire portfolio
to insure one. Remember this is risk distributing in general for other but as far as the
insurance company is concerned, if what it does is it agrees to issue only one insurance
policy, for one risk, then if something happens they'll lose all their assets. Example: The
total net worth of a bank was 1 million pesos. An applicant for fire insurance comes to them
and the amount he is applying for is 1 million pesos. Insurance company says okay. Fire
causes total loss and the insurance company needs to pay the insured. in effect, it pays its
total net worth. So, the law says there is a limit to the amount of the risk that you can take
for one particular risk in relation to your net worth.

Reinsurance
Another insurance company covering another insurance company with respect to that
particular loss or liability. Generally, that provision tells you that reinsurance companies
themselves have to have authority to conduct reinsurance business in the Philippines.
Sometimes, there are foreign reinsurance companies and there is a special approval
requirement also required in those occasions as well. Insurance Companies are supposed
to provide reports by way of annual statements and all that. The other one that pertains to
insurance companies is that old section on policy courts (?). Remember, insurance contract
must be in writing and approved by the insurance commission applies to riders,
indorsments, other things that you attach.

Variable contract
Insurance companies. Their business is to insure risks, but then i think, perhaps, they are a
major player in our financial sector. So that they are actually allowed to provide as financial
product this variable contract. They're part insurance and part investment. Example: I have
some funds I might place it in a bank or other mutual funds that earns a certain percentage.
Insurance companies can also do that. In other words, they will take your money, invest it
and put it in a financial product. In that sense it's not any different from banks. What makes
it different though, insurance companies are not supposed to be doing that as a business.
But, they allow that nonetheless for so long as those types of contracts include an insurance
component. Meaning if you invest with me a million pesos, 30 % of that will constitute
premium for life insurance and the balance of the money you gave, we'll invest that. So
when that earns you don't have to pay premium we'll take that from the earnings.
Bottomline: 2 types of contracts in a variable contract: 1. insurance, 2. investment.

The curious thing about variable contracts, the law expressly states that they are not
deemed securities under securities law. Hidden in the code, it says it is not deemed
securities under the securities code.

Claims Settlement
The job of insurance companies is to pay a claim. There provisions regarding claim
settlement, perios within which they should pay any claims. First of all, they are not
supposed to engage in unfair claims settlement. What are unfair claims settlement?
Essentially, practices of insurance companies where they may misrepresent any sort of
activity which the idea is to try to make it difficult or to delay the payment of claims. Again
you have an enumeration in Section 2247 about what constitutes unfair claims
settlement. The following provisions talks about the period of time within which to pay. 248
and 249 deal with life and health insurance and the periods to pay. In essence, with life
insurance it depends on the kind of life insurance. If you fail to pay there is interest that is
imposed. You have similar rules for non-life:Present within 30 days, agree what the amount
is, cannot agree then there's a 60 day period...

Payment of Claims

Stronghold case

Hofi notes: What interest rate should apply? Those used for forbearance of money.
Therefore, the proper rate that applies is 6%.

Part of the Authority of the Commission is that they have the right to inspect, examine,
power of visitation (visitation rights), check the records and books of insurance companies,
and to revoke their certificate of authority.

Conservators
Sometimes when an insurance company has problem with money or they do not have
enough cash on hand. They could be in a state of illiquidity. In which case it is possible for
the conservator to be appointed to try to bring back, liquefy the assets and so. That's
essentially the role of conservators. Conservators can even change board decisions. They
cannot really touch on perfected contracts.

What if despite the conservatorship it doesn't work out? Therefore, insurance company like
other companies can go to a state of insolvency. Insolvency is a case where your liability
exceeds your assets. In that particular instance there is a procedure which involves the
appointment of a receiver. Who will take charge of that company from that point on. FRIA
law does not apply to insurance companies and banks. They are not considered debtors by
express commission of the FRIA. What determines the procedure of liquidation for them is
still the insurance code.

Agents/Brokers
Insurance Agents and Insurance brokers have to be licensed by the Commission.

In essence what are they?

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