THE DEPARTMENT order directing insurance companies to raise their capitalization to P1 billion has been issued by the Finance department.

Department Order (DO) 15-2012, signed by Finance Secretary Cesar V. Purisima, mandated existing life and non-life insurers to raise their minimum paid-up capital every other year beginning 2014 until it reaches P1 billion by 2020.

Thus, from P250 million this year, insurers must have at least P400 million in capital by 2014, P600 million by 2016, P800 million by 2018 and P1 billion by 2020.

A higher P2 billion is required for reinsurers or those companies that insure insurance firms by 2020, the order said, while companies engaged solely in micro-insurance should have at least P500 million.

“This was the result of several consultations conducted by the Department of Finance and the Insurance Commission with industry players,” Purisima said over the weekend.

An earlier order, DO 27-2006, provided that local insurers should have had a minimum of P250 million in capitalization deposited in banks by June 30. The Finance chief has maintained that insurance companies should raise more capital in preparation for the common ASEAN market by 2015.

“The imposition of a higher minimum paid-up capital to further supplement [DO] No. 27-06 after December 31, 2012, shall ensure sufficient protection to the insuring public and further strengthen the integrity of the insurance industry,” the order stated.

Under DO 15-2012, no new company will be allowed to operate without having a minimum capital of P1 billion, P2 billion, or P500 million, depending on its function.

Capital requirements may however be deferred for those companies undergoing merger and consolidation or those which will meet the risk-based capital (RBC) hurdle rate of 150%.

For merging insurers, suspension will depend on a “favorable endorsement of the merger” from the IC and the filing of articles of incorporation with the Securities and Exchange Commission. The combined capital of both insurers will also have to be “not less than the current capital requirement,” the order said.

For companies that will meet the RBC hurdle rate, compliance may be postponed for two years, the order said. However, this right may only be exercised once.

“After which the qualified company shall comply with the required capitalization previously deferred and the ensuing capitalization requirements whether or not it meets the RBC hurdle rate,” the order said.

“Hence, all existing insurance and professional reinsurance companies should have reached the capitalization requirements of P1 billion and P2 billion by 2022, at the latest,” it added.

Purisima said the capital build-up program will “foster greater efficiencies and deeper market penetration.”

He cited World Bank data showing the Philippine insurance industry lagging behind its peers in the Southeast Asian region on required capitalization and insurance premiums as a percentage of GDP.

In 2010, data showed Philippines only required a minimum capital of $2.77 million for life insurers, considerably lower than its Asian peers: $33 million in Malaysia, $29 million in Vietnam, $16.10 million in Thailand, $7.8 million in Indonesia and $4.3 million in Singapore.

The same is true for non-life insurers where the Philippines’ capital requirement of $2.77 million fell behind Malaysia’s $33 million, Vietnam’s $14.5 million, Thailand’s $9.8 million, Indonesia’s $7.8 million and Singapore’s $3.83 million.

“By 2015, assuming that other countries do not call for higher capital requirements, the Philippines will still be lagging behind Malaysia, Vietnam, Thailand and Indonesia, even as implement the new order. It will only be by 2016 that the Philippines will improve its ranking to 4th placer, and by 2018 to 3rd placer within the same peer group,” the Finance chief explained.

“Based on the average capital requirement in the region, it will only be by 2018 that Philippine life insurance companies and by 2016 for non-life insurance companies would be able to catch up with their regional counterparts.”

Meanwhile, data also showed that in 2010 the combined penetration rates of life and non-life insurance industries in the country stood at 1.2% of GDP, significantly lower than those registered by its counterparts in Thailand at 3.6%, in Malaysia at 4.7%, in Singapore at 5.92%, in Indonesia at 1.43%, and in Vietnam at 1.36%.

“On life insurance penetration rate, the Philippines ranked 5th after Malaysia, Thailand, Indonesia and Singapore, while for non-life the country ranked lowest along with Indonesia,” Purisima claimed.

“With the country’s improving economic and labor figures, the low insurance penetration rates present a good opportunity for growth and greater investment in the sector,” he said.