THE WORLD BANK GROUP PHILIPPINES FINANCIAL SECTOR ASSESSMENT PROGRAM July 2019 TECHNICAL NOTE INSURANCE SECTOR: TARGETED ASSESSMENT OF ICPS AND DEVELOPMENT ISSUES Prepared By Serap Oguz This Technical Note was prepared in the context of a World Bank Financial Sector Assessment Program Gonulal (FSAP) mission in Philippines during June, 2019 led Finance, Competitiveness, and by Ilias Skamnelos, World Bank, and overseen by the Innovation Global Practice, Finance, Competitiveness, and Innovation Global WBG Practice, World Bank Group. The note contains the technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap. PHILIPPINES CONTENTS Scope and approach............................................................................................................................................................... 3 Executive Summary ................................................................................................................................................................. 4 I. Targeted Assessment of ICPs .................................................................................................................................11 ICP 1 ............................................................................................................................................................................................11 ICP 2 ............................................................................................................................................................................................14 ICP 4 ............................................................................................................................................................................................18 ICP 9 ............................................................................................................................................................................................20 ICP 10 .........................................................................................................................................................................................25 ICP 11 .........................................................................................................................................................................................26 ICP 13 .........................................................................................................................................................................................28 ICP 14 .........................................................................................................................................................................................30 ICP 15 .........................................................................................................................................................................................32 ICP 16 .........................................................................................................................................................................................34 ICP 17 .........................................................................................................................................................................................34 ICP 18 .........................................................................................................................................................................................37 II. Insurance Market Development ............................................................................................................................39 2 PHILIPPINES SCOPE AND APPROACH 1 This technical note provides a targeted IAIS Insurance Core Principles (ICP) assessment and makes recommendations for the development of the insurance sector. The ICP assessment focuses on 12 ICPs (1,2,4,9,10,11,13,14,15,16,17,18) and does not present a full assessment of observance. As this was not a full assessment, the work did not include a review of sample supervisory documentation. The assessment was conducted from June 6 until June 19, 2019 by Serap Oguz Gonulal, Lead Financial sector Specialist, World Bank. The assessment is based solely on the laws, regulations, and other supervisory practices in place in June 2019. While the assessment does not reflect on-going regulatory initiatives, some key proposals are discussed by way of additional comments in this report. The authorities have provided a self-assessment, supported by examples of actual supervisory practices and assessments related to entities whose identities have not been disclosed, enhancing the robustness of the assessment. Technical discussions with and briefings by officials, as well as discussions with industry participants, have also enriched this report,. The assessors did not meet with any consumer groups. The author is grateful to the authorities and private sector participants for their readiness to discuss issues and share information. The author is especially grateful to the Insurance Commission (IC) for the hospitality, cooperation and logistical arrangements, particularly the coordination of meetings with various industry stakeholders. The author is also grateful for the valuable inputs and insightful views received from insurers, professional associations and other industry participants. 1 This was a two-step full FSAP with the WB mission and the joint IMF-WB Basel Core Principles (BCP) for Effective Banking Supervision assessment mission taking place during June-July, 2019, prior to the IMF missions. In addition, the WB mission and the joint IMF-WB BCP assessment mission predated the outbreak of the global COVID-19 pandemic. The WB Technical Notes and the BCP Detailed Assessment of Observance have not been updated, but the FSA reflects the relevant policy reforms undertaken since the WB mission, and the findings and recommendations remain pertinent in light of the COVID-19 developments. 3 PHILIPPINES EXECUTIVE SUMMARY 1. The insurance industry in Philippines is small but growing. Insurance penetration remains below that observed in many countries in the region and very low compared to countries with similar per capita incomes in other parts of the world. The life insurance sector continues to command the largest market share with about 70 percent of total premiums. Non-life insurance is dominated by property and motor insurance. Penetration rates are unchanged from 2013 and generally lower than in comparable countries, especially in non-life. While traditional sales channels continue to dominate, there is increasing diversity in distribution. Risks in life insurance are relatively well spread and in non-life are mainly short- term. Although there are exceptions, the sector is profitable, and solvency exceeds minimum requirements. 2. During the last five years, the Insurance Commission (IC) has made a significant effort to improve insurance regulation and supervision. It has focused its work on improving capital requirements and reshaping the solvency standards to conform with a modern, risk-based capital regime. The Philippines Risk Based Capital (RBC2) standard draws on international practices and experience in the Philippines market to define solvency requirements that generally reflect risk. The minimum capital requirement has been strengthened and requirements in respect of governance, disclosure and investment practices have been upgraded. As a result, IC has felt sufficiently confident to relax or remove detailed limits on insurers’ investment policies. Improvements have been made in Anti-money Laundering and Countering Financing of Terrorism (AML/CFT). In addition, requirements with regard to management of fraud and market conduct have been improved, along with more meaningful licensing requirements for insurance brokers and agents. 3. The IC has considerable autonomy in practice but lacks operational supervisory independence. Supervisory independence is a necessary condition to provide intrusive, skeptical, proactive, comprehensive, adaptive, and conclusive supervision 2. A good understanding of operational independence is thus the starting point to achieve effective supervision. The Insurance Commissioner and Deputy Insurance Commissioners in Philippines are appointed by the President and serve at the needs of the President. The IC is a government agency under the Department of Finance and is funded by annual budget allocations. Staff are employed under the same rules as other public servants and at rates of remuneration well below industry counterparts as well as other government agencies. One consequence of the application of general public service rules to these employees is the restriction of staff and, this practice, over time, will inevitably have a negative impact with respect to the caliber of individuals who can be retained. The IC approves “Directors and Officers Liability Insurance but staff are not provided with the legal protection required by the ICPs (although the practice is that staff receiving an action against them 2 J. Elliott, M. Erbenova, A. Pancorbo ,Operational independence: Conceptual Framework Supervisory Independence Working Paper IMF 09-2013. 4 PHILIPPINES relating to their duties are represented by government solicitors). The overarching government regulations impose strict time limits on decision making, including a requirement to make decisions on “complex decisions” within 10 days. 4. Improving the independence of the IC should be accompanied by measures to increase its formal accountability to the government. This should include a more formal and elaborate accountability framework including, for example, a publicly-available annual multiyear (5 years) strategic and operational plan presented to the government, along with the IC’s annual report on progress i n meeting its stated goals and objectives. In addition, this would enable both industry members and members of the public to be more knowledgeable about IC’s activities and the insurance industry in general. 5. The assessment has identified areas for further development of IC’s supervisory approach , like risk profiling, and stronger cooperation and coordination among supervisors. While there is strong focus on RBC, there is no part of the supervisory reporting and review process that brings together the overall view of a particular insurer and ensures the appropriate allocation of supervisory resources to mitigating the highest priority risks. This is particularly important in relation to larger insurers, where there is scope for more proactive assessment and relatively greater resourcing to reflect the significance of these entities. Similarly, there is scope for increased cooperation with other agencies, including between IC and the Philippines Securities Exchange Commission (SEC) in relation to asset management issues. A similar area for improvement is regarding inter-actions with foreign regulators and the development of approaches that recognize other supervisors in respect of issues relating to licensing and groupwide supervision. 6. A key recommendation is that IC formulate a strategy with an implementation plan to advance its risk based and market conduct supervision. At present, all supervisory processes, including on-site inspections, are compliance-based. There is considerable scope for improvement by shifting the focus to the evaluation of the risk level associated with an insurer’s strategy, business model, and operations, and the adequacy and effectiveness of governance and controls in relation to those risks. A more risk-based supervisory approach would complement the IC’s risk-based capital regime and would encourage better risk management across the industry. The IC could develop a risk-based supervisory cycle, using impact and risk assessment to determine supervisory focus. In addition, some commonality of approach with other Philippines supervisors could support the further development of conglomerate supervision. Insurance supervisory organizations world-wide are finding that an increased focus on market conduct and consumer related issues is generating payoffs in terms of advancing the state of the insurance market. However, a successful strengthening of capacity in this area may require additional staff and 5 PHILIPPINES supplementary legislation which consequently could provide the appropriate framework for improved market conduct supervision. 7. The IC has been by and large successful in maintaining the financial stability and solvency of the insurance market. Over the last 10 years, insolvencies and involuntary company liquidations have been few and orderly, and the companies’ capital and solvency ratios have been on the rise (mainly due to the introduction of the risk-based capital). Yet, more can be done to ensure compliance of smaller companies with minimum solvency requirements. To this effect, the supervisor should consider enhancing the current system of early warning solvency tests to enable the supervisory authority to initiate corrective actions (e.g. require an additional capital buffer to be restored) before the minimum solvency threshold has been breached. 8. While consumer protection has improved in many respects, ongoing oversight of insurance intermediaries should be improved. In addition, fair treatment of consumers could be enhanced by establishing strong, clear rules for intermediaries regarding compensation disclosure and conflict of interest vis-a-vis insurance consumers. Moreover, insurer Boards should specifically be required to approve policies relating to fair treatment of consumers and to receive regular reports on their implementation (particularly with respect to complaint handling). 9. IC should review its resources and organization to meet the demands of a more risk-based approach. The current resources are inadequate to support IC’s compliance -based supervision including the required number of onsite inspections and market conduct supervision. There are several examples indicating that the resources are not sufficient like the time to do onsite inspections, market conduct supervision, etc. Moving to a more risk-based approach may release some resources but, almost inevitably, will also impose significant new demands with regard to the required skills and expertise. The IC should review its supervisory regime along with IT infrastructure using supervisory technology (sup-tech), as well as its current organizational structure. 10. IC’s inspection methods, data collection and reporting infrastructure (IT systems), analytical tools, and on-site inspection manuals require a major overhaul. The IC should consider allocating sufficient resources for the modernization of the insurance regulatory and supervisory architecture to bring the quality of on-line supervision in line with modern IT infrastructure and supervisory practices. IC should develop and maintain a set of ratios and data inputs from insurance companies’ financial reports that would allow IC to carry out preliminary risk assessments for licensed insurers almost instantly after the reports have been received. Subsets of this data can be made available to market players and investors on-line, enabling them to analyze the financial condition of insurers as they may require. On-site and offsite inspection manuals should be developed so that supervisory policies will be understood and interpreted on a consistent basis across divisions and individual staff members. Over time, well designed training 6 PHILIPPINES programs featuring risk-based supervisory techniques should be continued and enhanced so as to maintain the required knowledge level of staff members. 11. IC’s structure is functional, however some changes in organizational structure would be appropriate. Feedback from the industry indicated the existence of occasional lack of coordination between different IC departments, for example issuing separate requests for similar information. Despite the existing collaboration across IC departments, there is a risk that issues may be missed, or risks not clearly identified. It is recommended that IC consider, in the context of moving to a more risk-based approach, the benefits of, for example, an organization under which supervisory teams would take the lead on the preparation of risk assessments and the responsibility for the day-to-day relationship with insurers and intermediaries. An individual could be assigned to take on the role of Relationship Manager for each insurer or group of related insurers, thus serving as the “one-window” contact for all inter-actions with the particular insurers to which they have been assigned. Group members would draw on specialist expertise from off-line areas such as finance, investment, and actuarial, as appropriate. Separate enforcement and, potentially, also regulatory policy functions could be maintained. Whatever approach is taken, the objective would be to support comprehensive oversight and more effective coordination of supervisory effort. 12. Regarding supervisory review and reporting, the efficiency and timeliness of conducting monitoring and supervision through two departments is an ongoing concern. Consideration should be given to developing an integrated supervisory plan that will encompass workflows for offsite monitoring and on-site inspections for both insurance and reinsurance. Since the IC officers are knowledgeable and capable regarding the regulatory and supervisory framework for the insurance industry in general, an integrated supervisory plan will help to enhance the IC’s effectiveness and efficiency with regard to technical expertise and supervisory practices in the very focused areas of (i) ICP 9 – Supervisory review and Reporting, and (ii) ICP 13 – Reinsurance and Other Forms of Risk Transfer. In addition, the development of a more fulsome and risk-based approach to the Conduct of Business supervision, including a broader range of supervisory practices (e.g. market analysis, offsite and onsite monitoring and thematic review), should be considered. 13. The IC should carry out a comprehensive review of the current regulations and supervision processes and data reporting requirements with the view to reduce the regulatory burden on the industry. According to industry estimates, depending on the company size, between 20-30 percent of overall overhead costs in the sector can be assigned to regulatory compliance due to complex and highly prescriptive insurance regulations, and extensive (and often overlapping) information reporting requirements by different regulatory bodies. This, combined with the growing competitive pressures in the market, makes the sector highly unattractive to investors and further impairs its growth prospects. 7 PHILIPPINES 14. Licensing, suitability and control requirements should be reviewed and strengthened. It is recommended that the IC reviews licensing requirements with a view to increase the clarity, consistency and timeliness of licensing decisions and procedures. There should be a requirement to disclose the source of funds for any capital injections or start-ups, and capital should always be free and clear, i.e. not borrowed and then used for insurance company capitalization. Suitability requirements for all real person controlling beneficiaries of insurers should be strengthened, particularly with respect to identifying such individuals and assessing their integrity. Consideration should be given to developing more specific competency requirements for individuals in some control functions (e.g. risk management). The insurance legislation does not include general provisions requiring on-going approval of all changes in control, other than those with respect to foreign shareholders. The primary insurance legislation should also include an appropriate definition of control. 15. In conjunction with strengthening governance, transparency and internal control requirements, Own Risk and Solvency Assessment (ORSA), and Enterprise Risk Management (ERM) requirements should be developed and implemented on an individual entity and group basis. Institutional governance would also benefit from requiring actuaries to opine on the adequacy of premium pricing policies and external auditors to opine on the adequacy of the insurer’s risk management and internal control systems. Both auditors and actuaries should be required to disclose to IC (and with respect to any insurance company concerned to the chair of its audit committee), if the auditor becomes aware of “any situation or circumstances which, in the opinion of the auditor, may significantly and adversely affect the financial position of the insurance company and which is not already disclosed in the company’s accounts”. 16. Sequencing and implementation of these recommendations should be considered within the context of a multi-year regulatory and supervisory transition plan for the sector (e.g. five years). Within the lines of this plan there should be regular and appropriate consultation with the industry while the focus should be on increasing the efficiency of supervision without inordinately increasing administrative burden and cost. The aim should be to increase consumer confidence with the delivery of such plan and enhance trust in the sector and help to lay a strong foundation for its future. 17. The Insurance Code and the Regulations and Circulars remain functional while seeming particularly out-of-date when compared to a more contemporary insurance law. This picture is especially clear when it comes to the ability to carry out effective supervision and to deal with more severe financial stresses, where the current law has material shortcomings. The Code has been used effectively as a policy instrument and continues to provide options. However, more creative drafting is required to introduce flexibility with various authorities that are essential elements of international standards and best 8 PHILIPPINES practices (for example, reinsurance and market conduct supervision, the application of Preventive and Corrective Measures as described in the IAIS Insurance Core Principles). 18. Enabling new product development and liberalizing tariffs should be considered as part of an IC growth strategy for the insurance sector. The MTPL tariff liberalization, under close supervision on the technical and market conduct aspects by IC, would encourage competition on service while maintaining a technical actuarial price and create the appropriate needed collection of data for better actuarial pricing. A sandbox regulation that allows insurers and FinTech players to interact with consumers in a “safe production environment” without compliance to all regulatory aspects yet under appropriate consumer safeguards would boost the introduction of innovative products using the technological advancement for the benefit of consumers and development of the market. 9 PHILIPPINES Recommendation Timing3 Agency Equip IC with the formal and financial operational independence to MT DOF enable effective risk-based supervision. Set up risk-based supervision and allocate sufficient resources as well as MT IC investment in IT and regulatory tools for the modernization of the insurance supervision services. Increase the integration of the offsite and onsite work to achieve an ST IC efficient supervisory cycle with no overlaps. Implementing IT solutions building on the agents’ compliance reporting MT IC database to automate the monitoring of intermediaries’ compliance with the main licensing requirements. Develop and introduce further regulation on ceded reinsurance and ST IC detailed inspection manuals and regulatory tools for reinsurance supervision. Carry out a comprehensive review of the current regulations and MT IC supervision processes and data reporting requirements with the view to reduce the current regulatory burden on the insurance industry. Reform the current insurance code, review the role of the resolution MT IC mechanism along with mediation in consumer complaints and supervision processes by making them more transparent, consultative and accountable to the industry. Improve the consistency of valuation requirements across assets and MT IC liabilities moving valuation to a more market consistent basis, while continuing to take into account the characteristics of Philippines markets. Introduce regulations that allow group wide supervision. MT IC Complete the implementation of reserving for catastrophe risks. MT IC and other relevant authorities Carry out a modernization of the supervisory authority’s data collection MT IC systems, risk analysis tools, on-site supervision manuals, and its risk assessment methodologies. Consider moving into a principle-based requirement for investments. MT IC Restructure MTPL insurance liberalizing tariffs and reserves based on MT IC timely and credible data that needs to be collected. Develop sandbox regulations to create an enabling environment for the ST IC insurance market’s further development. 3 Short Term (ST) = within a year; Medium Term (MT) = within three years. 10 PHILIPPINES I. TARGETED ASSESSMENT OF ICPS 1. The following provides a targeted IAIS Insurance Core Principles (ICP) assessment. The ICP assessment focuses on 12 ICPs (1,2,4,9,10,11,13,14,15,16,17,18) and does not present a full assessment of observance. Objectives, Powers and Responsibilities of the Supervisor ICP 1 The authority (or authorities) responsible for insurance supervision and the objectives of insurance supervision are clearly defined. Description The financial sector regulation in Philippines is dependent on several authorities. Each major component of the financial sector is overseen by a separate agency or department of government with its own sector specific legislation. These authorities operate with considerable autonomy, but powers and responsibilities overlap in some areas, particularly regarding regulation of financial groups and financial/ industrial conglomerates. Excluding insurance, the major regulatory authorities are the Central Bank of the Philippines (Bangko Sentral ng Pilipinas, or BSP) and the Security Exchange Commission (SEC). The regulation of the insurance sector is established under several laws, the principal laws and regulations being: • The Republic Act No 275 of 1949 that created the IC as an office within the Department of Finance (DOF); • The Republic Act (RA) 10607 or the Amended Insurance Code (Code); • Various Department Orders issued by the Department of Finance (DOF) and Circulars and Letters issued by the IC from time to time on specific issues. The insurance legal framework is composed of texts of varying legal forces: the Insurance Code is the core of this framework; the insurance directives are issued by the DOF; memorandum circulars, circulars letters, regulatory rules and normative documents are formulated by IC within the scope of its powers granted by the Insurance Code. The Code provides the rules governing the insurance industry. Other legislations are RA 9829 (Preneed Code) and Executive Order 192 (series of 2015) that governs the Pre- need and Health Maintenance Organizations, respectively. The IC has been established under the Republic Act (RA) 10607 or the Amended Insurance Code. IC is a ministerial public service department, which reports to and carries out with quasi-judicial powers as an attached agency of the DOF. IC is responsible for supervision of insurance, reinsurance, HMOs, pre-needed companies, Mutual Cooperation, insurance/reinsurance brokers and agents in Philippines. IC is financed by levies on insurers' capital and net retained premiums. IC has 3 district bureaus as well as its head office in Manila. The supervision of insurance companies is largely based on the Insurance Law. Insurers must comply with other acts as well, such as circular letters and rules issued by IC. The Insurance Law regulates the organization and conduct of insurance business and 11 PHILIPPINES prescribes the rights and obligations of organizations and individuals participating in the insurance business. Laws and administrative regulations confer on IC the corresponding powers to undertake licensing and supervision, including supervisory powers. Further, the IC has the ability to propose amendments to the Insurance Cod and revise administrative regulations. In addition, the rules also empower the supervisor to impose administrative sanctions in the form of warnings and fines up to a certain limit. Because the Philippines insurance industry is evolving, and the existing regulations are encountering many new issues, IC’s practice is to develop and to issue instructions and circulars to test the effectiveness of its approach. It then modifies the interim provisions in the light of experience and finally develops a formal rule. More importantly, these interim rules and normative documents are regarded by the IC and so communicated to the industry as just as enforceable as formal rules. However, this approach results in the existence at any given time of a significant amount of regulatory material in the form of interim provisions, including central aspects of the regulations like the Risk Based Capital 2, solvency standards, that are still in the form of guidance. This approach can possibly create confusion or misunderstanding of the IC directions and intentions among the industry and possible challenges on their enforceability. Adequacy of Supervisory Powers Title 12 of the Code establishes a broad range of administrative and adjudicatory powers and responsibilities for the Insurance Commissioner to help it to carry out its strategic direction. These include the power and duty to: • prescribe the regulations, procedures, conditions, and guidelines for the undertaking of insurance business to be consistent with international best practices and protect the insuring public/policyholders; • prescribe regulations, procedures, conditions, and guidelines for regulating, promoting, and developing the undertaking of insurance business; • formulate policies and provide guiding recommendations on issues concerning the insurance industry, advise government agencies on all aspects of the insurance industry and propose legislation and amendments thereto; • approve, reject, suspense or revoke licenses or certificates of registration provided for by the Code; • approve the operating plan, expenditure plan, and annual expenditure budget of the Office; • control the administration and operations of the IC to be consistent with the Code; and • perform any other acts and duties as prescribed by law to be under the authority and responsibility of the Commission. 12 PHILIPPINES Additional and more detailed powers are described under the Code. There are several key supervisory powers. These powers include: • the power to approve, reject, suspense or revoke licenses or certificates; • the power to enlist the aid and support of, and/or deputize any and all enforcement agencies of the government in the implementation of its powers and functions; • the power to issue cease and desist orders to prevent fraud or injury to the insuring public; • authority to approve amalgamation of insurers; • the power retains and utilize, in addition to its annual budget, all fees, charges and other income; • the power to take control of a life insurance company; • the power to increase the limit of life insurance and non-life insurance security fund payouts to the policyholders. In addition, as a nationwide self-regulatory organization, the Philippine Insurance and Reinsurance Association (PIRA) also formulates sector standards and guidelines under the guidance of IC. The IC has been given the role not only of regulation and supervision of the insurance industry under the Code, but also a responsibility for promoting the growth of the insurance industry in line with DOF objectives. Comments IC has increased its efforts to ensure a sound regulatory and supervisory environment in Philippines, for example with the risk-based capital (RBC2-see ICP 17), demonstrating its commitment to turning broad objectives into operational achievements and strengthened supervision. While the authority responsible for insurance supervision (IC) is clearly defined in primary legislation, the objectives of insurance supervision are not fully consistent with the standard. ICP 1.2 requires that the objectives be clearly set out in primary legislation (rather than regulations) and ICP 1.3 requires that the principal objectives promote the maintenance of a fair, safe and stable insurance sector for the benefit and protection of consumers”. As currently written, the primary legislation includes two objectives: one is consistent with promoting the maintenance of a fair, safe and stable insurance sector for the benefit and protection of consumers, the other relates to development of the national insurance sector. As the legislation does not establish the first objective as the principal objective there is a potential for conflict. Supervisory staff indicate, that in practice the IC views the maintenance of a fair, safe and stable insurance sector for the benefit and protection of consumers as their principal objective in their day to day work. It is recommended that the authorities amend the primary legislation at their next opportunity to clarify the principal objectives of insurance supervision. In addition, while much of the Code deals with prudential 13 PHILIPPINES supervision the mandate of IC includes both prudential and market conduct (conduct of business), so the authorities may wish to affirm in the objectives section that the supervisory mandate extends to both prudential and market conduct (or conduct of business) supervision of insurers, insurance groups and insurance intermediaries. Supervisor ICP 2 The supervisor, in the exercise of its functions and powers is operationally independent, accountable and transparent; protects confidential information; has appropriate legal protection; has adequate resources; and meets high professional standards. Description IC is a ministerial public service department, which has the same status as other financial market regulators of Philippines, like the SEC. IC reports to, and carries out administrative functions delegated by, the DOF. The authority, functions and internal organizational structure of IC are stipulated by the DOF. The budget and staffing of IC are approved by the DOF. Governance of IC IC’s governance structure is defined under the Code and related regulations. The IC is comprised of a Commissioner and four deputy commissioners. The Head of the Authority/Supervisor is appointed by the President of the Philippines. The Insurance Commissioner has the sole authority to decide on all matters concerning the insurance industry. The four Deputy Insurance Commissioners are only have advisory powers. . There is no explicit requirement for the reasons for dismissal of deputy commissioner to be published. Appointment and Dismissal Procedures With regard to the Commissioner, appointment is made by the President and the term of appointment is 6 years. All IC staff are appointed by the Insurance Commissioner in accordance with Civil Service laws, rules and regulations. Under the Civil Service Law, all the positions up to the division managers are career/permanent positions divided among four (4) Functional Groups (Financial Examination Group, Technical Services Group, Legal Services Group and Management Support Services Group). Directors and Deputy Commissioners are third level career positions as classified by the Career Executive Service (CES) Board and are appointed by the President. Aside from career personnel, IC is authorized under the law to enter into a contract on service engagement to answer immediate manpower needs. Funding In the budget system of IC, income is separately managed from its expenditure. On the income side, insurance companies are required to pay the insurance supervision fee to the DOF according to the fee schedule established by the DOF; 14 PHILIPPINES on the expenditure side, IC will apply to the DOF for a budget that is prepared based on its supervisory needs and the rules on budget management. The budget, which can and does differ in value from the amounts of fee income, will be allocated and paid to IC after it is approved by the DOF. Although IC has discretion to allocate its resources in accordance with its mandate and objectives as it has its own sources of revenue (supervision fees and charges), the IC does not provide a competitive salary package to attract competitive talents. So, the IC cannot utilize sufficient human resources considering the number of vacancies. Adequacy of Resources and Outsourcing The IC is free to recruit staff within limits, rules and procedures set by the Code. A Chart outlining the structure of the IC is provided below. In June 2019, the IC had a staff of 210, of which 200 were at the central office in Manila and 10 in the district offices. Staff are deployed across the following divisions: • Office of the Insurance Commissioner (OCOM) - responsible in the overall regulation and supervision of the insurance, pre-need and HMO industries. • Financial Examination Group (FEG) - examines the financial condition and methods of doing business of all companies under the supervision of IC. Among its functions are the examination and verification of the affairs of all insurance companies through offsite and on-site examinations, acceptance of audited financial and annual statements, and issuance of Certification on the financial condition of insurance companies. • Technical Services Group (TSG) -Its duties include reviews and approves products of life insurance companies, MBAs, pre-need and HMOs, reviews and evaluates local and foreign investments of IC regulated entities, withdrawals and termination of security deposits held to maturity, monitors the rating and underwriting practices and methods of doing business of non-life insurance companies , enforces the regulatory functions in relation to the practice of reinsurance in the industry, and prepares and publishes various statistical reports on the development, state and performance of the regulated industries. • Legal Services Group (LSG) – six officers perform duties to cater to the IC’s Major Final Outputs of Insurance Licensing Service and Adjudication, Public Assistance and Mediation. The LSG conducts the examination of insurance agents and preparation of Certificates of Authority and Registration for new insurance companies and companies already doing business, respectively. The group also monitors the conservatorship, receivership and liquidation of deficient insurance companies and acts as conservator, receiver or liquidator in special cases. 15 PHILIPPINES • Management Support Services Group (MSSG) –officers provide organizational and logistical support to the entire agency, and implement office policies, laws, rules and regulations issued by the Civil Service Commission (CSC) and government agencies relating to general administration services and functions. A chart outlining the structure of the IC is provided below 16 PHILIPPINES Staff appear to be organized, knowledgeable, and adhere to high conduct standards. In order to retain highly skilled, competent and experienced staff, the IC should review its remuneration policy and sent for approval to the DOF every 3 years to ensure that the compensation is competitive with the market. In addition, the IC should set up 3-year strategic human resource plan for 2020-2023, in order to develop skills and experience of its staff and meet manpower shortage or skill differentials. The IC also has a technology development plan with the Philippines University to enhance its supervision capability. IC has not outsourced any of its supervisory functions. However, the IC can hire short-term specialists to support any of its functions or projects it considers it lacks the capability to fulfill. Transparency of Regulatory Requirements, Review and Consultation Most of the supervisory requirements and processes are established in laws, regulations and circulars which are publicly available that are enacted after public consultation. The IC has formal policies and procedures to guide supervisory work and assist in ensuring that it is conducted in a consistent manner across all institutions. Review of requirements and procedures Over the last five years the IC has taken steps to review and improve requirements in areas such as risk-based capital requirements, reserving practices. Information on the insurance sector and the supervisor IC publishes an annual report in English on the insurance market on its website, however, the annual report does not include details of IC’s own financial position . The report provides information on industry participants, markets and some industry financial information while giving little information on profitability, governance or risk. It does not publish an annual report detailing IC’s activities and own financials. The IC does issue special reports and publishes information on enforcement decisions. IC holds regular industry briefings and news conferences, informing the public of its policy goals, regulatory activities and market developments. Furthermore, IC has also been issuing press releases, and publishing articles under the names of its leaders in major news media to explain regulatory policies and directions. Confidentially IC has no internal policy on wrongful disclosure of confidential information. Actions taken necessary to preserve and protect information received from another supervisor are specified under the MOUs with the other supervisor/ counterparts. IC staff must not pass on confidential information which they receive in the course of their work and where it is possible to identify the individual insurer. Confidential information comprises 17 PHILIPPINES business secrets of insurers as well as of the insured and any information that has been provided to IC on condition that it is kept confidential. Civil Servant Law also provides that civil servants have the obligation to keep the secrets of the State and of their work confidential. In practice, IC officials indicate that confidential information is identified and safely stored and only utilized for appropriate supervisory purposes by the IC or related state agencies in the exercise of their authority. Comments The IC is in practice operationally independent in the day-to-day exercise of its supervisory functions and is not subject to intervention by the DOF in relation to supervisory decisions (although the DOF can hear appeals against supervisory decisions, it has not done so as yet). However, IC relies financially on the regular government budget process for funding and central government human resource processes for staffing, as well as government agreement to its internal structure and organization. As mentioned under ICP1, IC is subject to the overall direction of the DOF in relation to its mandate and functions. Currently IC’s regulatory and supervisory processes are resource-intensive, especially in a time of market and regulatory change (see ICP 9). IC’s own resources are stretched and will be under increasing pressure from the need to analyze and respond to the developments in licensed companies within the framework of an appropriately interventionist but not yet risk-based supervisory system. The institutional set of insurance supervision and regulation requires major changes to be able to administer an increasingly complex regulatory framework – political and financial independence and change in HR and training policies; investment in IT infrastructure and regulatory tools are needed. It is recommended that the authorities, in the context of the next review of the Code, make changes to the law to equip IC with the formal and financial operational independence it will need effectively to administer an increasingly complex regulatory and supervisory framework, including scope to set its own budget and recruit staff, subject to appropriate accountability. Licensing ICP 4 A legal entity which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied. Description Licensing requirements for insurance are set out in the Insurance Code and unlicensed operations can be sanctioned. The Insurance Code provides a definition of insurance business and requires all insurers, reinsurers, HMO, MBA, pre-needed entities, insurance agents and brokers operating in Philippines to be licensed with IC. Insurers can be life, non-life or composite insurers. They can be shareholding companies, limited liability companies or mutual insurers. Insurers may be local companies or foreign-owned 18 PHILIPPINES subsidiaries. Similar requirements apply to brokers and reinsurers, who may also establish branches. There are no restrictions on foreign ownership. Licenses are permitted for life or non-life and composite insurers. Composite insurers require two licenses for life and non-life, respectively. Life and non-life companies are permitted to write personal accident and healthcare insurance, but it must be reported separately. Non-life companies are allowed to accept inward reinsurance and are not restricted in the lines of business they can accept. For a nonlife company that would like to offer surety bonds, prior approval from the Commission is required. Establishing a local insurance company is relatively straightforward but minimum financial regulations must be satisfied and a significant number of documents are required. An insurance company must also register and be incorporated under the corporation law as well as comply with the requirements of the Securities and Exchange Commission (SEC), Board of Investments, the BSP and Bureau of Internal Revenue. Companies must also obtain a certificate of authority from the regulator before they can begin to transact business. Republic Act No 10607 provided that certificates of authority to operate will be issued for fixed three-year periods from 1 January. Certificates expire on 31 December of the third year of validity and must thereafter be renewed for a further three-year period. Among the many documents that must accompany an application is a list of officers and positions held, curriculum vitae of officers, underwriters, accountant, actuary and proof of reinsurance treaties. As a pre-licensing requirement for a new insurance company the regulator may require the shareholders to contribute in proportion to their subscription interests a contributed surplus fund of not less than PHP 100mn (USD 1.97mn) in addition to the minimum prevailing paid-up capital. And the minimum capital for a new insurer must be fully paid-in at the time of application and must be deposited with a commercial bank. Minimum capital may not be used before the applicant has received its IC license. Licensing criteria for domestic insurance companies An insurance company subject to the provisions of the Insurance Code is defined by Republic Act No 10607 as follows: "the term insurer or insurance company shall include all partnerships, associations, co-operatives or corporations, including government owned or controlled corporations or entities engaged as principals in the insurance business, excepting mutual benefit associations". Unless the context otherwise requires, the term also includes professional reinsurers. Domestic companies are defined by the same legislation as including companies formed, organized or existing under the laws of the Philippines. 19 PHILIPPINES There are no restrictions on banks owning insurance companies, or on insurers owning banks. And the holding companies are permitted to own the shares of insurance companies. Licensing criteria for foreign insurance companies Foreign companies are defined as including companies formed, organized or existing under any laws other than those of the Philippines. Foreign ownership is permitted under Department Order No 100-1994, dated 24 October 1994, either as a joint venture with an established company, investment in an existing company or through a branch office. Ownership of up to 100% is permitted. The qualifications for entry allow the regulator considerable leeway in assessing the type of company to which it will grant an operating license. The capital of each institution cannot be counted as available capital for the other entity. Comments Although the Insurance Law sets out licensing requirements for insurance and prohibits unlicensed operations many challenges remain. The law clearly states the requirements and covers financial aspects and nonfinancial aspects to ensure the implementation of safe and sound operations. During the licensing process, IC requires foreign applicants to provide their supervisors’ letter of opinion. During the licensing process IC looks at: minimum capital requirements as well as the other requirements related to the form of their organization, the eligibility of their shareholders, the qualifications of their senior management and actuarial staff, the adequacy of their information systems and the suitability of their products. When an application for the license is made, there are also some other requirements that must be observed as a part of the procedure: a credible three-year business plan along with information technology (IT) premises, outlines of proposed insurance products, a reinsurance plan, a marketing strategy, profitability and solvency forecasts and asset allocation plans must be submitted. It is recommended that IC makes • the licensing requirements should be publicly available and easily accessible Supervisory Review and Reporting ICP 9 The supervisor has an integrated, risk-based system of supervision that uses both offsite monitoring and onsite inspections to examine the business of each insurer, evaluate its condition, the quality and effectiveness of its Board and Senior Management and compliance with legislation and requirements. The supervisor obtains the necessary supervisory information to conduct effective supervision of insurers and evaluate the insurance market. Description Regulatory Authority 20 PHILIPPINES Regulatory authority for insurance monitoring and supervision are largely vested in Insurance Code and the Circular/s on Risk Based Capital (RBC2). Title 12 (Examination of Companies) of the Insurance Code provides the IC with broad based powers to supervise all insurance operations of insurance and reinsurance companies operating in the Philippines, as well as insurance and reinsurance intermediaries, loss adjusting activities, actuaries and other persons operating in the insurance sector. Specific responsibilities include “examination and inspection of the operations, assets, affiliates, receivables, equities and liabilities of insurance companies and reinsurance companies, the relation and balances between their profit and loss statements, all other elements that affect their financial structure and administrative structures, use and protection of premiums collected and actuarial and financial accounts and balances of insurance companies are carried out by insurance supervisors.” The IC’s supervisory framework is a compliance-based approach. This supervisory approach uses both offsite monitoring and on-site examinations to assess institutions. Documented framework for supervisory review is more focused on the quantitative (financial condition and RBC ratio). The examiners consider the result of latest audit in determining the extent of the subsequent audit. Regulatory Reporting As the IC lacks adequate electronic filing system all the information needs manual submitting. There is no electronic filing system that can collect and maintain quarterly and audited annual financial statements in formats determined by IC as well as other reports required by regulator including reports on capital adequacy. Also, there is no system that includes indicators which allow the timely identification and correction of inaccurate reporting from insurers. The IC periodically reviews reporting requirements as part of its annual monitoring plan. The IC requires insurance companies to submit financial statements, and financial and operational reports on an annual and a quarterly basis. As previously mentioned, the IC has the ability to request additional information and to increase the frequency of reporting as required. All annual financial statements must be audited, and quarterly statements must be reviewed by the auditor. In addition, an Annual Statement (AS) prepared by the company based on its AFS is submitted to the IC for audit. Lastly, unaudited quarterly statements are likewise submitted to the IC for monitoring and assessment. In addition, IC requires insurers to summit other reports periodically. Examples include: • Reporting on investments in other businesses • RBC and reserve valuation reporting 21 PHILIPPINES Any significant change in corporate governance is required to be reported to the Licensing Division/ AMLCGD. IC yearly assesses and updates the requirements for filing of annual statements and its attachments such as the annual financial statement. IC evaluates the financial performance of insurers on an annual and quarterly basis. Supervisor cannot process of the evaluation in a timely manner. Off-balance sheet exposures are considered as part of offsite There is no Early Warning System (EWS) and Triggers for Early Intervention” and IC does not carry out “Risk Focused Examinations” Off-site Analysis Off-site monitoring and analysis largely focus on the financial position of insurers, and trends in financial position and operations, including compliance, and market conduct. The IC looks at quarterly and audited annual financial statements, annual reports, financial statement notes, external audit reports, actuarial report and the latest off-site analysis report. On-site supervision On-site inspections are conducted rigorously and consistent with a compliance-oriented approach. Limitations of resources mean that the Insurance Commission achieves a two/three-year cycle for most commercial insurers (less frequently for the Government Service Insurance System (GSIS), and the usual period of examination is of the order of 20 days for a smaller insurer and 30 or more days for a larger insurer. Inspection work does not rely on the work of external audits and, instead, is replicative of it in part. The on-site inspections are followed up promptly with reports from IC to management. IC always uses its own staff for on-site inspection, however there might be certain areas that require specialized expertise, like cyber risk or the investment in derivatives. For these cases IC should consider the use of outsourced experts. The report of the inspection is sent in a confirmation letter addressed to the senior management emphasing facts and problems along with suggestions on rectification. The inspected company is required to comment on the confirmation letter in 10 days. Based on this, IC decides on the final correction plan and informs the inspected company. An on-site supervision plan is developed each year based on information from offsite supervision and information received by other IC departments. Five features are considered in developing the annual on-site plan and prioritizing insurers: • Offsite assessment of the insurer; • The length of time since the last examination; • The insurer’s complaint ratio (number of complaints/numbers of in force policies); and 22 PHILIPPINES • The insurer’s market share. Compliance-Based Supervision (CBS): CBS is presently carried out largely through the analysis of the individuals and the company to assess compliance with the regulations and through on-site analysis of policies and procedures. The IC has plans to augment its supervisory practices in this area including more thorough and detailed analysis of insurers and intermediaries CBS policies and reporting 4, as well as targeted and thematic examinations of CBS. Complaint Based Supervision: Conduct of Business (COB ) supervision is presently carried out largely through the analysis of individual complaints, company complaint statistics and on-site analysis of policies and procedures. The IC has plans to augment its supervisory practices in this area including more thorough and detailed analysis of insurer and intermediary COB policies and reporting, as well as targeted and thematic examinations of COB. Organization and resourcing of supervision: Supervision is undertaken by various units within IC, both institutional and functional/specialist. Insurance Groups: IC has identified a number of insurance groups operating in its market. The IC is not a home supervisor for any of these groups. For Financial groups operating within the Philippines, the BSP is the Home (lead) supervisor. For international groups, IC does participate in supervisory colleges or in information sharing with other supervisors and supervises on an individual insurer basis. Comments The main supervisory approach is compliance oriented although the regulatory requirements are increasingly risk based like the use of risk-based capital and have important elements of proportionality. Insurance regulation has become increasingly risk based particularly following the development of RBC. In addition, variable and proportionate regulations for MBAs, particularly microinsurance MBAs, compared to full-service insurers, is an example of a proportionate and risk-based approach. At the same time, supervision remains largely compliance oriented with the main focus of financial surveillance oriented to the compliance with the RBC rules for capital and net worth, and the more recent addition of governance obligations. The strong focus on RBC for the supervision assumes that the RBC reflects all risk to which the insurers is exposed. However, it has proven necessary to require an ORSA as well as to develop an EWS on different ratios beside the capital and solvency requirements for an effective supervision. On-site supervision has been the dominant form of insurance supervision in Philippines. With the growing number of insurance market entities, the limitations are becoming a very urgent issue, and IC should develop a transition toward offsite supervision. On-site 4 Brokers are not included but HMO companies are included. 23 PHILIPPINES supervision should be used in a more targeted manner based on information gathered from offsite supervision, which will help manage the scarce regulatory resources and will increase regulatory efficiency. There is also no adequate documented framework and public disclosure of supervisory framework. As the ICP promotes consistent implementation of supervisory review process, the authority needs to make progress in developing its monitoring and supervisory framework for insurers enabling consistency and transparency. Coordinated supervision is not assisted by the absence of a centralized database, which impedes information flow and results in the duplication of work. Different units conduct onsite and offsite supervision. There is scope to improve efficiency in supervision by increasing the integration of the offsite and onsite work to achieve an efficient supervisory cycle with no overlaps. The evolution of Philippines insurance legal framework towards RBC is bringing the market closer to international best practice. Although the IC has been working to move to risk based supervisory approach using supervisory tools such as RBC2, it is challenged by limited resources and technical capacity in an environment of fast growth in the insurance sector. Prerequisites for effective risk-based supervision are adequate resources, good insurance knowledge and judgment by staff, and strong requirements concerning institutional governance and internal controls. A risk-based approach to supervision requires not only changes to supervisory tools, policies and procedures of the organization, but the change of basic supervisory culture. To achieve that IC should focus on the transition to a more risk-based approach which includes the need to increase its level of resources, and to institute stronger governance and internal control requirements. IC should develop a risk based supervisory plan which addresses these issues. It is recommended that the IC • Develop its integrated supervisory framework to include a risk-based supervisory plan to bring together all the issues and actions on an insurer. This is particularly important in an increasingly competitive market with an expanding number of companies; • Increase the integration of the offsite and onsite work to achieve an efficient supervisory cycle with no overlaps; • Use on-site supervision in a targeted manner based on information gathered from offsite supervision, which conserves regulatory resources and increases regulatory efficiency; • Improve the statistics and set up of IT department to compile data and tables on the national insurance industry that will analyze the statistical information of the insurance industry, will prepare the statistical analysis report, and will provide support for offsite supervision and risk monitoring—as well as 24 PHILIPPINES conducting the offsite supervision on insurers with regard to their IT security; and • Modernizing and upgrading data collection and reporting infrastructure, as well as supervisory and analytical tools. Preventive and Corrective Measures ICP 10 The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision. Description Unauthorized Insurance Activities Due to lack of proper IT IC can’t pay specific attention in an efficient manner to prevention. The regulatory and supervisory reporting is analyzed manually and can’t generate forecasts and trends which can be referred to supervisors for further action. This includes monitoring technical performance through reserving levels and performance ratios and solvency levels. The trigger for preventive and corrective action in Philippines is the breach of IC and other regulatory requirements. The usual practice of IC for minor contraventions is to send a regulatory letter and request the insurer to remedy the problem. If not corrected, a second notice (regulatory letter) is sent and then, as necessary, administrative penalties are applied. In the case of more serious breaches, monetary penalties, suspension of individuals, and activities, and revocation of licenses are permitted by the legislation. Based on the nature of the problem, IC may ask for different timetables in the cases of emergency. The timetable can be shortened at IC’s discretion. During the last ten years the IC has dealt with several cases of unauthorized activity from insurers. Most frequently these cases involve unauthorized activity from people acting as agents and brokers. Power to Take Corrective and Preventive Measures Preventive measures include regulatory interviews with the auditors, directors, supervisory board and senior managers of the insurer where insurers are required explain issues on their insurance business operation, risk control and internal management. IC can request programs for rectification to be submitted. As part of the IC’s supervisory process, remedial action is first dealt with through discussion with insurers and increasing the level of supervisory intervention. In effect, the IC uses “moral suasion” to obtain the voluntary agreement of the insurer to address perceived deficiencies in a required manner. The IC has not established yet an intervention document “The Early Warning S ystem for Early Intervention Guidelines”, which would set out the IC framework for early intervention in more detail. 25 PHILIPPINES Comments IC has the power to take action against unlicensed activity and the ability to escalate corrective action where a breach has occurred and in the case of solvency breaches can require a plan of corrective action. It can also communicate directly with the board and senior management. It does not have any tools to take preventive action before an administrative breach has occurred, other than through discussion and agreement to inspection/examination findings. It is recommended to set up The Early Warning System that covers not only the solvency ratios but other relevant financial and nonfinancial ratios. An EWS would allow IC for an early intervention, which would set out the IC framework for early intervention in more detail. Enforcement ICP 11 The Supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed. Description The authority to issue formal directions to companies rests with IC. IC is empowered to issue guidance to companies to take particular actions or to desist from taking particular actions. In cases when companies do not comply with IC’s requests, it has the right to apply administrative sanctions. In cases of violations of the Criminal Code by insurers, IC must transfer the case to judicial prosecutors for further investigation. IC has a range of powers to enforce corrective action and where necessary impose sanctions. Supervisory intervention based on the level of the RBC2 (see ICP 17) ratio in both life and non-life cases is identical and is progressive as set out in the following table. Ladder of Regulatory Intervention RBC Level Less than 125% Trend test level where, if the linear extrapolation of the but greater than RBC Ratio ahead one year shows a ratio less than 100% or equal to then also a company action level response. 100% Less than 100% but Company Action level where company submits an RBC greater than or Plan within 45 days and is responsible for implementing equal to 75% the plan Less than 75% but Regulatory Action level where IC has authority to greater than or examine the company and issue “Corrective Orders”. Note equal to 50% that Regulatory Action also occurs if RBC Plans are rejected by the IC, or the company advises the Commission that it has failed to adhere to the Plan. 26 PHILIPPINES Less than 49 % Authorized and Mandatory Control level where IC can, if it determines that it is appropriate, take control of the insurer under section 247 of the Insurance Code. Aside from maintaining an RBC Ratio of at least 100%, non-life insurers are also required to pass a “trend test” (refer II.A.2 of the Insurance Memorandum Circular Numbers 6 and 7-2006). The Insurance Code contains specific provisions on the powers of IC, including the powers to adopt regulatory measures in the event of any problems relating to premium rates, RBC, liability reserves, and use of funds, and to conduct on-site inspections to obtain evidence. Furthermore, the Law also provides for various punitive measures against illegal acts. If an insurance company poses a material risk, IC may take a number of measures against the insurance company, including but not limited to issuing a warning, imposing a fine, ordering it to cease accepting new business, or revoking its insurance license, and impose sanctions on the persons held responsible for the violation, such as issuing a warning, giving a fine, disqualifying them from their position and imposing a barring from insurance industry. Persons refusing to submit information, (i.e., reports or documents required during the administrative investigations); hiding, preventing or not authorizing access of the officers to their files; or providing requested information with significant errors or in an incomplete manner can be subject to administrative penalty or criminal prosecution. IC generally checks whether corrective action has been taken through the exercise of its supervisory framework (on-site inspection),as well as through more direct monitoring of files. The Insurance Code specifically provides for administrative sanctions against companies committing violations and their personnel held responsible. The latest revision of the Insurance Law in 2016 did not update legal responsibility so the level of administrative penalties for some contraventions appears to be quite low. Comments Although the DOF is given necessary authority to act, it is not the IC that is empowered to do so under the current administrative structure of insurance supervision. The IC has limited authority under the regulations, which do not include group-wide capital requirements, to take action to protect an insurer within its jurisdiction that belongs to a group from financial difficulties in other parts of the group. Moreover, given that there is limited information on the intragroup transactions and internal structures and agreements, IC is not in a good position to identify possible issues due to the group structure on a timely basis. 27 PHILIPPINES The administrative penalty powers include both preventive actions and escalatory actions. Actions may be taken against individuals (e.g., suspension of officers and directors) as well as corporate entities and extend from penalties and suspensions to exercising conservatorship over the insurer in the case of failure to meet solvency requirements. It is recommended that IC review on a regular basis the general level of penalties to ensure that they are an effective deterrent. Reinsurance and Other Forms of Risk Transfer ICP 13 The supervisor sets standards for the use of reinsurance and other forms of risk transfer, ensuring that insurers adequately control and transparently report their risk transfer programs. The supervisor considers the nature of reinsurance business when supervising reinsurers based in its jurisdiction. Description Philippines-based insurers cede risks to domestic and foreign reinsurers: • Philippines has one domestic life and non-life reinsurer (NatPhi Re). There is 10 percent for minimum cessions to domestic reinsurers. • Domestic insurers also cede risks to foreign reinsurers, using brokers usually based in Hong Kong or Singapore. No foreign reinsurers are currently licensed in Philippines. Amounts ceded to reinsurers by Philippines-based life insurers are relatively low, reflecting a market focus on more traditional products with modest average policy values. For non-life, cessions are higher, ranging from 15% of gross motor premium in 2017 to over 65% for other lines, reflecting efforts to mitigate liability and catastrophe risks. IC permits insurers to structure their reinsurance programs broadly as they choose, including in respect of catastrophe risk, in accordance with their risk appetite and subject to their meeting standards on risk management and solvency. IC does not require insurers to obtain prior approval for their reinsurance contracts, including with related parties. Prior approvals were removed to reduce regulatory approval requirements generally in the economy. There is no initiative to ensure credit quality and security of reinsurance arrangements; reinsurers don’t need to meet objective criteria, such as on their rating. For reinsurance ceded to unauthorized foreign insurance companies the full amount of the ceded reserve is required to be held in bonds or Philippines government securities. Reinsurers are classified by roles they may undertake, including lead reinsurer and participant reinsurer in treaty business, and reinsurer in facultative business, according to financial strength. ASEAN countries ( particularly Singapore, Malaysia) and Hong Kong, are the most favored overseas reinsurance markets for most lines of business. The principal 28 PHILIPPINES exceptions are aviation and energy, which are either placed in London or the continental European markets, or a combination of both. IC has no relationships with some of the home supervisory authorities of foreign reinsurers doing business in Philippines. Reinsurance-Related Regulations: The Philippines-based supervisory regime applies uniformly to reinsurers and insurers alike, e.g., with respect to requirements for RBC, winding up, and more. Comments IC has limited regulatory requirements on the reinsurance arrangements of primary insurers. The regulatory approach should rely on risk management requirements, reporting and oversight by IC. It should also be supported by solvency and related risk management standards, which address risks in reinsurance, including liquidity risks, and reward the use of reinsurance especially in areas such as catastrophe risk. The IC doesn’t have the technical capacity to adequately assess companies’ risk exposures to catastrophe risk, nor can it evaluate the adequacy and credit quality of insurers' reinsurance programs. Without an adequate risk-based insurance supervision framework that can ensure adequate risk assessment by the insurers, good reinsurance programs, and adequate provisioning for the catastrophe risk, there is a significant question regarding the ability of insurance companies to pay claims in full in the aftermath of a highly unusual catastrophic event. In this context, the IC main interest has been based on the expectation of receiving technical assistance in the assessment of underlying catastrophe risk exposures of insurers, as well as in the risk-based supervision of their catastrophe risk retentions and risk transfer practices. Steps should be taken to fulfil the IC’s expectation of technical assistance in this area because otherwise, there may be significant exposure to the public. It is recommended that IC: • develop and introduce detailed inspection manuals and regulatory tools that can guide the supervisor’s analysis of companies’ net risk retention/reinsurance policies for portfolios of insurance risk; • develop Reinsurance Registration System for reinsurers to ensure credit quality and security of reinsurance arrangements; • the legislation be amended at the next opportunity to require explicitly that insurers promptly document all reinsurance transactions; and • while alternative risk transfer is not prevalent in the market, IC should consider developing specific requirements to ensure appropriate use of such arrangements as the market develops (e.g. requirement for prior IC approval). • The IC should also develop risk-based regulation and supervision methodologies that address insurers’ catastrophe risk accumulation and transfer practices, so as to enhance risk management and financial viability of the local insurance markets. The 29 PHILIPPINES legal framework should aim at strengthening insurance supervision and increasing the confidence of the population in the ability of local insurers to pay claims, even in the case of severe natural disasters. Development of appropriate risk-based regulatory requirements for catastrophe insurance is crucial for increasing the level of coverage for catastrophe hazards among homeowners and SMEs. The key objective of the standard risk-based supervision of catastrophe insurance is to assist insurance companies (and regulators) to calculate risk-based solvency margins required for portfolios of catastrophe risk, thereby supporting a quick and efficient implementation of the risk-based supervision of catastrophe insurance. Valuation ICP 14 The supervisor establishes requirements for the valuation of assets and liabilities for solvency purposes. Description The valuation of assets and liabilities is based on IFRS or PFRS. IC issued a financial reporting framework for the valuation of assets and liabilities for statutory reporting purposes. Both Life and Nonlife reserving should be determined using best estimate assumptions and are required to have appropriate margin for adverse deviation. Section 189 of the Insurance Code indicates that: “All companies regulated by the Commission, unless otherwise required by law, should comply with the financial reporting frameworks adopted by the Commission for purposes of creating the statutory financial reports and the annual statements to be submitted to the Commission. Financial reporting framework means a set of accounting and reporting principles, standards, interpretations and pronouncements that must be adopted in the preparation and submission of the statutory financial statements and reports required by the Commission”. This financial reporting framework is not the same as the financial reporting framework used to prepare the financial statements that the Securities and Exchange Commission may require. The main purpose of the statutory statements is to present important information about the level of risk and solvency situation of insurers. In prescribing the applicable statutory financial reporting framework, the Commissioner shall take into account international standards concerning solvency and insurance company reporting as well as generally accepted actuarial principles concerning financial reporting promulgated by the Actuarial Society of the Philippines. In this regard, representatives of the Actuarial Society of the Philippines (ASP) are involved in completing this reporting framework where actuarial expertise is needed and relevant. This is a good practice and the IC will continue to involve in the ASP in this kind of endeavors that bear risk and require actuarial expertise. Life and non-life companies are required to measure their assets and liabilities based on the FRF circular (CL2016-65) and submit the pertinent accomplished FRF template to the IC on quarterly basis. In addition, the life and non-life companies are also required to submit Actuarial Valuation Report in accordance with the Standards of Valuation of Policy 30 PHILIPPINES Reserves as contained in Circular Letter (CL) 2016-66 for life insurance and CL2018-18 for Non-Life insurance annually. Valuation Standards for Life Insurance Policy Reserves: https://www.insurance.gov.ph/wp-content/uploads/2017/02/CL2016_66.pdf Valuation Standards for Non-life Insurance Policy Reserves: https://www.insurance.gov.ph/wp-content/uploads/2018/03/CL2018_18.pdf Amendment to Circular Letter No 2016-69 Implementation Requirements for Financial reporting, Valuation Standards for insurance policy reserves and risk-based capital (RBC2) Framework: https://www.insurance.gov.ph/wp-content/uploads/2018/03/CL2018_19.pdf When the new framework was implemented in 2016, this circular provided the transition requirements: https://www.insurance.gov.ph/wp-content/uploads/2017/02/CL2016_69.pdf (Implementation Requirements for Financial reporting, Valuation Standards for insurance policy reserves and risk-based capital (RBC2) Framework) When updates on the non-life policy reserves requirements were announced in 2018, this circular provided the updated transition requirements: Amendment to Circular Letter No 2016-69 Implementation Requirements for Financial reporting, Valuation Standards for insurance policy reserves and risk-based capital (RBC2) Framework (CL2018-19): https://www.insurance.gov.ph/wp-content/uploads/2018/03/CL2018_19.pdf In Philippines, PFRS is used for general purpose financial reporting, e.g., to shareholders and other stakeholders. PFRS generally conform to IFRS, however with a time lag to implement new IFRS 5standards and amendments. For solvency purposes as set forth by the IC, reliance is made on PFRS rather than a differing prescribed RBC2 approach. There nonetheless may be differences in asset and liability valuations between audited general-purpose financial reports based on PFRS on the one hand, and RBC2 reporting to the IC on the other. The former is a more principles-based accounting framework, whereas the latter has some prescriptive elements set forth by the IC. For example, technical provisions for insurance liabilities may differ between PFRS and RBC2 reporting to the IC. PFRS as currently adopted includes implementation of IFRS 4 on accounting for insurance contracts, an interim measure put in place by the International Accounting Standards Board (IASB) to generally allow continued use of existing local jurisdictional 5 It was announced by the regulator in January 2019 that it has decided to postpone from 1 January 2022 to 1 January 2023 the implementation of IFRS 17 in order to give locally licensed insurers more time to comply. As IFRS 17 mainly affects long term insurance contracts the effect of this measure on non-life insurers is likely to be small. 31 PHILIPPINES accounting guidance until a more comprehensive and updated version (now IFRS 17, still in process of some amendments by the IASB) can be adopted and implemented. Comments There are requirements on valuation for solvency purposes which combine the benefits of alignment to accounting standards with requirements to address the specific needs of insurance business. The framework is not supported by governance requirements, actuarial opinions, risk management requirements. But supported by supervisory oversight and enforcement of reserving adequacy (ICP 9). It is recommended that: • IC establish an objective and a plan for improving the consistency of valuation requirements across assets and liabilities and longer term, for moving valuation to a more market consistent basis, while continuing to take into account the characteristics of Philippines markets; and • IC, in cooperation with other authorities, complete the implementation of an approach to reserving for catastrophe risks. Investment ICP 15 The supervisor establishes requirements for solvency purposes on the investment activities of insurers in order to address the risks faced by insurers. Description Investments in Philippine government securities in respect of the investment equivalent to 25% of the minimum net-worth are to be free from any lien (charge) or obstruction and deposited with the IC. Circular Letter No 2017-43, dated 22 August 2017, was issued having regard to the difficulty of achieving adequate yields in a low interest environment. Subject to the insurer maintaining the requisite net-worth value, and subject to approval from the IC, the limit for non-own occupation property investment was adjusted to 20% of net- worth. Approval by the IC would require a five-year projected income plan, details of proposed occupants and lease or rental agreements, proof of ownership and the relevant board resolutions. After all these conditions have been met, the property is allowed to be used for the solvency and net-worth calculations. Investments may only be in a company that has paid regular dividends over the last three years before purchase of the stock. Insurance companies issuing policies denominated in a foreign currency are allowed matching investments of up to 150% of the reserves and other obligations under those policies, except where such liabilities are less than 10% of their total reserves. Allowable foreign currencies are those from countries acceptable to the BSP as part of its international reserves. Apart from foreign currency-denominated bonds issued by the government of the Philippines (for which there is no limit) other foreign currency investments may not exceed the lesser of 25% of the company's net admitted assets or 20% of the company's net-worth. 32 PHILIPPINES The full amount of the legal reserve required for reinsurance ceded to unauthorized foreign insurance companies must be invested in bonds or Philippines government securities. Investment regulations in respect of the pre-need industry differ from those of the insurance industry, as governed by the Pre-Need Code. Although net-worth levels have been specified for HMOs there are no corresponding investment regulations, the only stricture being that asset appraisals are only allowable from an acceptable independent appraiser recognized by the Department of Trade and Industry (DTI) or any competent government office and that revaluation of property may only be allowed after consultation with the IC. The IC issued Circular Letter No 2016-48, dated 1 September 2016, requiring all HMOs to maintain a deposit or investment account with an amount of at least 20% of the paid- up capital requirement in cash, treasury bills and government bonds or in any combination thereof. IC has been reforming its requirements on insurers’ investments in recent years with the objective of giving companies increased scope to invest in a range of appropriate assets. It has also taken into account the potential scope for insurers to contribute further to the growth of the economy by providing funds for longer term investment, in infrastructure development for example. Insurance company investments are subject to a rule based regulatory system and supervisory oversight. The requirements include a set of assets that are inadmissible. The balance of the assets (admitted) is subject to various maximum exposures. Comments Insurers’ investments remain subject to a framework of limits and detailed requirements aimed at ensuring that risks are diversified and well-managed. It has not moved to a principles-based approach, although it also has high level requirements on the robustness and security of investments, or to full reliance on the solvency requirements. Many investments can only be made after a case by case approval by the IC6. As a result, real time opportunities can be missed and considerable resources are applied in the Commission to this approval process; something that might be usefully revisited as part of reducing the overall burden on both insurers and the supervisory staff. There is a limited obligation and wider encouragement to invest in Philippines and other government related fixed interest. Consider implementing a principle-based regime where the prudent person principle should guide the investments of insurers. 6 IC issued CL No. 2014-21, clarifications on investments which do not require prior approval, and which require prior approval from the IC 33 PHILIPPINES Enterprise Risk Management for Solvency Purposes ICP 16 The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks. Description At present, Philippines’s insurance legislation does not specifically require insurers to establish an Enterprise Risk Management (ERM) framework or to perform an Own Risk and Solvency Assessment (ORSA). Enterprise Risk Management can be defined as a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. ORSA has been defined as a tool of the Enterprise Risk Management system that requires insurance undertakings to assess properly their own short- and long-term risks and the amount of own funds necessary to cover them. Comments There are no requirements such as that insurers establish sound organizational structures, management systems, risk evaluation mechanism and risk appetite system as part of the second RBC2 pillar. The RBC2 regime should cover the risk management of insurance, market, credit, operational, strategic, reputation, liquidity and other risks under pillar 2. Conceptually, the RBC2 requirements should set out the control’s insurers need to manage the inherent risks identified in the RBC2 Internationally-affiliated insurers may have established their enterprise risk management systems while smaller (and/or local) firms may be at the early stages of their development or haven’t established such systems yet. IC need to develop ERM and ORSA requirements to further strengthen the risk management practices of insurers. It is recommended that in conjunction with strengthening governance and internal control requirements, the authorities begin to engage the industry in dialogue about the need for an ERM framework. In addition, the authorities should also consider expanding the internal control and risk management system requirements to gradually include risk tolerance statements, feedback loops and ORSA requirements on an individual entity and group basis. Capital Adequacy ICP 17 The supervisor establishes capital adequacy requirements for solvency purposes so that insurers can absorb significant unforeseen losses and to provide for degrees of supervisory intervention. 34 PHILIPPINES Description The Risk Based Capital approach is largely modeled on the North American systems . Insurance Memorandum Circulars Numbers 6 and 7-2006 set out the calculation of risk- based capital for the Philippines Life and Non-life insurance businesses respectively. These Circulars were issued under the general powers of Section 414 of the Insurance Code. The obligation of the “RBC Requirement” relates to the statutory net worth. The “RBC Requirement” is expressed in terms of the combination of risk factors with the North American approach of combining risks for diversification through the “square root” type formula. Circular Letter defines admitted receivables for solvency purposes for non-life companies. IC has two capital regimes for solvency purposes: Minimum Net Worth and Risk Based Capital (RBC2). Minimum Net Worth requires an insurer to have an unimpaired net worth of at least Php900 million (USD 17 million) and Php1.3 billion (USD 24 million) as of December 31, 2019 and 2022, respectively. IC has introduced a new capital regime (RBC2) with effect in 2016. The RBC2 comprise a three-pillar approach to solvency requirements and the application of the standards to groups. The concept of the three pillars draws on international standards, especially the EU Solvency II requirements. It does not include an internal modelling approach or any other provision for insurers’ use of their own methodologies. IC has also said that it wanted to provide a level of solvency requirements that would not restrict the growth in the insurance sector, a key policy objective of the IC. IC worked with insurers, the insurance association and technical experts, accounting and auditing firms and professional bodies. RBC2 comprises principally: ▪ Pillar 1 includes the quantitative requirements related to the calculation of capital requirements and recognition of eligible capital ▪ Pillar 2 covers the governance and risk management requirement that consists of a supervisory review process which may include a supervisory adjustment to capital ▪ Pillar 3 comprises the disclosure requirements designed to encourage market discipline. The RBC ratio is calculated by using the formula of total available capital divided by the RBC requirement. The minimum RBC ratio is 100% and it is qualified by the necessity to pass the associated trend test. In all cases, the insurer or reinsurer must have at least twice the minimum paid up capital as a minimum statutory “net worth” defined to include paid up capital, capital in excess of the par value, contingency surpluses, retained earnings, and revaluation increments (retained earnings and revaluation increments have to be approved by the Insurance Commissioner). In relation to solvency control levels (ICP 17.3), IC view the minimum solvency 35 PHILIPPINES requirements as an RBC (risk-based capital) in terms of the ICP requirement. Solvency Control Levels The section 194 of the Insurance Code No 10607 required insurance companies already doing business in the Philippines to have a net-worth of PHP 550mn (USD 11.58mn) by 31 December 2016, PHP 900mn (USD 17.69mn) by 31 December 2019 and PHP 1.3bn (USD 25.55mn) by 31 December 2022. For existing companies, the references to paid-up capital in the previous legislation were removed. Section 200 of the new law deleted the old measure of solvency and inserted a new solvency requirement that (in English in the original) "An insurance company doing business in the Philippines shall at all times maintain the minimum paid-up capital, and net worth requirements as prescribed by the Commissioner…" On 15 January 2015 the IC issued Circular Letter No 2015-02-A that modified the capital requirements contained in the revised Insurance Code. The circular changed the requirements for foreign branches so that a trusteed surplus must be maintained equal to at least the net-worth requirements of local companies. In addition, net-worth requirements were specified for existing professional reinsurance companies that supersede the previous capital requirements: by 31 December 2016 the local professional reinsurer was required to have a net-worth of at least 2.25bn (USD 47.38mn), PHP 3bn (USD 58.97mn) by 31 December 2022. The regulations specify the four stages of action (see ICP 10) required should the insurer have an RBC which is close to or less than the minimum RBC requirement, ranging from the insurer being obliged to conduct a linear extrapolation of the RBC ratio for the next period to the regulator being authorized to take mandatory control of the company. It is intended that the solvency ratio of insurers exceed 125 percent. If the solvency ratio is between 100 and 125 percent, the company must submit linear extrapolation of the RBC ratio for the next period and prepare a report explaining the reasons and setting out its expectations for future assessment periods. If the ratio is between 75 percent and 100 percent, the company must submit an RBC plan and financial projections for closing the capital deficit within a year. If the ratio is between 50 percent and 75 percent, the IC authorized to issue Corrective Orders. If the RBC ratio falls below 49 per cent then the Commissioner may take control of the company or liquidate it under Insurance Code. IC would take strong action in case of an insurer failing to meet the minimum RBC requirement-although it would not at this stage move immediately to impose receivership (it would issue regulatory letters first- see ICP 10) and the Insurance Code provides simply that it may do so where the insurer is “seriously” below its solvency requirement. The framework (3 Pillars) is in the process of implementation. Pillar 1 requirements apply in full and will be completed by end of 2019 and onsite evaluations have been taking place during the year. 36 PHILIPPINES Use of Internal Models The use of internal models is not currently permitted by IC. Comments A new RBC2 -insurance sector minimum capital rule using a risk based -approach has been introduced and is being progressively phased in. The law and regulations provide for various controls on provisioning and capital. The new RBC2 solvency framework is a major step towards a risk-based approach. The combination of Pillar 1 with a Pillar 2 qualitative and quantitative framework is aligned with international practice (actually it follows Solvency II approach) but the inclusion of such a high minimum net worth is likely to affect insurance sector development. The framework should be carefully reviewed. Intermediaries ICP 18 The supervisor sets and enforces requirements for the conduct of insurance intermediaries, to ensure that they conduct business in a professional and transparent manner. Description Insurance sales channels in Philippines comprise insurance agents, insurance brokers, bancassurance, and direct sales (by insurers). Bancassurance is another channel for experiencing growth. Life and non-life insurance can be distributed by ordinary agents, general agents, “variable life” agents, and brokers and all are actively pursued. Life insurance is he avily oriented toward the agency system in a similar way to the rest of the region and markets at similar levels of development but, less characteristically, has struck out to distribute through other financial institutions and groups, especially those providing banking services. Life insurance agent registration obligations, for those marketing the full range of products, requires separate registration for general and variable life products. Distribution channels used to be dominated by agents; however, since 2015 bancassurance has been considered likely to have been the major source of new business as data indicates. Traditional brokers (as opposed to those so classed in bank branches) are involved in corporate (including employee benefit) business, while direct marketing is confined to simpler life products. Variable life (unit-linked) must be sold through specially qualified agents who may be directly employed by insurers or banks. Licenses for agents and brokers are subject to three-yearly renewal by the IC in the same way as insurance companies and are for life or non-life only. Bancassurance continues to be a growth area, said to represent around 60% of single premium sales and possibly slightly over 40% of all other new business. The dependence on single premium business has, however, increased the volatility of bancassurance shares of the market. The banks, recognizing this factor, have made efforts to increase their share of the regular premium market, particularly in the variable 37 PHILIPPINES life area. Circular Letter No 2016-53, dated 7 September 2016, specified that in order to be licensed for bancassurance, the insurer and bank concerned must both first be members of the same financial conglomerate as defined by the Central Bank (BSP). Agents and brokers must be licensed and met a number of supervisory requirements. They are subject to onsite inspection. They must produce financial statements that are reviewed by IC. Prior to the issuance of license, insurance agents are required to pass the examination conducted by the IC prior to their dealing/ offering policies to the customers. CL2013-33 provides Guidelines on Market Conduct. However, reviews of these policies and procedures are not performed on a regular basis. Although specifically required under the primary legislation, there are still many claims that are not settled on a timely manner (evidenced by claims, long-aged receivables and payables). Comments The IC has good information on complaints that it directly receives, and good information on complaints received by banks. But it does not have a comprehensive system gathering data on all insurer and intermediary complaints and on their timely disposition. Supervisory programs for brokers, agents and insurers are still evolving. • The level of ongoing supervision related to agents’ conduct is inadequate. • There is no requirement to disclose to customers the basis on which agents are remunerated by insurers or other potential conflicts. The Code of Conduct for intermediaries, while a significant step forward, includes few specific conduct rules or examples of inappropriate conduct. It is recommended that IC: • Automate the monitoring of intermediaries’ compliance with the main licensing requirements by developing a special computer program that can be run by the IC on the agents’ compliance reporting database. Make the information about intermediaries’ affiliations with insurance companies publicly available on intermediaries’ websites; • Improve the legal framework on Information on Insurance Contracts that requires market participants to disclose all relevant aspects of insurance products before making them binding for policyholders; enabling consumers to cancel insurance policies without penalties for material reasons; • To bolster its supervisory program, the IC should consider the development of an industry complaint handling system to collect information from all insurers and brokers on the number of complaints they receive, the types of complaints received and how the complaints were dealt with; • Consider developing a more fulsome and rule-based code of conduct for intermediaries; 38 PHILIPPINES • Review the level of resources that it currently applies to market conduct and intermediaries in the light of the increasingly competitive market; • Consider establishing stronger requirements to require intermediaries to disclose the amount and/or the basis (commission) of their compensation; • Provide more guidance to the industry on expectations regarding the handling of perceived, potential, and real conflicts of interest; and • Legislation be implemented to provide IC with a power to issue administrative orders and allow suspension of intermediary licenses. IC should consider establishing a requirement for professional indemnity insurance for insurance intermediaries operating in its market to ensure that the public is adequately protected against the effects of intermediary errors and omissions. II. INSURANCE MARKET DEVELOPMENT 2. Insurance penetration remains low by international standards and, in combination with growing per capita income, the industry expects long term growth for the sector. Insurance penetration was 1.79 percent in 2016 while insurance density ranged from US$ 40-50 over the period 2013- 2017. The Philippines compares poorly with Thailand, India, and Malaysia, but is slightly better than Indonesia. The Philippines insurance market was the 45th largest in the world in 2017. It is the 37th largest life insurance market and the 54th largest non-life market. Total gross insurance income was US$5.07 billion and total assets amounted to PHP 158.807.00 million Table 1: Insurance Penetration in Selected Countries (US Dollars, 2017) Life Non-Life Personal Accident Total and Health Percent Per Percent Per Percent Per Percent Per Capita* Capita* Capita* Capita* Philippines 1.24 37.00 0.47 13.58 0.08 2.42 1.79 53.00 Thailand 3.91 254.93 1.19 77.31 0.29 18.59 5.39 350.82 Singapore 7.01 3,755.31 0.75 399.95 1.00 535.79 8.75 4,691.04 Malaysia 2.75 273.67 1.14 113.38 0.17 16.43 4.06 403.48 Vietnam 1.35 30.97 0.59 13.62 0.25 5.71 2.18 50.31 Indonesia 1.34 52.04 0.30 11.75 0.10 3.72 1.75 67.52 Source: SIGMA and Axco Global Statistics 3. The number of insurance companies has been progressively dropping, whilst the number of MBAs, HMOs and pre-need companies has been growing. At the end of June 2019 there were a total of Mutual Benefit Associations (MBAs), Health Maintenance Organizations (HMOs)76 authorized insurers, including 22 foreign branch insurers. This included 44 non-life insurers, 26 life insurers, 5 composite insurers 39 PHILIPPINES and one locally established reinsurance company. Market participants must either be locally established public companies or branches of foreign insurers. The sector also includes 35 MBAs, 30 HMOs, 16 pre- needed companies and two cooperatives licensed to conduct insurance business. The domestic reinsurance company, the National Reinsurance Corporation (PhilNaRe), was successfully privatized through an IPO in 2006-07 and is licensed under the Insurance Code. Conventional insurance companies are able to operate with separate legal entities for life and non-life business or as composites writing both in the same legal entity. There is no plan to require a change to the structure of the three existing composite insurers. MBAs are not permitted to write non-life insurance under the current law. 4. Although its financial data is not included in statistics of the private insurance sector, it can be said that the state operated GSIS is one of the largest and most important insurance institutions. Insurance of government property and interests (excluding those related to the armed services) is mandatory and compulsorily insured with the GSIS. The GSIS was established in 1937 to provide insurance to public servants and for government risks. “Government risks” is widely defined and includes business of governments at all levels, schools and public health delivery properties, as well as the generally more commercial public corporations such as power corporations, food authorities, and the national oil company. It is obligatory for these entities to take out insurance and to place it with the GSIS. The GSIS also manages the pension risks for government employees and, as a result, is potentially the largest long- term institutional investor in the Philippines asset markets. 5. Life business accounts for about 74 percent of total annual premiums, reflecting the role played by life insurance in savings and investment markets. In 2017, 72.54 percent of total premium income was from variable (unit-linked) products of which a large proportion was from single premium business, which is encouraged by government tax incentives. A further 27 percent was group policies, largely associated with employee benefit packages of employers. Initial, unaudited, figures for 2018 show an increase of 10.78 percent in premium income, of which 73.52 percent was variable life, again with a high proportion of single premium business. Legislation requires overseas. Filipino workers (OFWs) to remit certain proportions of their income - a great proportion of these remittances may be partly responsible for the robust single premium market. 6. Non-life is dominated by property and motor insurance and the penetration rate is particularly low. Motor insurance is the largest class of non-life insurance business, with a market share of 51 percent in 2017. For several years, the government has been researching ways and means of financing catastrophes at a national level. In August 2017, a new catastrophe insurance program was initiated by the government, supported by the Word Bank. Under the program the GSIS (state-owned insurer) provides the government and 25 participating provinces with catastrophe insurance cover with the World Bank acting as intermediary for reinsurance coverage provided by some of the world's leading reinsurers. 40 PHILIPPINES 7. The insurance market is intensely competitive and there are many insurers for the size of market. Fierce competition among insurers on price, rather than on quality of service, is resulting in the erosion of underwriting discipline and could create solvency problems. This is particularly true for smaller insurers. Fierce price competition is especially prevalent in liability lines (e.g. MPTL insurance). 8. The Philippines Crop Insurance Association, a government agency, was established in 1995 to cover related risks. It covers natural calamity risks in respect of rice, corn, fruit and vegetable crops as well as certain disease risks. In addition, property insurance coverage is granted in respect of farmers' warehouses, rice mills, irrigation facilities and equipment. The livestock pool (a public-private coinsurance pool established in 1978, which was underwritten by GSIS and managed by the Philippine Livestock Management Services Corporation), ceased operations in 2009 and is currently in run-off. Following the closure of the pool those wishing to purchase livestock insurance are now required to submit a proposal to an individual company of their choice, which in turn has to deploy its own reinsurance facilities where necessary (either treaty or facultative), to cover such a risk. 9. In recent years microinsurance has become an important factor in the insurance market as the government has made efforts to pursue an active policy of financial inclusion. The development of microinsurance does not usually give rise to large increases in market premium volume. What it can do, however, is to involve very large numbers of people in the insurance buying process, thus significantly increasing insurance awareness. The penetration rate of microinsurance is approximately 37 percent of the population - one of the highest in the world- and it is projected to reach 48 percent by 2022. 41 PHILIPPINES 10. A strong mutual/cooperative tradition and informal risk pooling, together with the growth of the microfinance industry, have been the driving force behind the development of microinsurance. IC has devoted considerable efforts to develop the microinsurance market over the years, assisted by GIZ, as a result, besides India, the Philippines is the only sample country where microinsurance is explicitly provided for in the insurance regulatory regime. However, whereas India created concessions for microinsurance on the intermediation side, the Philippines created a special prudential tier (with significantly lower minimum capital requirements) for the underwriting of microinsurance policies and linked this to the allowance for (MBAs in the Insurance Code. 11. Participants of the industry are of the view that the major issue holding up the development of the insurance industry is lack of awareness and understanding of the role of insurance in managing and transfer risks and are prepared to partner with the authorities to resolve this. They point to an overall lack of awareness of insurance products, coverages, services in general and consumers’ lack of trust brought about by past bad behavior in the industry. The participants pointed to limited resources available in the industry to promote insurance. The majority of the industry stated a willingness to partner with the DOF or IC in any initiatives to address the awareness issue. 12. Distribution channels are mostly traditional, with the majority of sales being transacted through agents. The insurance distribution system is composed of insurance agents, insurance brokers, direct sales (by insurers), and emerging channels such as the internet. According to Philippines laws there is a clear distinction between insurance agents and insurance brokers. In specific terms , insurance agents are institutions or individuals who, in exchange for commissions from insurers, engage in insurance activities on their behalf within the scope so authorized. The dominant distribution channels for non-life insurance are agents and brokers. Agents are very effective in small communities outside Manila, while brokers have secured about 50 percent of non-motor business, which is mainly made up of industrial and commercial property risks. Life insurance is heavily oriented toward the agency system in a similar way to the rest of the region and markets at similar levels of development but, less characteristically, in the Philippines the industry has also been successful in distributing through other financial institutions and groups, especially those providing banking services. Life insurance agent registration obligations, for those marketing the full range of products, requires separate registration for general and variable life products. 42 PHILIPPINES Distribution Channel of the Insurance Industry 2017 2.58% 27.33% Individual Agents 49.36% Insurance Brokers Direct Marketing 5.87% Bancassurance 14.86% Other Distribution channels Source: IC 13. E-commerce is not an important feature in the sale and delivery of non-life insurance, mainly due to the comparative lack of internet penetration among the general public. It is, however, reported that travel insurance available online is becoming more popular, although the premium volume is still comparatively small. Direct marketing is employed by several companies either through their banking connections or through strategic alliances with credit card companies and the like. 14. Bancassurance continues to be a growth area – it represents around 60 percent of single premium sales in life insurance and slightly over 40 percent of all other new business, but the trend is far less significant in non-life business. Under the new rules, all bancassurance agreements must be approved by the IC and the amount of pre-sales involvement by bank personnel is limited. Only appropriately trained bank personnel are to be involved in pre-sale activities such as needs assessment and giving general (generic) product information, whilst other bank employees are only allowed to refer clients to insurance agents (which will typically be the bank's own accredited agents). In all cases, the final sales are to be completed by insurance agents. The rules also require both the banking institution and insurance company to formulate an effective consumer protection framework, specifically designed to address all complaints that may arise. Circular Letter No 2016-53, dated 7 September 2016, specified that in order to be licensed for bancassurance, the insurer and bank concerned must both first be members of the same financial conglomerate as defined by the BSP. Banks have also set up their own brokerages, one of which accounts for over 45 percent of the total premiums for life produced by brokers in 2016. Section 20 of Insurance Act No , the General Banking Law of 2000, permits a bank to distribute through bancassurance subject to prior approval of the Monetary Board. Regulations were set out in Resolution No 1511, dated 17 October 2002, as notified by Circular No 357 - Series of 2002. There are no restrictions on banks owning insurance companies nor on insurance companies owning banks. In practice, banks and life 43 PHILIPPINES insurance companies have had strong ties, leading to several major joint ventures between them, as well as a number of bank-owned life insurance companies, including BPI-Philam Life Assurance Corporation, Inc and Manulife China Bank Life Assurance Corporation (Manulife China Bank). 15. Fixed premiums for compulsory motor third-party liability (MTPL) insurance continue to affect performance, although there have been efforts to restructure the premium and address the liability of insurers in case of claims. In a market with poor reserving standards, a lack of sufficient market data, and poor claims experience, there is a danger that IC will set premiums below profitable levels, with negative consequences for the solvency of companies. This situation amounts to the Law making a promise to the community to pay out a certain level of benefits, while only raising a part of the financing needed for the promise. This type of action is never sustainable. Thus, the insurance company or companies must be able to adjust premiums to changing market and legal conditions. 16. There is no MTPL data available for the insurers. The existing policy issuance process through the IC has failed to collect risk data in any coordinated manner. The limited actuarial skills in the market together with poor discipline amongst insurers concerning the collection of data on MTPL claims results in an inefficient MTPL insurance system. Therefore, there is need to take steps to be taken as soon as possible to establish an MTPL data base and to require insurers to contribute to orderly collection of market data. If this is not done, IC will continue to be exposed because of its responsibility for establishing rates in an environment where there is lack of proper loss data. 17. IC should consider the liberalization of the MTPL tariffs. The cost of the MTPL insurance should be based on technical matters and allowing the companies to set premiums would encourage the use and hence the collection of data. The IC supervision under this product would then focus on the soundness of the insurers, the availability of the technical basis for pricing the product, and the market conduct when selling and servicing this product. 18. Product development should be encouraged by the introduction of ‘sandbox’ regulation. The role of the supervisor in developing the market should focus not so much in creating or approving products but rather in introducing enabling regulation for insurers to develop new products taking advantage of technology advancements like block chain technology, artificial intelligence applications, etc. A regulatory sandbox is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question. The regulatory sandbox would enable insurers, as well as FinTech players, to experiment with innovative financial products or services in the production environment, but within a well-defined space and duration. It should also include appropriate safeguards to contain possible negative impact to consumers and maintain the overall safety and soundness of the financial system. A regulatory sandbox has the potential to deliver more effective competition in the interests of consumers 44 PHILIPPINES by: (i) reducing the time and, potentially, the cost of getting innovative ideas to market; (ii) enabling greater access to finance for innovators; (iii) enabling more products to be tested and, thus, potentially introduced to the market. 45