The table has turned to the Insurance Industry

by Ronel Forbes

January 5, 2022

The Philippine insurance industry will also start again as it prepares for the Philippine Insurance Commission’s (IC) mandated change in the Valuation of Insurance Policy Reserve (Reserve) and Risk-Based Capital (RBC), which will take effect on June 30, 2016.

A reserve is the minimal amount of responsibility that an insurance company should recognize for insurance benefit claims that are likely to be settled in the future to its policyholders in the business insurance coverage. The RBC, on the other hand, specifies the minimum amount of capital that an insurance company should set aside based on the risk it assumes and serves as a safeguard against insolvency.

The IC released Circular Letters 2014-42-A and 2015-32 in October 2014 and June 2015, respectively, outlining a new set of valuation rules for life and non-life insurance policy reserves. Furthermore, the IC performed a review of the current RBC framework in June 2015 with Circular Letter 2015-30.

As a result, the Commission asked all life and non-life insurance companies to participate in parallel runs of the Quantitative Impact Study (QIS) with the goal of determining the overall impact of the new Reserve and RBC framework on the insurance business models.

Changes

The higher Unearned Premium Reserve (or UPR, the premium received from policyholders for the unexpired portion of insurance benefit coverage) and Unexpired Risk Reserve determines the premium obligation for non-life insurance companies (or URR, the obligation and related expenses that are expected to be settled in the future for the unexpired portion of insurance benefit coverage). Previously, the premium obligation was calculated only on the basis of the UPR.

Loss Adjustment Expense must also be considered when determining losses and insurance covers under the new reserving framework (or LAE, expenses already incurred but not yet paid in connection with the settlement of losses and claims). In addition, the new reserving framework mandates that MfAD of 10% be taken into account when determining premium obligations, losses, and claims payments, which are used to meet the minimum reserve requirement.

The new reserving framework shifted the reserve requirement calculation from Net Premium Valuation (NPV) to Gross Premium Valuation (GPV) for life insurance businesses. The move to GPV reflects the best estimate of reserve for insurance policy obligation and promotes a market-based strategy.

The new reserving framework also allows for the use of the current market rate for discounting future cash flows to present value in the settlement of insurance benefit obligations, which was previously capped at 6%. In addition, the new reserving framework mandates that additional assumptions be considered in estimating the reserve required, such as lost wages and/or persistence, morbidity, and a 10% Margin for Adverse Deviation (MfAD).

The new RBC framework redefines the composition of Total Available (Qualifying) Capital for life and non-life insurance businesses. Credit, Liability, Market, Operational, Catastrophe, and Surrender risks have all been redefined.

In comparison to the previous framework, the assigned risk charges for certain risk components have been increased. Higher risk charges are associated with higher risk charges, which translates to higher capital requirements and customer base.

A number of CEOs, CFOs, and other stakeholders in the insurance business have expressed approval for the new methodology, particularly because the Reserve value uses market-based assumptions and the RBC is more risk-sensitive. The new Reserve and RBC framework is also considered as delivering enhanced financial stability to the insurance industry by improving risk management and aligning our processes with international standards.

Opportunities and Challenges

The financial and strategic implications of the above regulation change, including implementation efforts, are projected to be significant for insurance industry players. Establishing an effective company-wide reaction requires a methodology capable of looking beyond basic operational compliance and incorporating suitable financial and strategic impact evaluation to protect your business.

The need for data management and resources

Not only during the transition phase but also on an ongoing basis, the new framework will require data to be recorded at a more granular level. Existing systems should be able to capture historical data, create projections, and perform the necessary calculations. Investment in proper technology will become increasingly important in lowering compliance costs.

Financial service, risk and compliance, actuarial valuation, and IT teams will all need people who are trained and knowledgeable about the new regulatory framework and its financial and strategic ramifications. Employee KPIs should be reviewed to ensure that they are in line with the overall market share, implementation strategy, and goals.

Are you ready for a change?

The IC has not released any delay plans for the implementation of the new regulatory framework as of press time, and it is expected to go into effect on June 30, 2016, and be applied over the next few years until the changes are obsolete in 2025.

At this point, the CEO and CFO dashboards should show a forecast on the varying financial and strategic effects, as well as synchronized action plans to successfully respond to such regulatory developments. Otherwise, the company will be left behind by the wave of change, missing out on the chance to turn these obstacles into opportunities and improve its competitive position.

In view of enhanced financial stability in the insurance business, the regulatory improvement is seen as offering stronger protection for and strengthened confidence from the insuring public. For the approximately 30 million Filipinos who are covered, this is unquestionably a positive move.

Don’t forget to visit our site at MGS INSURANCE for more information about Non-Life insurance.

Such as Auto insurance, CTPL insurance, fire insurance, and so on.