Is Your Insurance Agent Qualified to Sell Insurance Contracts?

I was browsing over the Circular Letters issued by the Insurance Commission (IC) this morning when Circular Letter 2-2011 issued on January 26, 2011 took my attention.  The said circular is about the guidelines and schedule of qualifying examinations for agents for the year 2011.

The Insurance Code requires that no person shall act as insurance agent in the solicitation or procurement of applications for insurance or receive for services in obtaining insurance any commission or compensation from any insurance company doing business in the Philippines without first procuring a license from the Commissioner.

However, there is a practice in the insurance industry, particularly in the non-life insurance sector, that there are companies who are accepting applications for insurance coverage even from unlicensed agents.  These companies are helping these unlicensed agents to receive commission from them by allowing them to use the licenses of willing brokers and agents, of course that is for a fee (e.g., a portion of the commission will be retained by the license holder).

Why is this system being allowed by the insurance companies
There are two major reasons that an insurance company will accept premiums from unlicensed agents.  Please bear in mind that the following are just my observations and was based on my previous experiences.  These does not represent any particular company, broker, agent, etc.

Competition
There are 118 licensed insurance companies plus 1 professional reinsurer in the Philippines for the year 2010-2011.  

As I had said in my previous blog, Filipinos are not insurance conscious.  This make the competition very stiff among the companies in the insurance industry.

Also, premium rates in various non-life insurance lines are being dictated by the market, meaning, it is too thin that most companies are incurring a negative underwriting profit.

Accepting more premiums, whether it is from a licensed or unlicensed agents, would help the insurance company increase their revenues from underwriting and investment activities, thus helping them support their day-to-day operation.

Paid Up Capital Requirement
In an article written by Ted P. Torres of The Philippine Star, he states that there are still four insurance companies that are still struggling to raise the mandated P125-million minimum paid up capital required by the Insurance Commission and the Department of Finance.  Report also indicate that another non-life insurance company has expressed willingness to cease operations in the absence of the so-called "white knight" or a buyer of its assets.  

The P125-million minimum paid up capital requirement is further increased to P175-million for the 2011-2012 period in lieu of the impending full adoption of the Asean Free Trade Agreement (AFTA) in 2015.

Additional premiums from unlicensed agents would help create a positive  bottom line that could be use to increase the company's paid up capital by declaring a stock dividend.

What are the implications of this system in general?
Unlicensed agents are unregistered, meaning, they are not paying taxes for the commission income they received.  They could be considered as part of the underground economy.  

Although the 10% expanded withholding tax were deducted from their commissions; there is still a need for them to file their annual income tax on or before April 15 of the following year the commission was earned and pay additional income tax, if applicable, for the difference between the normal income tax rate (5% to 32%) and the withholding tax.

On part of the insured, there are cases that you might face a problem with your insurer, and because that your agent is  not licensed, he has no legal personality to represent you.  This will require you to perform the job that your agent should be doing on your behalf.

Conclusion
Please make sure that your insurance agent or broker has an existing license from the Insurance Commission.  Agents and brokers licenses are being renewed annually, more specifically, every June of each year.  If you have doubt with your agent's license, you may contact your insurer's customer service or the licensing division of the Insurance Commission.