Philippine Insurers Want New Code

Speaker
Feliciano Belmonte

The country's insurers are pushing for the speedy passage of proposed changes in the 1974 Insurance Code of the Philippines.

Speaking before members of the Philippine Life Insurance Association (PLIA) on January 25, 2011, House Speaker Feliciano "Sonny" Belmonte agreed that such antiquated pieces of legislation must be amended and updated.

There are currently four bills filed in Congress proposing amendments to the Insurance Code:  two with the Senate and the two with the House of Representatives.

A good number of the provisions of the 1974 Insurance Code are already obsolete.  Some are inflexible and cannot keep pace with the changing times, such as new risks and new international developments including recognition of insurance products such as variables (investment-laced), bancassurance, microinsurance, the licensing process of insurance agents, and the types of investments allowed for insurers.

The proposed amendments give the Insurance Commission (IC) more powers to lead and regulate the industry.

What is Compulsory Third Party Liability Insurance?

If you own your car, you probably already know a little about compulsory third party liability (CTPL) insurance.  But, do you truly understand why it is needed, who are covered, and what are its coverage.

In the Philippines, vehicle owners are required by law to secure a compulsory third party liability (CTPL) insurance as a prerequisite to the registration of a motor vehicle with the Land Transportation Office (LTO).

CTPL is a mandatory insurance for a possible liability to a third party.  Section 373(c), Chapter VI of the Insurance Code of the Philippines defines third party as follows:

Who are the third parties?
"THIRD PARTY shall refer to any person other than a PASSENGER as defined in the law and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity of the vehicle owner, or his employee in respect to death, bodily injury, or damage to property arising out of and in the course of employment."

Your friends and other persons, who are not your relatives, riding in your car are considered as third parties and not passengers.  The third party may either be inside or outside your car.

Passenger, on the other hand, is any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle's operator or his agent to ride without fare.  In other words, they are paying a fare and on board a public utility vehicle.  However, once the passenger arrived in his destination and got off the public utility vehicle, he became a third party.  Please note that a person on board a private vehicle is not a passenger.

What liability is covered?
It covers the liability of the insured in respect of the bodily injury and/or death of any THIRD PARTY in an accident caused or arising out of the use or operation of the insured vehicle.  

Subject to the limits of liability stated in the policy, the insurer will pay all sums necessary to discharge the insured from liability, assuring the victim and/or his dependents of immediate financial assistance, regardless of the financial capacity of the motor vehicle owner.

Liability for loss or damage to property is not covered.

How much is the insurance coverage?
The current CTPL coverage is Php100,000.00.

How to make sure that your CTPL policy is genuine?
In the past, there have been reports of fake CTPL policies being sold by questionable parties at LTO branches and insurance policies being reproduced many times and sold to unsuspected motorists.

To once and for all address this issue, The Philippine Insurers and Reinsurers Association (PIRA) has rolled out a system labeled as "Certificate of Cover Authenticating Facility 2.0" (COCAF 2,0).  The system is an upgraded version of the insurance industry's answer to the problem of spurious CTPL policies generated by non-industry players.  It is meant to ensure that all CTPL policies issued to motor vehicle owners are genuine and generated tax revenues for the country.

PIRA chairman Michael F. Rellosa said, "This system is beneficial to all parties.  Motorists are assured that the CTPL policies they're buying are authentic, insurance companies get their premiums fast, and the government gets to collect correct taxes pronto."

Insurance companies and their agents are required to enroll into the system and open electronic wallets (eWallets) that must contain an initial cash deposit equivalent to the cost of a single CTPL policy to be able to use the system.

If the agent sells a policy, the system automatically deducts from his eWallet corresponding premium and credits it to the insurance company, separates the taxes and credits them to the government, and leaves behind the agent's commission.

The Insurance Commission will soon have a gateway to the system for real-time monitoring.

How Does Insurance Works?

Investopedia.com defines insurance as "a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium."

Insurance works by pooling risk.  It simply means that a large group of people want to insure against a particular loss pay a small sum of money (premium) into what we will call the insurance bucket, or pool.  When a contributor to the pool suffers a loss there is enough money to compensate (indemnify) them.

Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class.  They know that not all insured individuals will suffer losses at the same time or at all.  This allows the insurance companies to operate profitably and at the same time pay for claims that may arise.  You pay for the probability of the loss and for the protection that you will be paid for losses in the event they occur.

Risks
Wikipedia defines risk as "the potential that a chosen action or activity will lead to a loss."  It is a probability or threat of a damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities, and that may be neutralized through preemptive action.

Life is full of risks - some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable.  What's important to know about risk when thinking about insurance is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the risk.

Risk Control
Risk control is the process of monitoring and controlling and keeping track of the identified and the unidentified risks.  This process will hope to identify risks that are no longer possible and risks that are coming due, as well as any new risks that may become evident.

There are two ways that risks can be controlled.  You can avoid the risk altogether, or you can choose to reduce your risk.

Risk Financing
If you decide to retain your risk exposures, then you can either transfer that risk (i.e., to an insurance company), or you retain that risk either voluntarily (i.e., you identify and accept the risk) or involuntarily (you identify the risk, but no insurance is available).

Risk Sharing
Finally, you may also decide to share risk.  If you could get rid of the risk altogether, there would be no need for insurance.  Also, if the cost of the loss or the effect of the loss is reasonable to you, then you may not need insurance.

For risks that involve a high severity of loss and a low frequency of loss, then risk transference (i.e., insurance) is probably the most appropriate protection technique.  Insurance is appropriate if the loss will cause you or your loved ones a significant financial loss or inconvenience.  For risks that are of low loss severity but high frequency, the most suitable method is either retention or reduction because the cost to transfer (or insure) the risk might be costly.

How to Become an Insurance Agent in the Philippines?

In my blog entitled "Is Your Insurance Agent Qualified to Sell Insurance Contracts?," I stated that the Insurance Code of the Philippines 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, the Insurance Commission cannot just issue a license to any person who desires to become an insurance agent unless he/she had satisfied the Commissioner as to his/her competence and trustworthiness.

Competence can be determined by passing the examination conducted by the Insurance Commission.  This means you must have attended a seminar conducted either by the insurance company you are planning to represent, also known as the sponsoring insurance company, or taking a course at the Insurance Institute for Asia and Pacific, Inc. (IIAP).  A certificate coming from either the insurance company of IIAP will suffice your claim that you had been trained in the kind of insurance contemplated in the license.

Trustworthiness of the applicant can be proved by submitting documents showing that he/she is of good moral character and must not have been convicted of any crime involving moral turpitude.  An example of these documents are Certificate of Good Moral Character, and NBI or Barangay Clearance.

You may take the qualifying examination at the Insurance Commission's office in Manila that is conducted every day from Tuesday to Friday at 8:30 A.M.  The Commission's Cebu and Davao offices also conducts examination every 2nd and 4th Wednesdays of the month.  Examination in other places shall be scheduled and applicants are suggested to coordinate with the representative(s) of the sponsoring insurance company or organization in the area of exam.

To pass the examination, you must have at least 30 correct answers out of 50 questions.  If you fail the exam, you will be allowed to retake the exam provided it will not be taken within the same day the exam which you failed was conducted.

New Careers for Insurance Professionals

Insurance professionals are not exempted from getting bored in their current positions.  It happened to me early 2002 when I decided to become an entrepreneur and organized my own reinsurance broker.

Dr. Randall S. Hansen, Ph.D., wrote, "Career change is a natural life progression; most studies show that the average job-seeker will change careers (not jobs) several times over the course of his or her lifetime."

If you are facing a career change plunge, take it slowly and make sure that you really want to do it.  It is highly advisable that you map out a career path that will help you travel from Point A to Point Z while taking all the right steps in between.

So if you are in insurance industry and is considering a career change within the same industry, it is important to choose one of the areas of expertise available.  Never choose a particular career path based on the "wrong" reasons.  There's nothing wrong if a particular position pays well because no salary is worthwhile if you're miserable in that position.

To those who are considering a career change, I am recommending that you consider a career in IT because computer systems design and related services industry is still among the economy's largest and fastest sources of employment growth.

In a report of Tom Young at Computing.co.uk, he said "Global IT spending should return to growth in 2010 for the first time since the recession."  All major segments - computing hardware, software, IT services, telecom and telecom services - are expecting to grow.

There are institutes who offers Certificate in IT for Insurance Professionals like The Chartered Institute for IT and The Chartered Insurance Institute.  This course demonstrates a broad understanding of IT; is specific to the insurance industry; and has been developed by professionals for professionals.

What is Insurance?

In a report dated September 26, 2010 by GMA News.TV, they said that despite the devastation wrought by typhoons Ondoy and Pepeng on 2009, Filipinos are still not that insurance conscious.

Philippine Insurers and Reinsurers Association (PIRA) chairman Mitch Rellosa observed that the increase in application for insurance coverage after the said typhoons was not due to the people's response to potential threat of death and destruction but as a response to bank requirements.  Rellosa stated his concern over the need for educating the Filipinos about the importance of insurance.

In response to that, I am writing this blog to help Filipinos understand what is insurance and the need to have a proper insurance protection.

Definitions
Section 2(1) of the Insurance Code of the Philippines defines a "contract of insurance" as "an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event."

Investopedia.com gives their definition of insurance as "a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium."

In the above definitions, we can see that insurance is a contract or agreement between two parties - the insurance company or insurer and the policyholder or the insured.

The agreement allows the insured - individuals, business and other entities - to protect themselves against significant potential losses and financial hardships in exchange for a reasonably affordable rate, that is the premium, thus transferring the cost of said potential losses from the insured to the insurer.

The loss of income that a family would experience as a result of the premature death of the breadwinner is considered a significant loss and hardship.  It would be very difficult for a family to replace the income lost caused by such unforeseen event but the premiums paid to the insurer will ensure that the income will be replaced by the insured amount.  The same is true with other forms of insurance.  The potential loss will have a detrimental effect on the individual or entity by having an insurance protection.

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.

About

When I joined a non-life insurance company in 1981, I didn't know that I will have a career in the insurance industry.  Although I am a Certified Public Accountant, I handled different positions with different insurance companies such as in underwriting, marketing, reinsurance, claims, and finance.

Statistics gathered by the Philippine Insurers and Reinsurers Association (PIRA) shows that Filipinos are still not insurance conscious despite the devastation wrought by typhoons Ondoy and Pepeng on 2009.

I hope that through this blog, I could help them to understand what is insurance and why it is important for us to have an insurance protection.

If you have something to share about insurance, please feel free to send your comments, suggestions, and reactions here.