Death Of Filipino Life Insurance

Policymaking can be a very tricky activity even under the best of circumstances. There are several reasons for this. Undoubtedly the most important of these is the fact that in the pursuit of one policy desideratum, another is often downgraded or cast aside. A prime example of this is a situation that is unfolding before our eyes.

The situation I speak of relates to the Philippine life insurance industry. I use the word ‘Philippine’ because it is to the industry’s Filipino-owned segment that I am referring. That segment is slowly being wiped out, thanks to government policy.

The incipient demise of the Filipino-owned life insurance companies is the side effect of well-intentioned government policy toward the life insurance business in this country. In this instance a good intention has—as the oft-quoted saying goes—paved the road to hell.

The policymakers’ good intention was their desire to strengthen the domestic life insurance companies to a point where they would be able to meet the more intense foreign competition that was bound to result from Philippine membership of WTO (World Trade Organization) and the coming into existence of the Asean Economic Community.

The regulator of the Philippine insurance industry—the Insurance Commission (IC), a part of the Department of Finance (DoF) family of agencies—appreciated that there could be no strengthening of the Philippine insurance industry without a firming up of the equity structures of the Filipino life insurance companies. Accordingly, it issued a circular requiring all those companies to raise their paid-in capital to a certain minimum amount. The capital buildup was to be completed by a certain date, failing which the Filipino life insurance companies would lose their operating licenses.

In essence, DoF and IC acted in a comprehensible manner in requiring the Filipino life insurance companies to undergo a capital buildup program. Meeting intensified foreign competition does, after all, require the infusion of additional equity into their companies by the owners. If the required additional capital infusion had been within the owners’ capabilities, there would have been no problem and the need-to-meet-foreign-competition issue would have been addressed.

Unfortunately that is not how things happened. DOF/IC set the levels for the required additional-capital infusion so high—several hundreds of million pesos in some instances—that the Filipino-owned life insurance companies began to ask themselves if the government wanted them to stay in business. In truth, hardly any of the Filipino life insurance companies has been in a position to produce the additional equity required by DoF/IC. And even if by one means or another—including borrowing—they were capable of raising the required additional capital, the Filipino life insurance companies have been wondering whether it would be worthwhile for them to comply with a new requirement of a government that they consider insensitive and uncaring.

Being unable—or, in one or two cases, unwilling—to comply with the government’s capital buildup program, a succession of Filipino life insurance companies has chosen to get out of an industry that they love and that has been remunerative for them. Their ranks are gradually being depleted by receiverships and liquidations.

A case in point is Philippine Prudential Life Insurance Co., a company founded around 50 years ago by Daniel L. Mercado, a US-trained actuary. Being unable to raise the required additional-capital infusion, the company is now in receivership. It is so sad that in the twilight of his years Mr. Mercado should contemplate the progressive demise—due to a government policy change—of a company that he brought to life and had nurtured all these years.

Back to the point I made at the outset about the tricky character of government policymaking. Must a well-intentioned change in government policy toward an industry give rise to negative effects down the line in the same industry? In the case of the Filipino-owned life insurance companies, might the desired strengthening of the Philippine insurance industry have been accomplished without killing off life insurance companies that were founded with Filipino capital, were nurtured by Filipino professionals and have not been a burden on this country’s taxpayers?

My answer is an emphatic Yes.