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Year, 2

Chapter III Business of Insurance

Title 4 Investments
(Sections 198 to 209)

Investments by Insurance Companies
1. Nature of permanent contracts and long-term securities are, therefore suitable for
the greater part of the life insurance fund.
2. Well spread in order to smooth out market fluctuations.
3. Not limited to stock exchange securities.

Investment of the Amount of Increase of Paid-Up Capital or Assets
1. Domestic insurance company
2. Domestic professional reinsurer
3. Foreign insurance company or foreign professional insurer
4. New insurance company or professional reinsurer.

Investment of Legal Reserve
1. The amount corresponding to the aforementioned legal reserve shall be invested as
a. In the case of a domestic company
i. Investment in the lot and building- not more than 20% of the net worth
of such company.
ii. Any registered enterprise - not exceed 20% of the paid-up capital of the
registered enterprise excluding the intended investment.
b. In the case of a foreign company
i. Twenty per centum (20%) of the net worth or twenty per centum (20%)
of the paid-up capital of the issuing company, whichever is the lesser.
2. The full amount of the legal reserve required.

Foreign Currency Denominated Investments
1. The following such investments may be allowed:
a. Issues of the Philippine government or Philippine government-owned or
controlled corporations;
b. Issues of Philippine private corporations provided they shall have a credit
rating of at least BB+ or its equivalent;
c. Issues of foreign governments provided these shall have a credit rating of
BB+ or better as rated by an international credit rating agency acceptable to
the Insurance Commission;
d. Issues of foreign corporations provided these shall have a credit rating of at
least BBB as rated by an international credit rating agency acceptable to the
Insurance Commission;
e. Loans against mortgages on real properties outside the Philippines
f. Loans guaranteed by banks of foreign countries;
g. Investments in venture capital which shall be considered as surplus

2. Reserves and other liabilities in a foreign currency must be matched with assets in
the same currency to at least 50%.

Necessity of Approval by the Insurance Commission
1. Investments not subject to approval investments that includes:
a. First mortgage loans
b. Policy loans (for life companies)
c. Purchase money mortgages
d. Real or personal property acquired by reason of loan
e. Lot and building for office use
f. Bonds of the government and government-owned or controlled corporation
g. Bonds
h. Preferred stocks and common stocks of solvent corporations
i. Securities issued by enterprises registered under RA No. 5186 (Investments
Incentives Act)
2. Investments subject to approval
a. Such other securities as may be approved by the Commissioner Section
b. (1) invest in equities of other financial institutions and (2) engage in the buying
and selling of short-term debt instruments Section 201
c. securities issued by any registered enterprise in such amounts as may be
approved by the Commissioner (reserve and surplus investments of life
insurance companies). Section 206
d. Only for investments in excess of the 20%-20% limitations set forth therein
Sections 191, 193, 204 and 205
e. transactions between a controlled insurer and any person in its holding
company systemloans or extensions of credit, or investments, involving 5%, or
more of the insurers admitted assets as of the thirty-first day of December next
preceding Section 291

1. For life insurance companies:
a. all investments not requiring prior approval are considered as reserve
b. all investments subject to approval by the Insurance Commission are
considered/qualified as either reserve or surplus investment.
2. For non-life insurance companies:
a. Only investments made under Sections 200 and 204 which do not require
prior approval are considered/qualified as reserve investments.
b. Investments made under Sections 198, 201, 200(2)(a) (in excess of 20%-
20% limitation) are qualified as surplus investments.

Dual Nature of the Business of Insurance

GENERAL RULE: No one would buy insurance from a company that does not
have a substantial net worth in assets over and above its current premium
income. These assets must be invested and must produce an investment income

EXCEPTION: For small mutual associations operating on a cooperative basis, the
business of insurance is necessarily a combination of the business of
underwriting and the business of investment.

Title 5 Reserves
(Sections 210 to 214)

Reserves in General modern statutes require insurers to maintain reserves to assure the
payment of losses covered by their policies and the return of unearned premiums.

Reserve or Reserves means a sum of money variously computed or estimated, which,
with accretions from interest, is set asided.

Reserved as a fund with which to mature or liquidate either by payment or reinsurance
with other companies, future unaccrued and contingent claims accrued but contingent and
indefinite as to amount or time of payment.

Reserves in life insurance
1. Aggregate net value of policies
2. Computation.
3. Purpose of a policy reserve calculation:
To arrive at a reasonable, usually conservative, estimate as to how much of the
existing assets must be conserved to assure payment of future policy benefits and
how much might be spent without endangering the companys ability to meet its
policy obligations.

Reserves in property insurance
1. Unearned premium reserve must at all times be adequate to pay a full proportionate
return premium to policyholders.
2. Loss reserve reserves must be set up to assure payment when loss occurred.
Valuation of reserves and cash surrender values in life policies
1. Reserve of a life insurance contract is a liability item representing the difference
between the actuarially determined value of future benefits payable and future
premiums receivable.
2. Cash surrender values in life insurance contracts represent the insurance companys
obligation to the policyowner in the event he desires to surrender the contract.

Nonforfeiture values on termination of life policies
1. Life insurance on the level premium basis
a. the premium in the early years is more than is necessary to cover mortality
b. the premium in the later years, it is less than is necessary to cover mortality
2. Recovery by policyholder of unabsorbed part of premiums already paid.
General Principle: An insurance company transacting any type of insurance, as one
contracting party, shall be left in as favorable a position following the termination of a
policy by a policyholder as it was prior thereto, and equity does not demand that the
seceding policyholder shall be in as favorable a position after termination as he was
prior thereto.

Title 7 Reinsurance Transactions
(Sections 216 to 222)

Power to engage in reinsurance business
General Rule: A corporation authorized in general terms to engage in the insurance
business may issue policies of reinsurance; hence, no empowering or validating
legislation is required.

Note: Mutual companies not given the specific power to reinsure risks, which power is
expressly given to stock companies, have no power to reinsure.

Ceding of excess risks
To foreign insurance or reinsurance companies/brokers not authorized to transact
business in the Philippines are required to show to the satisfaction of the Insurance
Commission that the Philippine market cannot provide the facilities sought abroad;
To insure observance of the requirement, such facultative reinsurance transactions
are now subject to the prior approval of the Office of the Insurance Commissioner.

Rules and Regulations on Reinsurance
1. Non-life:
a. Insurance companies whose treaty limits and premium cessions as of the 31
December of the preceding year.
b. Reinsurance abroad of Motor Car business.

2. Life:
a. Retention of a life insurance company on any one standard life insured.
b. Minimum retention on substandard lives.
c. No reinsurance.
d. Reinsurance treaties placed abroad.
e. Reinsurance abroad on other life insurance riders, group insurance and all other
life insurance business.

3. Facultative placements:
General rule: Before any insurance company enters into any kind of reinsurance treaty
or agreement involving remittances of foreign exchange with any other insurance
company or insurance broker, the prior approval of the treaty or agreement by the
Insurance Commission shall first be obtained.

Title 9 Policy Form
(Section 226 231)

Standardization of insurance contracts
1. Easier for consumers to study insurance contracts and to compare contracts issued by
different insurers.
2. Both insurers and insureds gain from greater meaning they can attach to court
interpretations of earlier contracts and from reduction of policy conflicts in adjusting
3. Competition and tradition favor some standardization.

Power to prescribe insurance contracts and standard policies
1. Part of power to regulate
2. Different types of control
a. Complete and compulsory standard policies
b. Required standard provision
c. Prohibited provisions
d. Optional forms filed in connection with rate filing and approval
3. Object
a. To protect the insured and other persons having claims
b. Protects honest and competent insurers against unfair competition
c. Insurer with restrictive clauses might escape any liability would bear the loss.
4. Effect of noncompliance with standard policy statutes.

Submission of policies for approval
1. Forms of policies
2. Contents of policies

Guidelines for foreign currency denominated insurance policies.
1. Shall be valued in the same currency used in the insurance policy
2. Booked in the currency stated in the underlying instrument/document.
3. Only cash holdings shall be allowed
4. Premium related taxes and documentary stamp taxes shall be based on the peso
5. Commission shall be paid
6. Policy benefits and claims payable in the currency of the insurance policy issued.
7. Premiums shall be billed in the same currency as the policy issued.
8. Income arising from foreign currency shall be recognized.
9. All foreign currency assets and liabilities shall be recorded.
10. The value of the foreign currency assets and liabilities shall be converted to Philippine
11. Fluctuation Reserve-Foreign Exchange
12. Realized foreign exchange gain or loss shall be recognized as income or loss
13. Balance sheet items in foreign currency shall be submitted with the Annual Statement.

General form of a life insurance policy
1. No standard form but must include certain standard provisions.
2. Important options and privileges given to policyholder
a. Stop or change premium payments
b. Change the recipients
c. Assign the contract rights
d. Change use of the dividends
e. Change to a different policy
f. Reinstate coverage
g. Take cash or loan values
h. Cancel the policy and received accumulated benefits in a variety ways
i. Use the policy proceeds

Major classes of life insurance
1. Individual insurance
2. Group insurance

Life insurance as property
1. Compared with other property
2. Guaranteed value at death
3. Significance

Protection function of life insurance
1. Pooling of risks
2. Prediction of number of death claims

Rights of insured under a lapsed life policy
1. Forfeiture
2. Extended insurance
3. Paid-up insurance

Title 11 Claims Settlement
Section 241 to 244

Claims settlement the indemnification of the toss of the insured.

Life Insurance Losses
1. Definiteness of death
2. Proof of death
3. Nature of claim
4. Income benefit provision

Time for Payment of Claims

Life Policies (Section 242) Non-Life Policies (Section 243)
Maturing upon the expiration of the
term the proceeds are immediately
payable to the insured, except if
proceeds are payable in installments
or annuities, which shall be paid as
they become due.
The proceeds shall be paid within 30
days after the receipt by the insurer
of proof of loss, and ascertainment of
the loss or damage by agreement of
the parties or by arbitration but not
later than 90 days from such receipt
of proof of loss, whether or not
ascertainment is had or made.
Maturing at the death of the insured,
occurring prior to the expiration of
the term stipulated the proceeds
are payable to the beneficiaries
within 60 days after presentation of
claim and filing of proof of death.

Effect where claim is fraudulent
Policy shall be forfeited if the claim for loss be in any respect fraudulent.

Damages Recoverable under Section 244
Attorneys fees
Expenses incurred by reason of unreasonable withholding
Interest at double the legal interest rate fixed by the Monetary Board
Amount of claim

Title 12 Examination of Companies

Examination of insurers
Continued solvency to meet their commitments (Section 246)
Checking of assets, liabilities and reserves is part of the procedure as well as a
review of almost all underwriting, investment, and claim practices.
Title 15 Proceedings Upon Insolvency
Sections 249 to 251

An insurer may be liquidated for a number of reasons including financial insolvency.
It may be voluntary in nature in order to effect a corporate reorganization or
o Insolvency as a ground for dissolution or forfeiture of charter
o What constitutes insolvency
o Irregularities a justification for dissolution
o Weight of Insurance Commissioners opinion on soundness of financial plan
o Receivership
o Rehabilitation of insolvent insurance companies
Action against receiver or liquidator not subjected to any action, claim or demand
by, or liability to, any person in respect of anything done or omitted to be done in
good faith.

Title 17 Mutualization of Stock Life Insurance Companies

Title 18 Withdrawal of Foreign Insurance Companies

Executed in writing, accompanied by evidence of due authority for such execution,
properly acknowledge
Publication of application for withdrawal daily for a period of one week in two
newspapers of general circulation
Discharge its liabilities to policyholders and creditors
Examination of the books and records of the withdrawing company
Pay expenses of such publication within 30 days after the presentation of the bill.

Title 20 Holding Companies
Holding companies any person who directly or indirectly controls any authorized
Control the possession directly or indirectly of the power to direct or cause direction
of the management and policies of an authorized insurer.

Prepared by:

Vinalou G. Vizcocho