Mergers and consolidations are becoming a key item to consider for senior insurance executives. According to data from the Insurance Commission, the number of life insurance players has decreased to 31 in 2014 from 33 in 2011. In nonlife, the decline is more apparent, with 70 firms last year compared with 83 in 2011.
One of the major reasons why insurance companies pursue such deals is the higher capital requirement imposed by the Insurance Commission. Currently, a domestic insurer is required to have a net worth of P250 million, which is due to be increased to P1.3 billion by 2022.
This higher capitalization requirement is happening against the backdrop of Association of Southeast Asian Nations (ASEAN) economic integration, were barriers to trade and investment are expected to be liberalized to facilitate entry of investment, improve the competitiveness of insurance companies, and boost economic activity within the region. This is in line with the ASEAN Economic Community’s aim to have a semi-integrated financial market by 2020.
As a result, small insurance companies may not be able to compete with the well-established local insurance firms and the foreseeable entry of more foreign insurance companies. Hence, small players are now encouraged to merge and consolidate in order to meet the minimum capitalization requirement and to sustain their respective businesses.
The Insurance Commission issued Circular Letter No. 2015-11 in March to clarify the rules and regulations covering merger deals. The salient features of the circular are provided below:
1. Domestic insurance companies that are planning to merge or consolidate are required to notify the Commission in writing at least 30 days prior to any board action to approve any Plan of Merger/Consolidation. The Plan must be submitted to the stockholders or members for their approval. Once approved, all policyholders and creditors must be notified within 20 days from the execution of the agreement.
2. The company to be dissolved or absorbed must discharge all its accrued liabilities; otherwise, such liabilities (with the consent of creditors) will be assumed by the absorbing or acquiring company. For policies that are subject to cancellation by the company to be absorbed, the same must be cancelled pursuant to the terms of such policies. Such proof of discharge must be in writing and submitted to the Insurance Commission for review.
3. The Commissioner shall approve or deny the Plan and Articles of Merger/Consolidation based on his assessment of the financial condition of the concerned insurance companies. Once approved, the insurance companies must submit the Articles, including the endorsement of the Commissioner, to the Securities and Exchange Commission (SEC).
4. Once the approval of the SEC is secured, the constituent insurance companies must surrender their certificates of authority to transact insurance business, and the surviving entity (or the newly-formed company in case of consolidations) must secure a new certificate of authority to transact insurance business.
5. All proposed mergers and consolidations must be completed within 12 months from the time of notice to the Insurance Commission. However, requests for extension may be granted if filed before the end of the 12-month period.
The circular highlights the responsibility of insurance firms to inform their policyholders and creditors of any merger or consolidation plan. Policyholders and creditors will this be well-informed of developments, thereby ensuring transparency and protection of public interest. Further, a two-tiered review and approval process by the Insurance Commission and SEC must be undertaken before the unification can take effect.
With ASEAN integration and higher capital requirements looming, it makes sense for small insurance players to combine their resources for sustainability, especially since the insurance industry is considered one of the pillars of our financial system and national development. In addition, the prospect of an expanded cross-border market likewise makes mergers and consolidations attractive for insurance companies seeking a competitive position. This approach enhances the competitiveness of the industry and helps to ensure sufficient protections for the insuring public.
In the race to the finish line, insurance companies do understand that synergy of resources is the way to go. Indeed, size does matter.
Diberjohn P. Balinas is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
source: Businessworld
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