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BY DIANE CLAIRE J. JIAO, Reporter Insurers  appeal  rejected Higher capitalization requirements to take effect as scheduled A NONLIFE INDUSTRY APPEAL to suspend a  scheduled increase in capitalization requirements  has been turned down by the government, with  Cabinet officials saying doing so would  compromise the solvency of insurers and worse,  the public interest.  Insurance is a business of scale. It is highly capital intensive  to be able to answer the substantial risks it confronts each   business day, Finance Secretary Cesar V. Purisima said in a  letter to Mario C. Valdes, general manager of the Philippine  Insurers and Reinsurers Association (PIRA).  The industry organization, in an open letter to President  Benigno S. C. Aquino III that was published in broadsheets  yesterday, criticized the capitalization requirements as  “Insurance is a capital-intensive business and we want to make sure that when someone buys an insurance  policy… the company they buy it from has the wherewithal to protect them when the time comes,” he added.  Department Order 27-2006 requires all insurers to have a minimum paid-up capital of P175 million as of the end of  last year, to be deposited in banks this coming March and finalized on paper by June. The level must be increased  to P250 million by the end of this year. Mr. Purisima, in his letter to the PIRA, said insurance companies should be  solvent enough to cover the variety of risks they guarantee. Nonlife insurance, in particular, provides financial  protection against damage to property caused by events such as natural disasters, he said.  “Our primordial interest is to secure the investments of the insuring public — which number into millions — provide  better service to all stakeholders and enhance the solvency positions of the insurers,” Mr. Purisima said. The  PIRA’s Mr. Valdes, in the organization’s open letter, claimed “should the implementation…take place for 2011, only the big companies shall  remain, and the small- and medium-sized insurers…will be forced to close shop and cease operations.” This will  leave thousands of insurance employees  unemployed and kill the spirit of free enterprise in the country, he added.  Mr. Purisima, however, pointed out that the capital buildup schedule had been released as early as 2006, giving  insurers enough time to comply. “This did not come as a surprise to the companies. They have had sample time to prepare for this eventuality,” he  said. The Finance chief urged nonlife insurers to consider mergers so that funds can be pooled, which would allow  firms to easily follow the capitalization schedule. “They can form insurance cooperatives. In exchange, we are  considering extending tax exemptions to them,” Mr. Purisima said in a separate interview yesterday on the  sidelines of a media forum. PIRA spokesperson Michael F.Rellosa nixed the idea of mergers, however, telling  BusinessWorld that these are “good on paper but iffy on the ground.” “Nonlife insurers are mostly family-owned.  They are also in fierce competition with each other. There are issues. It’s hard to put them on the same table,” Mr.  Rellosa said in a telephone interview yesterday. He proposed that the Finance department instead consider shifting  from a fixed-rate capital system to a risk-based one. Bigger companies that take on bigger risks will have to  accumulate more capital, while smaller firms with lower risk profiles will not have disproportionate capital  requirements, he explained. “This is already used in other countries. It is a good way of  arriving at the financial  health of a company. It takes into consideration not just the risks that you cover, but also the ratio of receivables  and investments you hold and even who’s running your business.” The PIRA, said Mr. Rellosa, is also looking at  other means to have the order suspended. “We will exhaust all administrative means. We can go to the courts,” he  claimed. Lacson & Lacson Insurance Brokers, Inc. Managing Director Salvador L. Lacson, for his part, sided with  the government, warning that the Philippines already has one of the lowest capital requirements in the region.  “Insurers need strong financials due to the nature of their Heat from S1/1 business. The insuring public is not well  served if insurance companies are weak and small,” Mr. Lacson said in a text message. At P175 million or roughly  $4.6 million, the Philippines is a long way off the levels required by Malaysia ($33 million), Singapore ($20 million),  Indonesia ($12 million) and Thailand ($6.44 million), Finance department data showed. Mr. Carandang also noted  that domestic capital requirements were smaller compared to the rest of the region and that the capital adjustments  had long been discussed. He also denied that the policy was biased in favor of  larger insurers. —   with a report from Johanna Paola D. Poblete  discriminatory and unreasonable and called on the president  to intervene. Palace spokesman Ramon A.  Carandang, however, told BusinessWorld that Mr. Purisima had Malacaangs backing. We support the proposal of  Secretary Purisima; this is weighing the interest of the many, the insurees vis-a-vis the insurance companies, he  said.