UNDER Section 148 of Act 1459 (March 1, 1906), otherwise known as The Corporation Law, an insurance corporation must have a capital stock of “not less than P500,000” and “that 50 per centum of the whole stock has been actually subscribed, and that 50 per centum of the subscription has been actually paid in cash.” Thus, an insurance corporation must have at least P125,000 in paid-up capital (PUC). Section 148 further provides that the “whole subscribed capital stock of any fire and marine insurance corporation must be fully paid up in cash within one year after filing its articles of incorporation.”
In December 1914 Act 1459 was repealed by Act 2427, otherwise known as the Insurance Act. Section 196 of Act 2427 required that every insurance corporation shall “have a subscribed capital stock equal to at least P250,000, 50 per centum of which must be paid up in cash previous to the issuance of any policy, and the residue within 12 months from the date of filing its articles of incorporation.” The capitalization requirement under Act 2427 practically had no difference from that under Act 1459.
Presidential Decree (PD) 63, dated November 20, 1972, introduced an amendment to Act 2427. PD increased the PUC requirement to “at least P2 million.” For the first time, the secretary of finance was granted the power to “increase such minimum paid-up capital stock, under such terms and conditions as he may impose, to an amount which, in his opinion, would be sufficient to reasonably assure the solvency of the company and the safety of the interests of the people.”
The Insurance Act would subsequently be replaced by the Insurance Code, with the repeal of Act 2427 by PD 612, dated December 18, 1974, otherwise known as the Insurance Code. Under Section 188 of the Insurance Code, as amended by PD 1455 (June 11, 1978), a domestic insurance company shall be “possessed of a paid-up capital stock equal to at least P5 million.” The law provided for a staggered increase as follows: P3 million by December 31, 1978; P4 million by December 31, 1979; and P5 million by December 31, 1980. Once again, the secretary of finance was authorized, upon recommendation of the insurance commissioner, to increase the minimum PUC stock to “assure the safety of the interests of the policyholders and the public.”
Under Department Order (DO) 116-93, dated December 7, 1993, the minimum PUC for nonlife insurance companies was increased to P50 million and for life insurance companies, a minimum PUC and surplus of P50 million.
Exercising, once again, the powers granted under PD 612, or the Insurance Code, Secretary of Finance Margarito B. Teves, issued DO 27-06 on September 1, 2006, directing the graduated increase in capitalization requirements of all insurance companies. For domestic insurance companies, the PUC required was increased as follows: P50 million by December 31, 2006; P75 million by December 31, 2007; P100 million by December 31, 2008; P125 million by December 31, 2009; P175 million by December 31, 2010; and P250 million by December 31, 2011. DO 27-06 also imposed the minimum statutory net worth culminating to P500 million by December 31, 2011.
The issuance of DO 27-06 would be challenged in court, via a Petition for Certiorari and Prohibition, on the ground of unconstitutionality for being violative of due process and equal protection. The Court of Appeals dismissed the challenge on July 20, 2007 (Covenant Assurance Co. Inc. et al. v. Teves et al., CA G.R. SP No. 97041) and affirmed the constitutionality of DO 27-06. It was affirmed by the Supreme Court in Minute Resolutions (G.R. 181131) dated September 8, 2008 and December 15, 2008. On June 1, 2012, DO 15-2012 would be issued by Finance Secretary Cesar V. Purisima further increasing the PUC requirement. This again would be challenged before a lower court (Security Pacific Assurance Corp. et al. v. Purisima, et al., Civil Case Q-12-71404, QC, RTC). A writ of preliminary injunction would be issued by Branch 80 of Regional Trial Court in Quezon City against DO 15-2012 in an order dated December 5, 2012. The case, however, will be rendered moot with the passage of Republic Act (RA) 10607.
Almost simultaneous with the capital build-up requirement, the Insurance Commission directed, for the first time, the adoption of risk-based capital framework (MC 6-2006 and 7-2006) for all insurance companies. Eventually, MC 10-2006 was issued providing a “Consolidated Compliance Framework” and directing that the fixed capitalization requirement under DO 27-96 may be suspended on a year-to-year basis with respect to a particular insurance company should it comply with the prescribed RBC hurdle rate.
The PUC requirement under PD 1455 in 1978 would only be revised by law under RA 10607 on August 15, 2013. Under RA 10607, “new” domestic insurance companies should be “possessed of a paid-up capital equal to at least P1 billion. However, for those already doing business, meaning those already existing, the capital regime shifted from the PUC requirement to the net worth method. Thus, the following net worth was required: by June 30, 2013, P250,000,000; by December 31, 2016, P550,000,000; by December 31, 2019, P900,000,000; and by December 31, 2022, P1,300,000,000. Pursuant to Section 194, the net worth shall consist of: PUC; retained earnings; unimpaired surplus; and revaluation of assets.
The capital structure required for new companies and the net worth required for existing companies, may be reviewed every two years, upon order of the President.
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Dennis B. Funa is presently the deputy insurance commissioner for Legal Services of the Insurance Commission. E-mail: dennisfuna@yahoo.com