ONE of the amendments introduced by the amended Insurance Code is the insertion of the word “cooperatives” in Section 190, which defines what juridical entities may become insurers. For the first time in Philippine insurance history, cooperatives were statutorily recognized as being legally capable of carrying out an insurance business. Thus, the birth of “cooperative insurance.”
As of the end of 2013, there are a total of 1,137 cooperatives registered with the Cooperative Development Authority (CDA). The Autonomous Region in Muslim Mindanao (ARMM) has the most number with 126, followed by Region 3 with 120, and by Region 4 with 119 cooperatives. There are, of course, other cooperatives that are not registered with the CDA. Of the total number of registered cooperatives, 278 can be classified as credit cooperatives, 247 as producer (or production) cooperatives, and 170 as consumer cooperatives. Some of these cooperatives, the exact number of which is undetermined, are engaged in informal insurance or insurance-like activities. By “informal”, we refer to those operating outside the regulatory jurisdiction of the Insurance Commission (IC). In other words, they are unlicensed and, therefore, unregulated. Thus, the term “informal insurers”.
With contributions sourced only from its members, cooperatives can most likely engage only in micro-insurance, which is also a statutory novelty in the amended Insurance Code. Under Sections 187 and 188 of Title 6 of the amended Insurance Code, micro-insurance is where the “amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed seven-and-a- half percent [7.5%] of the current daily minimum wage rate for non-agriculture workers in Metro Manila” and the “maximum sum of guaranteed benefits is not more than 1,000 times of the current daily minimum wage rate for non-agricultural workers in Metro Manila.”
There are several modes by which these informal insurers may be licensed as insurers under the amended Insurance Code. First, as a regular insurance company in which case it will have to comply with the P1-billion capitalization requirement. If, however, it will engage in micro-insurance, it may avail of the capital incentive under a Department of Finance department order which reduces such requirement by 50 percent. Second, which is the more feasible route, is the registration of the cooperative into a Mutual Benefit Association (MBA) under Sections 403 to 423 of the amended Insurance Code. The other modes should include the affiliation of a cooperative with an existing MBA or a cooperative insurance society. This process of conversion into regulated and licensed entities is the process of “formalization”.
Recognizing the challenge posed by these informal insurers, the IC, the CDA, and the Securities and Exchange Commission (SEC) issued Joint Memorandum Circular (JMC) 01-2010, dated January 29, 2010 (Defining Government’s Policy on Informal Issuance Activities), directing the termination of all “informal insurance or insurance-like activities within one year from the effectivity” of the circular. The circular was to take effect 15 days after publication in a newspaper.
JMC 01-2010 recognized that the primary challenge posed by informal insurers is the threat faced by “the general public from unsafe and unsound insurance and informal risk-protection schemes.” Thus, the joint circular required all informal insurers “to secure a Certificate of Authority from the Insurance Commission, within two years from the effectivity of the circular.” The three agencies committed to “undertake the necessary measures including the issuance of cease and desist orders, after due notice and hearing, to ensure that insurance providers are operating within the provisions of the Insurance Code.”
JMC 01-2010 expressly excluded certain risk pooling activities from the definition of insurance such as the concept of damayan or abuloy where “individuals or group of individuals voluntarily pledge and contribute a certain amount of money to a fund and the benefits are not predetermined but are contingent to the amounts collected.”
On June 25, 2010, Joint IC-CDA-SEC Memorandum Circular 02-2010 was issued to deal with the “pool of funds” collected by informal insurers in their transition to formalization. It was directed that they be utilized as premium payments for those transitioning to formal insurance and as contributions for those transitioning toward licensed MBAs. It also prescribed the courses of action which may be taken against those that will not heed the call to formalize, i.e., revocation proceedings before either the SEC or CDA, without prejudice to administrative and criminal sanctions and actions under the Insurance Code.
With poor compliance toward formalization, JMC 01-2011 was issued extending the deadline to December 31, 2011. JMC 02-2011 was issued on December 12, 2011, reminding the target entities of the impending deadline. Notwithstanding, the challenge of informal insurers continues to this day.
It should also be pointed out that Republic Act (RA) 9520, otherwise known as the “Philippine Cooperative Code of 2008,” expressly recognizes that a cooperative may be organized to engage in insurance business (Article 6 [9]) and to engage in insurance activities for its members (Article 6 [7]). If so, it will be classified as a service cooperative (Article 23 [e]) which should be distinguished from an insurance cooperative which is “engaged in the business of insuring life and property of cooperatives and their members” (Article 23 [9]).
Under Article 105 of RA 9520, “[e]xisting cooperatives may organize themselves into a cooperative insurance entity [cooperative insurance society] for the purpose of engaging in the business of insuring life and property of cooperatives and their members.”
Under Article 106 of RA 9520, “cooperative insurance societies shall provide its constituting members different types of insurance coverage.” As mandated by Article 107, the insurance laws “shall apply to cooperative insurance entities organized under this code” and that “the requirements on capitalization, investments and reserves of insurance firms may be liberally modified upon consultation with the authority [CDA] and the cooperative sector, but in no case may the requirements be reduced to less than half of those provided for under the Insurance Code and other related laws.”
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Dennis B. Funa is the Insurance Commission’s deputy commissioner for legal services. Send comments to dennisfuna@yahoo.com.