The Philippine Insurance Commission's (IC) recent withdrawal of a proposal to hold the minimum net worth requirement of local insurance companies' at PHP 900 million (USD 18.6 million) is expected to have a mixed impact on the overall insurance industry over the short to medium term, according to AM Best.
AM Best notes that the Department of Finance maintains its long-term objective to strengthen the Philippines’ insurance industry.
Under the Insurance Code, existing local insurance companies had to meet the PHP 900 million capital requirement by 31 December 2019, while new entrants to the market are required to have PHP 1 billion in paid-up capital.
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The requirement not only prompted capital injections in the market to strengthen the insurers’ capitalisation, but also led to increased M&A activity in Philippines’ highly fragmented insurance market.
However, in view of the economic fallout from COVID-19, AM Best notes that there is a possibility that M&A momentum and the impetus to shore up capital positions may falter over the near term.
The government, through the Department of Finance, maintains its requirement for all insurers to have a minimum net worth of at least PHP 1.3 billion by 31 December 2022, despite the IC’s recent proposal to hold the minimum requirement at the existing level of PHP 900 million.
Over the near to intermediate term, the recent rejection of a relaxation in minimum capital requirements is likely to pose continuing challenges to many local insurers that are facing significant pressure on underwriting growth and profitability amid the ongoing COVID-19 pandemic.
As such, the balancing of priorities such as meeting licensing requirements and ensuring business survival during this critical period, which may be prolonged, is a difficult task for which a number of insurance companies will require further support from the regulator.
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Many small- and medium-sized companies will need to bolster their capital bases to comply with the increasing minimum net worth requirements and given the remaining time period, AM Best expects that this will likely be achieved through capital raises with new/existing shareholders, rather than through internal capital generation.
AM Best anticipates some potential M&A activity to also arise in the Philippine insurance market in the run up to the end of 2022, which will be credit positive for the overall industry.
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