CHAPTER 11: INSURANCE COMPANIES

11.1 The Insurance Industry

Introduction to Insurance

It is a generally acknowledged phenomenon that there are enormous risks in every sphere of
life. For property, there are fire risks; for shipment of goods, there are perils of sea; for human
life, there are risks of death or disability; and so on. The chances of occurrences of the events
causing losses are quite uncertain because these may or may not take place. In other words,
our life and property are not safe and there is always a risk of losing it.

Insurance is an important aid to commerce and industry. Every business enterprise involves
large number of risks and uncertainties. It may involve risk to premises, plant and machinery,
raw material and other things. Goods may be damaged or may be destroyed due to fire or
flood. Some risk can be avoided by timely precautions and some are unavoidable and are
beyond the control of a business. These unavoidable risks can be protected by insurance.

Definition of Insurance

Insurance is defined as a social promise where an insurance company provides financial

compensation for the larger number of risks and uncertainties. It may involve risk to raw
material, premises, plant, and machinery, and illness or death, in return for payment of a
specified amount called premium.

Insurance refers to a contractual arrangement in which one party, i.e. insurance company or the
insurer, agrees to compensate the loss or damage sustained to another party, i.e. the insured,
by paying a definite amount, in exchange for an adequate consideration called as premium.

It is often represented by an insurance policy, wherein the insured gets financial protection from
the insurer against losses due to the occurrence of any event which is not under the control of
the insured.

Insurance Industry

The phrase insurance industry can be used to describe the entire insurance provider arena or
an individual or group product-based sector of the insurance market. The insurance market is
where insurance providers and buyers come together. It comprises of all the insurance

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companies active in a particular country. It offers risk management against contingency or
uncertain losses. There are common terms includes in the industry:

1. The entity which offers insurance is called an insurer and the person Who buys insurance is
called insured.

2. The insured pays a small premium to the insurer, in return for covering a major loss.
Insurance industry has played an important role in developing the habit of savings among the
general public.

Common Reasons For Insurance

There are literally endless eventualities that may cause people, businesses, or other entities
significant financial losses. Below is a list of the most common reasons people seek insurance:

Homes, households & families

 Protecting a household after somebody’s death from loss of income.

 Protecting the contents of your home from theft, flood, hurricane, earthquake, and other
hazards.
 Protection for the insured and family members against unexpected health expenses.
 A policy to cover the costs of a funeral. This is one of the oldest types of insurance there
are, dating back to Ancient Greek and Roman times.
 Protecting yourself on legal claims made against you. We call this liability insurance.

Vehicles

 Getting cover for losses the policyholder incurs because of car accidents.
 Protecting your vehicle against theft, fire or flood.

Businesses

 Protecting your business from loss of income or interruption of business.

 Key employee cover, i.e. protecting your business if you lose a key employee.
 Protection from lawsuits.
 Protecting cargo during a sea voyage – a voyage policy.

Principles of Insurance

In order for the relationship between the insurer and the insured to work, the following certain
important principles that must be upheld:

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1. Indemnity - the principle of indemnity ensures that an insurance contract protects you
from and compensates you for any damage, loss, or injury. The purpose of an insurance
contract is to make you "whole" in the event of a loss, not to allow you to make a profit.
Thus, the amount of your compensation for a loss is directly related to the amount of
loss that you actually suffered.
2. Contribution - contribution is a similar principle to indemnity, and it applies to situations
where you have more than one insurance policy for the same asset or entity. For
example, imagine that you own a truck that is insured by both Company A and Company
B. If another driver hits your truck and it will cost you $5,000 to fix it, you can submit your
claim to Company A, Company B, or to both companies. If Company A compensates you
fully, then it can claim a proportionate contribution from Company B. However, if both
companies compensate you fully, you can't keep the full amount and turn a profit,
because this would amount to an unfair windfall.
3. Insurable Interest - the insurable interest principle requires that the owner of a
particular insurance policy have an ownership interest in the particular subject matter of
the insurance policy. For example, the owner of a hot dog cart has an insurable interest
in the cart because he owns it and is earning money from it. However, if he sells the hot
dog cart, this means he will no longer have an insurable interest in it. Creditors also have
an insurable interest in debt. The absence of an insurable interest can make the
insurance policy in question null and void.
4. Subrogation - subrogation means that one party stands in for another. In the insurance
context, subrogation will arise if you are injured by a negligent third party, and your
insurance company reimburses you for your damages. Under the principle of
subrogation, your insurance company can stand in your shoes and recover the pay-out
from the negligent party. The goal of this principle is to encourage responsibility and
accountability by holding negligent parties responsible for injuries they cause.
5. Loss Minimization - as the owner of an insurance policy, you have an obligation to
take necessary steps to minimize the loss of your insured property. The law doesn't
allow you to be negligent or irresponsible just because you know you're insured. For
example, if a fire breaks out in your kitchen, you have an obligation to take reasonable
steps to put it out, like using a fire extinguisher or calling the fire department. You can't
just stand back and allow the fire to burn down your house because you know that
insurance will pay for it.
6. Proximate Cause - the principle of proximate cause, or nearest cause, comes into play
when more than one event or bad actor causes an accident or injury. An example would
be if two separate landowners carelessly burn piles of leaves, and the fires eventually

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 join together and burn down your house. The insurance principle of proximate cause
dictates that nearest or closest cause should be taken into consideration to decide the
liability.
7. Utmost Good Faith - insurance contracts also require that both parties act with the
utmost good faith. This means that both parties must accurately and fully disclose all
material information. This not only ensures fairness, but also helps insurance companies
accurately price premiums for insurance applicants. Insurance policies can be declared
null and void if an applicant made a misrepresentation of material fact that was relied on
by the insurance company.

11.2 Life Insurance Companies

Life insurance is a contract between an insurer and a policyholder in which the insurer
guarantees payment of a death benefit to named beneficiaries upon the death of the insured.
The insurance company promises a death benefit in consideration of the payment of premium
by the insured.

The purpose of life insurance is to provide financial protection to surviving dependents after the
death of an insured. It is essential for applicants to analyze their financial situation and
determine the standard of living needed for their surviving dependents before purchasing a life
insurance policy. Life insurance agents or brokers are instrumental in assessing needs and
establishing the type of life insurance most suitable to address those needs.

Common Features of Life Insurance

No matter what type of policy you buy, life insurance consists of these four components:

 Policyholder - the person who owns the life insurance policy. Typically, if the
policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on
someone else.
 Beneficiary - the person, people or institution(s) that receive money if the policyholder
dies. There can be more than one beneficiary named on the policy.
 Premium - the money paid monthly or annually to keep a policy active (or “in-force”). If
you stop paying premiums, the policy lapses.
 Death benefit - the money paid out upon the event of the policyholder. Life insurance
goes into effect as soon as you make your first premium payment, meaning you’re
eligible for the death benefit as soon as the policy is in force.

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Life Insurance Types

Three main types of life insurance in the Philippines are available to choose from: term life,
whole life, and VUL.

1. Term life insurance. Provides only death benefit payment for a fixed period ranging
from one to 30 years. If the policyholder does not die within the term period, the
coverage ends and the insured gets nothing. Being a pure life insurance, term life is one
of the cheapest life insurance types in the. Philippines.
2. Whole life insurance. Provides lifelong coverage or until the insured is 100 years old,
with a death benefit and an investment component. Because it earns dividends, the
policyholder can borrow or withdraw cash, partially or fully, for any purpose. The
premium stays the same throughout the duration of the insurance policy.
3. Variable universal life insurance (VUL). Provides death, disability, and living benefits
with an investment component. VUL insurance is quite similar to whole life insurance,
except that the policyholder can choose to invest in various assets, including bonds,
stocks, and money market funds.

11.3. Property Casualty Insurance Company

Property insurance and casualty insurance (also known as P&C insurance) is actually an
umbrella term which includes many forms of insurance. It offers financial protection against
damage or loss to property or people caused by accidents, natural disasters, or from the action
of others.

The Property portion of P&C insurance refers to coverage for personal belongings and property
in the event that they are damaged or stolen. Most property is covered against things like theft,
vandalism, fire, and weather.

The Casualty portion of P&C insurance refers to coverage for incidents in which you are legally
liable for property damage or injury caused to another party. Your liability is covered in and out
of court by your insurance company when you are considered liable or negligent during a crash
or incident at your home. Liability is often referred to as “Third Party” coverage.

Property and casualty insurance are typically bundled together into one insurance policy. For
example:

 Homeowners Insurance

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  Car Insurance
 Condo Insurance
 Renters Insurance
 Power Sports Insurance
 Landlord Insurance

11.4 Regulation of Insurance Companies

Insurance is closely regulated for the good of the insurance industry and the general public.
Each state has its own laws and regulations to regulate the insurance business conducted
within its boundaries .Each state has an insurance department headed by an official charged
with the responsibility for controlling insurance matters within that state. These officials are
called directors, superintendents, or commissioners of insurance, depending on the state where
they hold office, but they all perform similar duties. The term "commissioner" applies in most
states.

Regulation of Companies

State regulation of insurance companies affects numerous aspects of their formation and
operations, ranging from capital and surplus requirements to investment and marketing
practices. State laws require the reporting of financial data and payment of premium taxes, and
specifically prohibit a number of unfair or deceptive practices.

Admitted and Non-admitted Companies

One of the duties of an insurance department is to determine which insurance companies will be
allowed to do business in the state. A company that meets the insurance department's
standards and is authorized to do business in a state is called an admitted or authorized insurer.
An insurance company that is not authorized to do business in a state is a non-admitted or
unauthorized insurer. A non-admitted insurer can only do business in the state under special
circumstances.
Domestic, Foreign, and Alien Companies
Although a company can conduct business in several states, it is formed and incorporated in
only one state. Within its home state, an insurance company is known as a domestic company.
Within states other than the state in which it is incorporated, an insurance company is a foreign

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company. A company that is incorporated in a country other than the home state, but doing
business in the states, is known as an alien company.

Financial Regulation
In addition to examining and authorizing companies to conduct business within the state, the
state insurance department keeps close watch over the financial health of all companies doing
business within its boundaries.

Various regulations are designed to preserve insurance company solvency, to detect financial
problems, and to protect insured in the event that insolvency occurs. State laws impose capital
and surplus requirements on insurers, require the preparation of annual financial statements,
and require periodic examinations of insurers. These laws establish initial financial requirements
and help in the early detection of financial problems. If an insurer falls into a hazardous financial
condition, the insurance department attempts to rehabilitate the company. If an insurer becomes
insolvent, the insurance department will handle the liquidation.

In many states, the public is also protected by one or more insurance guaranty associations that
provide funds for payment of unpaid claims when an insurer becomes insolvent.

Regulation of Agents
Many insurance regulations are directed toward governing the qualification and behavior of
insurance agents. As the primary source of contact between insurance companies and
members of the general public, it is important that agents be properly educated and act in an
ethical and professional manner.

Licensing
The state insurance department devotes much of its time to working with insurance agents. One
of its most important duties with regard to agents is licensing. It is illegal for someone to sell
insurance without first obtaining a license from the state to do so.

An agent may only offer insurance in the states where he or she holds the proper license. For
example, an agent who is licensed to sell insurance only in his or her resident state of Indiana
could not provide insurance on an Indiana customer's lake home located in Michigan. However,
the Indiana agent could obtain a nonresident agent license from Michigan, and in that case he
or she could sell coverage on property located in that other state.

Codes Regulating Agents

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In addition to licensing, the state is responsible for the way agents conduct business within the
state. State insurance codes are very specific about the standards agents must meet.

A fiduciary is a person who stands in a special relationship of trust to another person. Agents
have fiduciary duties toward their clients, especially regarding the handling of premiums.

Agents cannot misrepresent or falsely advertise the terms or benefits of a policy or the financial
condition of the company. Agents must make complete, accurate statements about the product
being sold.

Twisting is a form of misrepresentation in which the agent convinces the client to cancel
already existing insurance and buy another policy from the agent, to the detriment of the
insured. Twisting is illegal.

Rebating is giving or offering some benefit other than those specified in the policy such as
cash, gifts, or securities to induce a customer to buy insurance. For example, an agent might
kick back part of a commission to the customer, thus lowering the price of the insurance in
return for the business. Rebating is illegal in all but two states.

Rating Organizations

Some states establish their own rates for certain types of insurance and require all companies
to use these mandatory rates. For most types of insurance, however, the company must
establish the rates and submit them to the state.

Rate-making involves collecting extensive and accurate financial, operational, premium, and
loss records. To assist the insurance company in collecting these statistics, certain central
service bureaus have been established. These organizations made up of numerous individual
insurance companies gather, pool, and analyze statistics from all the member companies. The
bureau then establishes loss costs based on these combined figures and files them with
individual states. Loss costs represent the key component of an insurance rate how much an
insurance company needs to collect to cover expected losses.

Member companies can use these loss costs combined with factors covering their own
expenses and profit margins to establish finished rates. Companies must file rates with the state
but can do this by referencing the service bureau's loss costs and filing their own individual

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factors reflecting expenses and profit. Some companies do not belong to a service organization
and collect their own statistics and file independently.

Companies that use bureau filings sometimes deviate from the published rates by charging
something either higher or lower than the recommended rate. Deviations are usually permitted
within a specified range, provided that the insurer is consistent in applying the same deviation to
all similar risks.

One of the largest services bureaus is the Insurance Services Office, commonly referred to as
ISO, which files both loss costs and standardized forms on behalf of its member companies.
The National Council on Compensation Insurance, Inc. (NCCI) is a rating bureau that has
jurisdiction over the workers compensation field. The Surety Association Of America functions
as a rating bureau for surety bonds. There are numerous other rating bureaus.

Enforcement
An important area of regulatory responsibility for the state insurance departments is
enforcement of the many laws and rules that apply to the conduct of the companies, agents,
and types of insurance transacted within the state. The department is responsible for seeing
that the insurance business within its jurisdiction operates in compliance with these codes and
standards. Reported violations must be investigated, and appropriate penalties assessed.
Violations can result in fines, license suspension or revocation, suspension or revocation of a
company's authority to do business in the state, and, in some cases, imprisonment.

Federal Regulation
Although most insurance operations are regulated by the states, there are some areas where
the federal government has exercised its regulatory authority. For example, federal law imposes
penalties for fraud and false statements made in connection with insurance transactions.
Anyone engaged in the insurance business who makes a false material statement or report or
willfully and materially overvalues any land, property, or security in connection with financial
reports or documents presented to an insurance regulatory official or agency for the purpose of
influencing their actions can be subject to punishment. Any insurance officer, director, or agent
who willfully embezzles, abstracts, purloins, or misappropriates any of the moneys, funds,
premiums, credits, or other property of an insurer can be punished accordingly. Punishments
can consist of substantial fines and/or periods of imprisonment for up to 10 years.

11.5 Pension Funds

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Pension funds are collective investment undertakings (UCITs) that manage employee savings
and retirement. Their primary objective is to provide pensioners who have reached retirement
age with income in the form of a lifetime pension or capital. Unlike public pension funds
managed on a pay-as-you-go basis, pension funds are managed by capitalization.

When members reach retirement age, they are provided with either an annuity or a capital paid
by the fund.

At the core of pension fund operations are three types of activity: premium collection,
investment of sums collected, benefits paid.

Public pension funds vs. Private pension funds

In a public pension fund referred to as a pay-as-you-go pension plan, contributions paid by the
assets are designed to pay pensions for retirees. This system, which is generally compulsory,
rests on inter-generational solidarity. Being very vulnerable to unemployment and demographic
changes, the financial balance of the system depends on the ratio of the number of contributors
to that of the pensioners.

Unlike this system, private pension funds or fully-funded pension plan is often individual and
voluntary, allowing working people to set up their own retirement. They save during their working
lives to insure their old age. The contributions received are the subject of financial investments.
The return on these investments depends primarily on market developments.

11.6 Types of Pension Funds

Pension funds can offer two types of contract: the defined benefit contract and the defined
contribution contract.

Defined benefit pension plan

As conveyed by its name, this plan defines the benefits that will be paid to the future pensioner
as soon as the contract is signed. These benefits are therefore guaranteed, regardless of
investment returns and market conditions.

The amount of the contributions is not defined when the contract is concluded. It varies
according to market conditions and interest rate fluctuations.

This pension plan is generally made available only to employees. Companies undertake to offer
it to their employees, bearing the risk of an increase in contributions.

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Defined contribution (DC) plans

Unlike defined benefit plans, people who have signed a defined contribution contract, whether
they are wage earners or self-employed, do not know the amount of benefits they will receive on
retirement. Benefits depend on market conditions and investment returns. On the other hand,
the amount of contributions is known in advance. With this kind of contract, the risk of
investment is borne by the contractor.

11.7 Pension Funds Regulations

Definition

 Creating rules to protect the money in pension funds from being stolen.
 Setting standards to be sure that pension fund managers have the highest ethical
standards.
 Carefully watching the activities to pension fund managers to be sure they follow the
rules.
 Imposing penalties when the rules are not followed.
 Intervening on behalf of individual workers to be sure their pension is safe.

Why is pension fund regulation required?

 Most workers would not understand when their pension savings is at risk.
 Stronger rules are required for pension funds than for other types of financial institutions.
 Workers will not speak up to protect their rights because they may be afraid they will
lose their job.
 Providing tax incentives for retirement savings means stronger rules are required.
 Pensions are more complicated than other kinds of financial products.

CHAPTER 12: INVESTMENT FUNDS AND FINANCIAL CONGLOMERATES

12.1 Investment Funds

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An investment fund is a supply of capital belonging to numerous investors used to collectively
purchase securities while each investor retains ownership and control of his own shares. An
investment fund provides a broader selection of investment opportunities, greater management
expertise and lower investment fees than investors might be able to obtain on their own. Types
of investment funds include:

1. Mutual Funds - is a type of financial vehicle made up of a pool of money collected from
many investors to invest in securities such as stocks, bonds, money market instruments, and
other assets. Mutual funds are operated by professional money managers, who allocate the
fund's assets and attempt to produce capital gains or income for the fund's investors.

Mutual funds work like unit investment trust funds (UITFs). The only differences between these
two investment vehicles are the companies that offer them and government agencies that
regulate them. Insurance providers and brokerage companies manage mutual funds, while
banks handle UITFs. The Securities and Exchange Commission (SEC) regulates mutual funds
companies in the Philippines. For UITFs, the regulatory body is the Bangko Sentral ng Pilipinas
(BSP).

 Types of Mutual Funds in the Philippines

o Bond Funds - Bond funds typically pay periodic dividends that include interest
payments on the fund's underlying securities plus periodic realized capital appreciation.
Ideal for: Low to moderate-risk investors who want to protect their savings against
inflation while earning higher profits than time deposits and money market investments
Where the funds are invested: Fixed-income, long-term securities such as Philippine
treasury notes and other government bonds and corporate bonds
Investment horizon: Medium to long-term (One to three years)

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 Goal: Capital preservation
Risk appetite: Conservative to moderate
o Equity Funds - is a mutual fund that invests principally in stocks. It can be actively or
passively (index fund) managed. Equity funds are also known as stock funds.
Ideal for: High-risk investors with experience in stock market investing who want to
maximize their profits
Where the funds are invested: Shares of stocks listed in the Philippine Stock Exchange
Investment horizon: Long-term (Five years or longer)
Goal: Long-term capital growth
Risk appetite: Aggressive
o Balanced Funds - is another option for intermediate-term investors. Balanced funds,
which are often called hybrid funds, own both stocks and bonds. They earn the
"balanced" moniker by keeping the balance between the two asset classes pretty steady,
usually placing about 60% of their assets in stocks and 40% in bonds.
Ideal for: Low to moderate-risk investors who want to earn a bit higher profits than bond
funds
Where the funds are invested: A mix of shares of stocks and bonds (typically 60% stocks
and 40% bonds)
Investment horizon: Medium to long-term (Three to five years)
Goal: Medium to long-term capital growth
Risk appetite: Conservative to moderate
o Money Market Funds - is a kind of mutual fund that invests only in highly liquid
instruments such as cash, cash equivalent securities, and high credit rating debt-based
securities with a short-term, maturity—less than 13 months. As a result, these funds offer
high liquidity with a very low level of risk.
Ideal for: Low-risk investors who want to prevent their money from losing its value while
earning a little higher profit than regular savings or checking accounts and time deposits
Where the funds are invested: Risk-free, short-term securities, including time deposits,
government Treasury bills, and corporate bonds
Investment horizon: Short-term (One year or less)
Goal: Capital preservation
Risk appetite: Conservative

Licensed mutual funds companies in the Philippines:

 ALFM Mutual Funds

 ATR Asset Management (ATRAM MF)
 Cocolife Asset Management Co. Inc.
 Metro Asset Management Inc. (FAMI)
 Grepalife Asset Management Corporation (GAMC)
 MAA General Assurance Phil., Inc. (MAAGAP)
 MBG Equity Investment Fund, Inc.
 Asset Management Inc. (PAMI)
 Philequity Management, Inc. (PEMI)

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  Sun Life Financial Philippines

2. Exchange-traded Funds (ETF) - is a collection of securities—such as stocks—that tracks an

underlying index. ETFs can contain many types of investments, including stocks, commodities,
bonds, or a mixture of investment types. An exchange-traded fund is a marketable security,
meaning it has an associated price that allows it to be easily bought and sold.

The First Metro Philippine Equity Exchange-Traded Fund, Inc. (FMETF) is a domestic
corporation engaged primarily in investing, reinvesting, trading in, and issuing and redeeming its
shares of stock in creation units in exchange for a basket of securities representing an index.

Registered with the SEC on January 15, 2013, FMETF is the first-ever exchange traded fund in
the Philippines. The fund aims to provide returns which would reflect the performance of the
Philippine equities market by investing in a basket of securities which are included in the
Philippine Stock Exchange index (PSEi).

An ETF is a managed investment fund that is traded on an exchange, such as the Philippine
Stock Exchange (PSE), intended to track an index or a basket of assets.

3. Money Market Funds - is a kind of mutual fund that invests only in highly liquid instruments
such as cash, cash equivalent securities, and high credit rating debt-based securities with a
short-term, maturity—less than 13 months. As a result, these funds offer high liquidity with a
very low level of risk.

4. Hedge Funds - is another type of fund that pairs stocks it wants to short (bet will decrease)
with stocks it expects to go up in order to decrease the potential for loss. Hedge funds also tend
to invest in riskier assets in addition to stocks, bonds, ETFs, commodities and alternative
assets. These include derivatives such as futures and options that may also be purchased with
leverage, or borrowed money.

12.2 Money Market Mutual Funds

A money market mutual fund (MMF) is a type of mutual fund that invests in high-quality, short-
term debt instruments, cash, and cash equivalents. Though not exactly as safe as cash, money
market funds are considered extremely low-risk on the investment spectrum, and thus carry
close to the risk-free rate of return. A money market fund generates income (taxable or tax-free,
depending on its portfolio), but little capital appreciation. Example of money market fund in the
Philippines is BDO Peso Money Market Fund (Banco De Oro Universal Bank) is a peso-

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denominated fixed-income fund suited for corporate and individual clients who are risk averse
and are looking for safe investments with yields higher than those of savings and time deposit
accounts.

Types of Money Market Instruments

a) Certificate of Deposit (CD) - these are time deposits like fixed deposits that are offered
by scheduled commercial banks. It is also banks issue certificates of deposit to raise
short-term cash. Their duration is from one to six months. The CDs pay the holder higher
interest rates the longer the cash is held.
b) Commercial Paper (CPs) - These are issued by companies and other financial
institutions which have a high credit rating. Also known as promissory notes, commercial
papers are unsecured instruments which are issued at the discounted rate and
redeemed at face value. The difference is the return earned by the investor.
c) Treasury Bills (T-bills) - are issued by the government to raise money for a short-term
of up to 365 days. These are the safest instruments as these are backed by a guarantee
of government. The rate of return, also known as risk-free rate, is low on T-bills as
compared to all other instruments.
d) Repurchase Agreements (Repos) - It is an agreement under which RBI lends money
to the commercial banks. It involves sale and purchase of agreement at the same time.
e) Bankers Acceptances - This works like a bank loan for international trade. The bank
guarantees that one of its customers will pay for goods received, typically 30 - 60 days
later. For example, an importer wants to order goods, but the exporter won't give him
credit. He goes to his bank which guarantees the payment. The bank is accepting the
responsibility for the payment.
f) Swaps - Banks act as middlemen for companies that want to protect themselves from
changes in interest rates.
g) Credit Enhancement - The bank issues a letter of credit that it will redeem the money
market instrument if the issuer does not.
h) Municipal Notes - Cities and states issue short-term bills to raise cash. The interest
payments on these are exempt from federal taxes.

There are also investments based on money market instruments:

o Shares in Money Market Instruments: Money market funds, other short-term

investment pools in banks, and the government combine money market instruments and
sell shares to their investors.

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 o Futures Contracts: These contracts obligate traders to either buy or sell a money
market security at an agreed-upon price on a certain date in the future. Four instruments
are typically used: 13-week Treasury bills, three-month euro time deposits, one-month
euro time deposits, and a 30-day average of the fed funds rate.
o Futures Options: Traders can also buy just the option, without an obligation, to buy or
sell a money market futures contract at an agreed-upon price on or before a specified
date. There are options on three instruments: three-month Treasury bill futures, three-
month euro futures, and one-month euro futures.

12.3 Real Estate Investment Trusts

Philippine Definition: Real Estate Investment Trust Act of 2009

Real Estate Investment Trust’ or “REIT’ is a stock corporation established in accordance with
the Corporation Code of the Philippines and the rules and regulations promulgated by the
Commission principally for the purpose of owning income-generating real estate assets. There
have been a good number of real estate companies that showed interest in offering REITs;
Ayala Land Inc, SM Prime Holdings, Shang Properties & JG Summit and SMDC,

How It Works

REIT was created with mutual funds as the basic blueprint. The people behind REIT wanted to
generate income from a diversified portfolio of real estate assets, much like a Mutual Fund
earns profit from investing in a diversified pool of stocks.

Types of REITs

 Equity REITs is the most common form of enterprise. These entities buy, own and
manage income-producing real estate. This is the type that invests in the ownership and
management of malls, hotels, commercial buildings and warehouses. The primary
source of income comes from the rental payments of tenants.
As an example, if the SM group created a REITs specific company (i.e. SM REIT), an
investor will hypothetically have a share in the rental profit of future SM Malls. Knowing
SM Malls have 100% occupancy rates, it’s easy to predict future income stream.
 Mortgage REITs also known as mREITs, lend money to real estate owners and
operators. Their earnings come primarily from the net interest margin—the spread
between the interest they earn on mortgage loans and the cost of funding these loans.

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 Due to the mortgage-centric focus of this REIT, they are potentially sensitive to interest
rate increases.
 Hybrid REITs enterprises hold both physical rental property and mortgage loans in their
portfolios. Depending on the stated investing focus of the entity, they may weigh the
portfolio to more property or more mortgage holdings.
 Publicly Traded REITs offer shares of publicly traded REITs that list on a national
securities exchange, where they are bought and sold by individual investors. They are
regulated by the Philippine Securities and Exchange Commission (SEC).
 Public Non-traded REITs are also registered with the SEC, but don’t trade on national
securities exchanges. As a result, they are less liquid than publicly traded REITs but tend
to be more stable because they’re not subject to market fluctuations.
 Private REITs are not registered with the SEC and don’t trade on national securities
exchanges. They work solely as private placements selling solely to a select list of
investors.

There would be 3 main beneficiaries once REIT-specific companies are established in the
country:

a. REIT Companies: They’re the first in line to reap the benefits. Majority of these REITs
will be composed of old, well-funded companies, like SMDC, Ayala Land, Century
Properties, Rockwell Land, Megaworld, Robinsons Land and Shang Properties Realty
Corporation. They will have a new avenue to raise funds without borrowing from banks
or foreign investors.
b. Local and Foreign Investors: REITs will offer the public an alternative way to invest in
the local real estate industry. Owning a share of a REIT would mean being part owner of
the actual mall, condo building, commercial establishment or office building, without the
attached responsibilities like that of a landlord. Investors will be given 2 ways to earn a
profit: First is through the annual dividend payout, second is through the sale of the
actual REIT shares.
c. Government: REITs will have the opportunity to invest in real estate properties across
the country. They will be able to develop new buildings and infrastructures outside of
Manila, benefiting the local governments. The Bureau of Internal Revenue will also have
a new source of taxable entities.

12.4 Financial Conglomerates

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A conglomerate is a corporation made up of a number of different, seemingly unrelated
businesses. In a conglomerate, one company owns a controlling stake in a number of smaller
companies which conduct business separately. The parent company can cut back the risks from
being in a single market by becoming a conglomerate. Sometimes conglomerates can become
too large to be efficient, at which time they have to divest some of their businesses.

There are many different types of conglomerates in the world today, from manufacturing to
media to food. A manufacturer may begin by making and selling its own products. It may decide
to expand into the electronics market, then moving into another industry like financial services.

A media conglomerate may start out owning several newspapers, then purchase television and
radio stations, and book publishing companies.

A food conglomerate may start by selling potato chips. The company may decide to diversify,
buying a soda pop company, then expand even more by purchasing other companies that make
different food products.

Example: San Miguel Corporation (SMC) is one of the Philippines’ largest and most diversified
conglomerates, with revenues that accounted for about 5.9% of the country’s GDP in 2018,
through its highly integrated operations in food and beverages, packaging, fuel and oil, power,
and infrastructure.

ABS - CBN Filipino media and entertainment conglomerate based in Quezon City. ABS-CBN
reports its business into several categories or business segments. Broadcast ( ABS-CBN TV
network, ABS-CBN Regional, Radyo Patrol, My Only Radio), Films and music ( Star Cinema
Productions, Star Creatives Group .etc) and etc.

Benefits of Conglomerates

1. Companies owned by conglomerates have access to internal capital markets, enabling

more ability to grow as a company.
2. A conglomerate can allocate capital for one of their companies if external capital markets
aren’t offering as kind terms the company wants.
3. By participating in a number of unrelated businesses, the parent corporation is able to
reduce costs by using fewer resources, and by diversifying business interests, the risks
inherent in operating in a single market are mitigated.

Disadvantages of Conglomerates

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The size of conglomerates actually hurts the value of their stock, a phenomenon called
conglomerate discount. The sum of the value of the companies held by a conglomerate tends to
be more than the value of the conglomerates stock by anywhere between 13% to 15%. The
combination of a handful of different issues relating to financial transparency and management
makes conglomerate stock valued at a discount.

12.5 Security Brokers and Dealers

Brokers and dealers are terms associated with securities. A broker is a person who executes the
trade on behalf of others, whereas a dealer is a person who trades business on their own
behalf. A dealer is a person who will buy and sell securities on their account

A broker-dealer is a person or firm in the business of buying and selling securities for its own
account or on behalf of its customers. Broker-dealers fulfill several important functions in the
financial industry. These include providing investment advice to customers, supplying liquidity
through market making activities, facilitating trading activities, publishing investment research
and raising capital for companies. Broker-dealers range in size from small independent
boutiques to large subsidiaries of giant commercial and investment banks.

There are two types of broker-dealers: a warehouse, or a firm that sells its own products to
customers, and an independent broker-dealer, or a firm that sells products from outside
sources.

12.6 Retailers

A retailer, or merchant, is an entity that sells goods such as clothing, groceries, or cars directly
to consumers through various distribution channels with the goal of earning a profit. This
merchant can be a physical building or online. Retailers don't manufacture the goods they sell.

There are some exceptions to that rule, of course, but usually, the retailer is just the final link in
a supply chain that gets a product to a customer. The difference between retailers and
wholesalers is that while retailers sell directly to consumers, wholesalers sell their goods to
other businesses (i.e., retailers).

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Retail Standards. Retail industry standards are the accepted standards for operating a retail
business. They can be very useful to help both new and ongoing retail businesses operate more
efficiently. The two most compelling standards that retail operations need to know about are:

GS1 retail industry standards. These standards focus on supply and demand chain
management, the most prominent of which is the GS1 number system used in Universal
Product Codes (UPC). The GS1 numbering system standard works to increase operational
efficiency by providing a way for retail businesses to manage inventory and conduct checkout
activities electronically. UPC codes typically include a manufacturer’s identification code and
merchandise identification and pricing information, among other standards. In addition to
standards for barcode technology, GS1 includes industry standards for formatting electronic
communications ranging from pre-purchase messages to transmitting payment information.

The American National Standards Institute Accredited Standards Committee. All standards
for electronic data interchange are set by the ANSI Accredited Standards Committee. Although
ANSI standards are not specific to the retail industry, many retail businesses adopt them as
standard operating procedures. For example, EDI is a document standard that provides a
common interface between two or more computer software programs at different locations. They
are what allow a retail business to transmit ordering information from a store or a business
website to a third-party distribution center or warehouse. All retail operators should be familiar
with the various ANSI standards.

Advantages

a. Awareness — The primary benefit of retail marketing is to bring awareness to the

consumer that the product exists to fill a need or a want that the consumer has. For
example, if a retail marketing campaign is promoting a product that gets rid of nail
fungus, someone with nail fungus now knows that an over-the-counter product is
available to help resolve their nail fungus problem. In return, this marketing helps to
boost sales for the nail fungus remover manufacturer and the retailer selling the
product on its store shelves. In essence, potential customers of a product have to
know that the product exists for the sales of the product to be successful. Retail
marketing is the bridge between a product and its potential customer target market.
b. Boosts Profits — Retail marketing also has the advantage of boosting business
profits. Whether it’s announcing the launch of a new product or offering a special sale
or coupon on an existing product, this type of retail marketing can attract larger crowds

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 to the retail location. The more potential customers who walk through the door
provides a potential for higher sales, and a larger sales volume brings increased
profitability to the retail establishment.
c. Creates a Competitive Environment — Retail marketing creates a healthy
competitive environment between retailers. This benefits consumers because it helps
to keep their costs down when purchasing products. Retail marketing also helps keep
competitors aware of what the other is charging for the same product, so it allows
retailers to adjust prices as necessary to stay competitive in the market.
d. Creates Jobs — A direct positive effect of retail marketing is that it draws more
customers to the retail stores. An indirect effect of retail marketing, however, is it
creates jobs. When a retail store has more business, it also tends to need more
employees to help with the volume of business. For potential employees that have
experience in the retail industry or who are looking to break into retail work, retail
marketing can open up many new job opportunities.

Disadvantages

a. Difficult to Sell To — Large retailers move enormous amounts of product each day. If
your product is an unknown, you're going to have a difficult time selling it to the biggest
retailers. Company.com explains that getting your product stocked at retail giants
requires you to have a track record of success. Large retailers only want items that
consumers are going to buy, and they don't need to take a risk on the unknown.
b. Lower Profit Margin — Retail giants have the advantage of enormous revenue figures.
That allows them to sell items for less than smaller retailers, but at a cost to companies
that deal with the retailer. Low-cost products at large retailers stem from several factors,
including low shipping costs and price manipulation. A large retailer can essentially tell a
manufacturer, "We'll buy your product at this price only." The price the retailer sets often
results in a lower-than-average profit margin for the manufacturer, which enables the
retailer to sell the product for less than smaller retailers. The manufacturer must then
hope that it can sell the product in bulk to make up for the lower-than-usual profit margin.
A failure to move large amounts of the product can result in diminishing profits.
c. Impersonal — Dealing with retail giants is similar to dealing with a large international
bank in that the communication is impersonal. The retailer may decide to stop stocking
your product at any time and without anything more than a quick phone call or letter
informing you of the decision. A smaller retailer is more likely to work with you and
exercise greater patience. In addition, a large retailer has so many manufacturers vying

21
 for its shelves that it may not take steps to ensure you're well taken care of. It's not a big
deal to the retailer if it loses you as a manufacturer. For example, suppose you sell fruit
to a large retailer. If the retailer is a day or two late in picking up your order, your fruit
may go bad, leading to smaller sales figures. A smaller retailer likely only has a handful
of manufacturers to deal with and is more likely to maintain a solid relationship with you.
d. Competition — Retail giants often stock products from hundreds of manufacturers. The
retailer that buys your product may also buy five similar products from other
manufacturers, leading to a competition between products. If your product doesn't have
a strong brand name or attract buyers, it's very easy for the retailer to toss your item to
the curb. That kind of competition doesn't exist on the same scale at smaller retailers,
where your product may be one of a kind or in competition with only one other brand.

12. 7 Other Financial Conglomerates

“Heterogeneous financial conglomerates are conglomerates whose primary business is

financial, whose regulated entities engage to a significant extent in at least two of the activities
of banking, insurance and securities business and which are not subject to uniform capital
adequacy requirements”

— Joint Forum on Financial Conglomerates (JF, 1999)

12.8 Regulations of Non-depository Institution

Non-depository institutions include insurance companies, pension funds, securities firms,

government-sponsored enterprises, and finance companies.

4 Types of Non-depositary Institution

A non-depository institution includes:

 Insurance companies. — Insurance is a financial product sold by insurance companies

to safeguard you and/or your property against the risk of loss, damage or theft (such as
flooding, burglary or an accident). An insurance policy is the contract that you take out
with an insurer to protect you against specific risks under agreed terms.

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  Pension funds. — Pension funds are investment pools that pay for employee retirement
commitments. Funds are paid for by either employees, employers, or both. Corporations
and all levels of government provide pensions. The fund managers invest these
contributions conservatively. They must avoid losing the principal but still beat inflation.
 Brokerage firms.— Brokerage firms are the financial institutions that handle assets.
Firms employ stockbrokers to represent investors who trade in public stocks. A full-
service brokerage firm researches markets to make recommendations for their clients,
as well as stock and bond trades.
 Finance companies. A finance company is an organization that makes loans to
individuals and businesses. Finance companies make a profit from the interest rates (the
fees charged for the use of borrowed money) they charge on their loans, which are
normally higher than the interest rates that banks charge their clients.

CHAPTER 11:

CASE STUDY:
http://mefin.org/files/reports/CaseStudy-Philippine-approach-to-developing-inclusive-insurance-
market.pdf

NEWS ARTICLE:
https://www.rappler.com/thought-leaders/203229-ways-duterte-endangers-filipinos-retirement-
pensions?fbclid=IwAR0UVerH6WGrH433z3W_avA0la6R_YYJRtoNQbITRvZJEGIL3xztrc6nN-Y

VIDEO:
https://www.youtube.com/watch?v=3frFitEUAu0&fbclid=IwAR1TYWX3NaIUFWQ4vIYJMMl-
i6klHTTd2sEhD9jPp-BGSziMPLePkG7FdOI

REFERENCE:
https://sol.du.ac.in/mod/book/view.php?id=1226
http://hyinsuranceblog.com/an-introduction-about-insurance-benefits-and-types/
https://www.quora.com/What-is-the-definition-of-insurance-industry
https://www.policygenius.com/life-insurance/what-is-life-insurance/
https://www.investopedia.com/terms/l/lifeinsurance.asp
https://businessjargons.com/insurance.html

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https://www.moneymax.ph/personal-finance/articles/insurance-types-families/
https://www.google.com/amp/s/www.allstate.com/tr/amp/insurance-basics/property-and-
casualty-insurance.aspx
https://www.nationwide.com/what-is-property-and-casualty-insurance.jsp
https://www.thezebra.com/insurance-guide/property-and-casualty-insurance/
http://www.pearsonitcertification.com/articles/article.aspx?
p=349051&seqNum=4&fbclid=IwAR2QIkAU3upQQHcULvu5rZhpGWtNsbNHWqza6EsdYH4VE
qzsR9tXyz28i_M
https://www.atlas-mag.net/en/article/pension-fund-and-social-investment?fbclid=IwAR0hX0-
wOR7lfJ12sR0NYCZsaqUPvZBj7vd6z15wv13ymyzhNOrnu2KH194

CHAPTER 12:

CASE STUDY:
https://www.dlsu.edu.ph/wp-content/uploads/2019/03/4_Sayoc_072915.pdf

NEWS:
https://asia.nikkei.com/Business/Companies/Philippines-Ayala-conglomerate-sets-up-150m-
tech-fund

VIDEO:
https://www.youtube.com/watch?v=QgV5lrgaDRM&feature=youtu.be

REFERENCE:
https://www.investopedia.com/terms/m/mutualfund.asp
https://www.investopedia.com/terms/e/etf.asp
https://www.investopedia.com/terms/m/money-marketfund.asp
https://cleartax.in/s/money-market-mutual-funds
https://www.investopedia.com/terms/r/reit.asp
https://www.investopedia.com/terms/b/broker-dealer.asp
https://www.thebalancesmb.com/what-is-a-retailer-2890386

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https://bizfluent.com/list-6516424-advantages-retail-marketing.html
https://smallbusiness.chron.com/disadvantages-companies-doing-business-retail-giants-
34041.html
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/M1-
Conglomerates_supervision_presentation-O.Nedelescu.pdf
https://opentextbc.ca/businessopenstax/chapter/u-s-financial-institutions/
https://en.m.wikipedia.org/wiki/Insurance
https://www.thebalance.com/pension-funds-definition-list-and-issues-3305875
https://www.ziprecruiter.com/e/What-Are-Brokerage-Firms
https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/finance-
company

Presented by:

BSACC 2-1

AMAZONA, JUNEL B.
DAYAON, JEROME P.
REY, MYLE I.
VILLANUEVA. EUNICE FRANCHESSKA

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