CHAPTER 11: INSURANCE COMPANIES 2.
The insured pays a small premium to the insurer, in
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
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.
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:
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
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 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 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.
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
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 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
 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 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.
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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
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
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.
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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
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.
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)
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)
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  MBG Equity Investment Fund, Inc.
 Asset Management Inc. (PAMI)
 Philequity Management, Inc. (PEMI)
 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-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.
o Futures Contracts: These contracts obligate
traders to either buy or sell a money market
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 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. 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
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
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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
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).
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
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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 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 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
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 similar products from other manufacturers, businesses. Finance companies make a profit
leading to a competition between products. If from the interest rates (the fees charged for the
your product doesn't have a strong brand name use of borrowed money) they charge on their
or attract buyers, it's very easy for the retailer to loans, which are normally higher than the
toss your item to the curb. That kind of interest rates that banks charge their clients.
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.
 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
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