460. THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED entity f authority ving any such certificate of shal ject he ingurance and other applicable laws, of ippines and to the jurisdiction and supervision of the Commis: nce company shall transact any business in the Philippines until after it shall fave obtained a jority for that purpose from the Commissioner upon application therefor and payment by the company concerned of the fees hereinafter prescribed. ‘The Commissioner may refuse to issue a certificate of authority to any insurance company is judgment, ‘such refusal will best promote the interests of the people of this country. No such certificate of authority shal ‘granted to any such company until the Commissi Shall have satisfied himself by such examination may make and such evidence as he may requit ified by the laws of the SEC. 193. No director or officer of insurance compani with the pertinent provisions containe 19 corporate governance circulars prescribed by the Commissioner. In addition hereto, the Commissioner shall presct {ualiications of directors, executive officers and other cy Is of insurance Sr tens ‘companies for purposes of this No person shal concurrently be a i ctor and or Officer of an insurance cor a or Of pany and an adjustment See. 193 . g0c.193 ‘THE BUSINESS OF INSURANCE. ‘Title 1 — Insurance Companies, Organization, Capitalization, and Authorization Before issuing such certificate of authority, the ‘Commissioner must be satisfied that the name of the es and regulations on the use ‘companies and other supervised every three (3) years thereafter, subject to the company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or decisions of the ‘Commissi Every company recelving any such certificate of authority shall be subject to the provisions of this Code and ‘other related laws and to the jurisdiction and supervision of the Commissioner. No insurance company may be authorizedtotransactin the Philippines the business of life and non-life insurance specifically authorized to do so by Provided, That the terms, “life” and shall be deemed to include health, insurance. No insurance company shi adjustment company and ‘company have equity in an any equity In an accreditation system, or scheme. Any local ordinance ‘or local government unit regulatory issuance imposing ‘such restriction or disenfranchisement on any insurance ‘company shall be deemed null and void ab initio. (n) 4st|4eq THEINSURANCE CODE OF THEPHILIPPINES ANNOTATED Sac. igg SEC, 194, Except as provided in Section 289, no new domestic life or nonlife insurance company st i stock corporation, engage in business capital 31, 2016, an additional Three hundred fifty million pesos (P300,000,000.00) in net worth; by 2019, an additional Three hundred fifty ‘The Commissioner may, as a pre-licensing requirement of a new insurance company, in addition to the paid-up ‘capital stock, require the stockholders to pay in cash to the company in proportion to their subscription interests @ contributed surplus fund of not less than One hundred million pesos (P100,000,000.00). He may also require ‘company to submit to him a business plan showing ‘company's estimated receipts and disbursements, as the basis therefor, for the next succeeding thret years. (a) If organized as a mutual company, in lieu of such net worth, it must have available total Fs equity in an be determined by the Insurance Commission litles for losses reported, expenses, taxes, ind reinsurance ofall outstandin, ) ees: ec. 195 “THE BUSINESS OF INSURANCE 183 ‘Tle 1 — Insurance Companies, Onanizatin, Capitalization, and Authorization of the interests of the policyholders and the public. The ‘minimum paid-up capital and net worth require remai 3d for th ipproach and other internationally accepted forms of capital framework. (n) For the purpose ofthis section, net worth shall consist Unimpaired surplus; Revaluation of assets as may be approved by the loner. (n) ‘The Commission may adopt for purposes of ‘compliance with capital build up requirement under this Code the recognition as part of the capital account, capital notes or debentures which are subordinate to all credits, ‘to common capital stocks. (n) ‘The President of the Philippines may order a periodic t annual statement or a hibiting the condition and incorporated under the laws of the Philippines, ‘a copy of the articles of incorporation and bylaws, andANNOTATE i THERNSURANCECODEOF THEPHILIPINES ANNOTATED Sey ther, cortified by the Securities ang ibe a copy of that which is filed ‘any amendments shange Commi jorated under any laws other than those ines, a certificate from the Securities and mission showing that itis duly registered in the mercantile registry of that Commission in accordance ithe Corporation Code, A copy of the articles of incorporation and bylaws and any amendments to either, if organized or formed under any law requiring such to be filed, duly certified by the officer having the custody of ized, a copy of the law, charter or ich the deed hand and seal of the proper officer of such state or country having supervision of insurance business therein, if any nial or names ofthe persone compos the parinershipor association, tearaunt of etual capa tnployed or 10 be erpoyed rr an he nes ocr nd persons by whom ie buinens oor nay The certificate must be verified ut ¢ Verified by the affidavit of the hief officer, secretary, agent, or manager of the compat ‘any written articles of agreement of ‘thereof must accompany such certificate. SEC. 196.TheCommissionermustrequireasacondition mn of insurance business in the insurance : thee neurance company, that such lesignating some person who st Philippines as its general agent whom any notice — 500.197 ‘THE BUSINESS OF INSURANCE “Tile 1 — Insurance Companies, Organization, Capitalization, and Authorization provided by law or by any insurance policy, proof of loss, ‘summons and other legal processes may be served in all actions or other legal proceedings against such company, and consenting that service upon such general agent shall bbe admitted and held as val jerved upon the foreign ‘company at its home office. Any such foreign company shall, as further condition nt to the transaction of insurance business in the Phi make and file with the Commissioner an agreement or stipulation, executed by the proper authorities of said company in form and substance as follows: joner to transact Philippines, that if at any time said company st the Philippines, or cease to transact business the ‘shall be without any agent in the 1es on whom any notice, proof of loss, summor ‘served, then in any action or proceeding arising out of any made upon the Insurance Com ‘service upon the Insurance Commissioner shall have the ‘same force and effect as if made upon the company.” Whenever such service of notice, proof of loss, ie must, within ten (10) days thereafter, id, a copy of such notice, proof process to the company atits home or prit ‘sending of such copy by the Commissioner shall be a necessary part of the service of the notice, proof of loss, or other legal process. ‘SEC. 197, No insurance company organized or existing under the government or laws other Philippines shall engage in business in the unless possessed of red reserveofnotlessthanOnel ‘nor until it shall have deposited with the benefit and security of the policyholders and creditors of such company in the Philippines, securities satisfactory 485,186 TEINSURANCE CODEOFTHEPHILIPPINES ANNOTATED gy Commissioner consisting of good securities of the new issues of stock is For purposes of insurance company shall refer only Philippines. ing with said Commissioner ake value of which sh of s vont ort vale of Such as maybe wi the Philippines, the secures deposited a atoresal ei ‘apcrra nampa upon the Commissioner's ro ie val and only afer the company has dUly atsoever und towable orto any ra secs. 190-197 ‘THE BUSINESS OF INSURANCE. “tle 1 — Insurance Comparies, Organization, Captazaion, and Author SEC. 199. Every foreign company doing bt the Philippines shall set side an amount corres the legal reserves of the be invested only in scribed in Section ‘stocks or bonds approved in and kept in the bbe sent out of without the written consent of the Commissioner Power of state to regulate insurance business. sc reasons for governmental regulation. — The insurance heavily regulated by law because of public policy jons to insure that every insurance company comply with the applicable laws in conducting its business and in its dealing with the Insured. ‘The insurance business possesses peculiar characteristics justifying governmental control and provision. (a) The chief characteristicis thatan insurance cont aleatory contract, that is, a contract under which the obl the insurer, will mature (become immediately only upon the happening of generally speaking, much mo: the coverage bargained for. Inequality of values fo be exchanged characterizes insurance since the premium paid by the insured unconditionally is ordinarily for less than the amount which the insurer may become obligated to pay on a contingency which will probably not occur. The insured gets only a promise by the insurer and may never have occasion to find ut, by his own experience, whether that promise would be468 THE INSURANCE CODE OF THE PHILIPPINES ANNOTATED Sers. 15945 performed, He is, therefore, more gullible with respect insurance and more susceptible to the wiles of the salesmen: (©) The insured’s inability to look out for his own interes, is increased by the technical character of the insurance contra 1) While some insurance contracts can be written mostly in ordinary laymen’s language, vi them require either some trade terms or, what is likely fg mislead, some special meanings given to simple terms, 2) Furthermore, the various conditions of the insurer's promise and of settlement, and the promises of services or benefits are likely to add up to a pretty involved contract that very few insureds can understand without the explanations given by a competent and honest insurance agent or broker. Hence, latter are included within the scope of governmental regulation, 3) Moreover, an insurance cannot succeed unless makes a large number of contracts and mass production of contracts means that the insured must ordinarily take the insurer's printed form, or do without. Because of this, ee insurance is sometimes called a “contract (d) All of these result in inequality of bargaini , gaining of power : dacs ates insurer. The government oe ily to protect the interest insured, secondarily, to protect honest and competent insurers from unfair competition by the dishonest and incompetent. (EW. Patterson, op. cit., pp. 2-3.) Q) enerally recognized that the b a re 1 business o ‘affected and control by the state by vi power, in the interest of general convenience an good of Gi People. Indeed, it is not only the right but also the ign duty of a state to regulate the business of insurance. (8) Scope. — The power is very broad It extends to all persons seeking to engage in the ‘ tr insurance business, whether carried ransaction of insurance business, ried on by # secs. 190199 ‘THE BUSINESS OF INSURANCE 0 “Tle 1 — Insurance Companies, Organization, Capitalization, and Authorization domestic or foreign company, an individual, or an association, and whether applied tonewly formed corporations or already engaged in the business, (b) The state may regulate the relations between insurer and insured in various respects as well as the affairs of an insurance company without violating due process. (©) It has the right to prescribe reasonable conditions prerequisite to the carrying of insurance business, provided thei erit ithin or without the State. (see 43 Am. Jur. 2d. 1 is unlawful to do such business except on specified con carrying on of such business is the exercise of a franchise. (State ex rel. Rachards v. Ackerman, 37 N.E. 828.) (4) State regulating agencies. — TheState controls the insurance through all departments of the government. (see Chap. judicial department exercises control by deciding, controversies between litigants. ‘The legislative department has broad powers to enact sgislations, necessary or expedient for the public good -d only by the provisions of the Constitution. ‘The executive department through a particular official or office, ie,, the Insurance Commission, is charged with the ‘Stages of regulation. — The State may regulate insurance enterprises at three stages: when they are launched; while they are successfully doing business; and when they have gotten into financial difficulties. (a) The first stage is controlled by the granting of charters under general laws and by the granting of licenses to new enterprises (see Secs. 192-193.); (b) The second, by the power to revoke (or refuse renewal icenses, by the power to examine a company (see Secs.160 THEINSURANCECODEOF THEPHILIPPINES ANNOTATED Secs. 19955 245-246, 415), and by the criminal penalties for various infractions of its laws (see Secs. 493-434.); and (c) The third, through the power of the Insurance Commissioner to appoint a conservator or receiver to take charge of the management of the company or administer its assets, or a liquidator to wind the company’s business and distribute its assets. (see Secs. 255-256.) Thus, from the cradle to the grave, an insurer is under offical surveillance. (E.W. Patterson, op. cit, pp. 1, 9-10.) Business of insurance conducted almost exclusively by corporations. Insurance, no doubt, may be carried on by indivi ny individuals partnerships, but today the busines of insurance is conducted in almost all is which, while va varying widely in thes teams and provision, provide elaborate systems forthe mn an tion of it i formation and regulation of nsuzancecomporation. (9 Am. Jt The various corporations, in who: : tions, se hands most of the ‘nourance business now lies, differ very greatly in their nature 7 tetera thes charter powers. A company may ter i eae the laws to grant only certain surance company is usually e ie ly empowered to write personal accident and health insurance and annuities as well 8 2) A e oe fs murnce company customarily is empowered '0 and inland and certain minor linea = NSUranee Poth omen @) A oo a may usually also write workmen's well a cane sane and accident and health insurance 3 ieee lines such as fidelity, surety, and plate (4) There i rointhe bee ering tendency to break down the sharp barrier ‘asualty field soas to permit one company ‘THE BUSINESS OF INSURANCE 1 insurance Companies, Organization, Capitalization, and Authorization to write most types of fire and casualty coverages — referred to ‘as"multiple line” underwriters. (Vance, op. cit, p. 123.) isions of the Corporation Code of the Philippines, are expressly made applicable by the Insurance rations now or hereafter engaged in business in the Philippine ras they do not conflict with the provisions of Chapter II In other words, in case of conflict, the Insurance Code shall prevail. General requirements before an insurance company may transact insurance business. (1) Domestic insurance companies. — Before a domestic insurance company, as defined in Section 190, may transact any insurance business in the Philippines except as agent of a person cor corporation authorized to do the business of insurance in the Philippines, it must comply with the following requirements: is possessed of the required paid-up capital and assets (Sec. 192, par. 1.); (b) It shall have obtained a certificate of authority for that ‘purpose from the Insurance Commissioner upon application therefor and payment of the fees prescribed (Sec. 193.); and (©) It shall have filed with the Insurance Commissioner the documents required under Section 195. ‘The Commissioner may, as a preicensing requirement of a new insurance company, require the payment in cash by the stockholders, in addition to the paid-up capital stock, of a contributed surplus fund of not less than P100 million and the submission by such company of a business plan showing its estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years. (Sec. 194, par. 2.) ‘The contributed surplusis intended to prevent the diminution of the required paid-up capital by organizational expenses. As soon as the company recovers these expenses, the stockholders will be allowed to withdraw their contributions. ies. — In addition, ifthe insureris shall have filed with the Insurance 2) Foreign insurance foreign company (Sec. 190.),tg nsuRANCECODE OFTHEPHTLIPINES ANNOTATED Se. 139 55, on i written power of attorney designating som, person eho shall be erat the Philippines as its agent ee 196.) and deposited with the Insurance Commleiones, for the benefit of its policyholders and creditors satisfactory securtg required under Section 197. ‘An insurance company may not transact the business of ig and non lifeinsurance concurrently unlessspecifically authorized to do so, No insurance company shall have any equity in an adjustment company and neither shall an adjustment company have any equity in an insurance company: (Sec. 194, par. 9; ee ‘Chap. IV, Title 5.) Minimum capitalization requirements for new insurance and reinsurance companies and those to be rehabilitated. Only sufficiently capitalized insurance and re-insurance companies can be competitive regionally and globally and sustain public and investor confidence in the insurance industry Non-compliant and failed insurance companies cause an alarming number of unpaid insurance claims, causing inestimable damage and prejudice to the victims of unpaid insurance policies, The result is a frustrated insurance policy- holding public and unfavorable public perception of the industry as a whole, Most insurance companies previously put undet conservatorship or receivership, or recommended for liquidation because of violations of statutory and regulatory requirements, primarily capital impairment and margin of solvency deficiency, and subsequently allowed to be rehabilitated, had failed ee He Rew capitalization requirements are designed to malt Hee tauzance industry stronger and more resilient to shackles oie ‘ee the money entrusted by policy holders and al es a i tyne with the “big boys” in the region (1) Effective July company shall be unless it has a capitalization of Pi : 1 Bi at least 50% consists of Paid-up capital ar 1, 2006, no new life or non-life insurance ess in th ippines paid in cash, of which ind the remaining portion “THE BUSINESS OF INSURANCE 499 Insurance Companies, Organization, Capitalization, and Authorization thereof as contributed surplus, which in no case shall be less than 200 Million Effective July 1, 2006, no new reinsurance company allowed to do business in the Philippines unless it has jon of P2 Paid in cash, of which at least 50% consists of paid-up portion thereof as contributed surplus, which in no case shall be less than P400 Million. at least 50% consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than 200 Million. (4) Effective July 1, 2006, no reinsurance companies under conservation or receivership or for i rehabilitated unless it has a net worth of P2 accordance with the Insurance Code, and of which at least 50% consists of paid-up capital and the remaining portion thereof ributed surplus, which in no case shall be less than P400 6) The above requirements are without prejudice to other requirements that are to be imposed under any risk-based capital method that may be adopted by the Insurance Commission." (Dept. of Finance Order No. 19-06, May 15, 2006.) rersand thus adequately protect the insuring 20 established fed anual capitalizationsure NSURANCE CODEOF THE PHILIPPINES ANNOTATED See 15994 ot ithdrawal of securities surance companies. wer of a State to require company ee ee within its boundaries to file gs dleposit security for the performance of their obligations before they can issue policies within the State. Such deposit constitutes a trust fund for the benefit of policyholders. Any surplus after the satisfaction of the claims f policyholders constitutes a trust fund for the benefit of creditors of the depositing company. (43 Am. Jur. 2d. 123,) (b) The actual market value of the securities required to bbe deposited with the Insurance Commissioner must not be Jess than the minimum paid-up capital required of domestic insurance companies. (c) Atleast 50% of the total security deposit shall consist of bonds or other instruments of debt of the government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, including the Bangko Sentral ng Pilipinas. (see Sec. 197.) (2) On withdrawing from a State, a foreign insurance company is entitled, after having paid all liabilities, to withdraw its deposits with the State and they may not be attached by a foreign creditor. (see 43 Am. Jur. 2d 123; see Secs. 197, 198.) Section 198 specifically confers custody over the securities upon the Insurance Commissioner with whom these investments are required to be deposited. An implied trust is created by law (see Arts. 1440, 1441, Civil Code.) for the benefit of all claimants under subsisting insurance contracts issued by the insurance company. As the officer vested with the custody of the security deposit, the Commissioner is in the best position to determine if and when it may be released without prejudicing the rights of eal bela (Republic vs. Del Monte Motors, Inc., 504 SCRA Deposits and wi TITLE 2 SOLVENCY REQUIREMENTS ‘SEC. 200. An insurance company doing business In the Philippines shall at all times maintain the minimum pald- up ci and net worth requirements as prescribed by the Commissioner. Such solvency requirements shall be based on internationally accepted solvency frameworks ‘consultation with the Insurance and adopted only after industry associations. Whenever the aforementioned requirement be found to be less than that herein required to be maintained, the ‘Commissioner shall forthwith direct the company to make ‘good any such deficiency by cash, to be contributed by i stockholders of record in proportion to their respective interests, and paid to the treasurer of the company, within fifteen (15) days from receipt of the order: Provided, That any new risk of any kind or character unless and until it make good any such deficiency: Provided, further, That a stockholder who aside from paying the contribution due from him, stockholder by 19 payment or reimbursement is made by the defaulting stockholder. (a) Maintenance of solvency requirements times. Every insurance company doing business in the Philippines ‘must at all times maintain the minimum paid-up capital and net worth requirements as prescribed by the Commission. By 5PINES ANNOTATED 466. _THEINSURANCE CODE OF THE PHILIP ot ion 200 “such solvency requirements sha the provisions onal) accepted solvency frameworks ana doped ly afer due consultation withthe insurance industry associations.” (pat. 1.) (1) Definitions. — As used in the Code — {a) The term paid-up capital sh surplus and capital paid in (b) The terms asse ies and reserves shall not include the assets, liabilities and reserve included in separate ‘accounts established in accordance with Section 237 of the Code; ‘The phrase total amount of its insurance in force as of he preceding calendar year shall mean the total amount of a ‘company’s insurance in force at the beginning of the preceding year, plus the total amount of insurance issued, revived or increased during that year, less the total amount of insurance terminated by death, lapsation, maturity, disability, surrender or other causes during that year, on all policies except term insurance; and (a) The phrase net premium written during the preceding calendar yar shall mean a non-life company’s gross premiums onrisks written and renewed during the preceding year in the Philippines, less returns and cancellations, plus reinsurance premiums received during that year from authorized and unauthorized insurers, less reinsurance premiums ceded during that year to authorized and unauthorized insurers. (2) Satisfaction of deficiency. — Whenever the aforementioned solvency requirement is found to be less than that required of an insurance company to be maintained, the deficiency shall be made good by cash to be contributed by all stockholders of record in proportion to their respective interests and paid to the treasurer of the company within 15 days from receipt by such company of the order of the Insurance Commissioner directing such company to make good such deficiency. For purposes of the above, a professional ll be doce , reinsurer sha 1 1975, effective Dec ae (Ins. Memo. Cir. No. 4-75, Oct. sec. 201 ‘THE BUSINESS OF INSURANCE 7 Tile? — Solvency Requirements may be stressed that this margin of it as it would improve security for ; a safeguard against adverse fluctuations of the company’s results, increase the company’s retention capacity, and strengthen both the company and the rt of the company’s annual profits would be used for ing up this solvency margin.” (“Supervision and Regulation of the Insurance Business in the Philippines,” Journal of the IBP, First Quarter, 1976, pp. 24-25, by ‘Commissioner G. Cruz-Amaldo.) (3) Importance. — national market. According! SEC. 201. No domestic insurance corporation shall declare or distribute any dividend on its outstanding ‘stocks unless it has met the minimum paid-up capital and net worth requirements under Section 194 and except from profits attested in a sworn statement to the Commissioner by the president or treasurer of the corporation to be remaining on hand after retaining unimpaired: (a) (a) The entire paid-up capital stock; {b) The solvency requirements defined by Section 200; (¢) In the case of life insurance corporations, the legal reserve fund required by Section 217; (d) In the case of corporations other than life, the legal reserve fund required by Section 219; and (e) A sum sufficient to pay losses reported, or settlement, and all liabilities for expenses ‘Any dividend declared or distributed under the preceding paragraph shall be reported tothe Commissioner within thirty (30) days after such declaration or distribution. sioner finds that any such corporation istributed any such dividend in violation is section, he may order such corporation to cease and desist from doing business until the amount of such dividend or the portion thoraof in excess of the amount allowed under this section has been restored to said corporation.Es INES ANNOTATED 198 THE INSURANCE CODE OF THEDHILIPPINES mt er shall prescribe solvency require. foreign insurance companies oper. Distribution of dividends to stockholders of domestic corporations. premiums on unexpired lends to stockholders until a deduction has been made of an amount sufficient to cover losses which the previous business of the company indicates may reasonably be expected to occur. (Lexington Life, F & M Ins. Co, v. Page, 56 Ky. [M B Mon] 412; see 43 Am. Jur. 2d 161.) (2) Specific requirements. — Section 201 imposes three (3) requirements for a domestic insurance corporation declaring or distributing any dividend on its outstanding stocks: (a) The company has met the minimum paid-up capital and net worth requirements under Section 194; (b) The dividends must be declared out of profits from its, business; (©) The profits must be attested in a sworn statement its president or treasurer to be remaining on hand after retaining unimpaired 1) the entire paid-up capital stock, 2) {he insolvency Tequirement defined by Section 200, and 3) te case of life insurance corporations, legal reserve fund, req = by Section 217 and in the case of conporations other than life, the legal id required by Section 219, and oa sum sufficient t losses or in the course of set a and all for expenses and taxes; and ; \e dividend must be reported to the Commissioner within 30 days after such declaration or distribution. by —000— TITLE 3 ASSETS SEC. 202. In any determination of the fina condi assets only such assets legally or beneficially owned by the insurance company concern Commissioner which consist of: (2) Cash in the possession of or in transit under its control, sound bank or instruments, and accordance with and subject to the applicable provisions of this Code and the income realized therefrom or accrued thereon. (c) Loans granted by the insurance company concerned to the extent of that portion thereof adequately secured by non-speculative assets with readily realizable values in accordance with and subject to the limitations imposed by applicable provisions of this Code. (e) The net amount of uncollected and deferred premiums and annuity considerations in the case of a life insurance company which carries the full mean tabular reserve liability.500 THE INSURANCE CODEOF (9 Reinsurance recoverable by the ceding insurer: thorized to transact busi. {thts cout ‘amount thereof; or ness in this cou iS an asset or as earned premium reserves, for reinsurance recoverable from an insurer but which presents meets the applicable this country. standards of solvency (g) Funds withheld by a ceding insurer under a reinsurance treaty, provided reserves for unpaid losses and unearned premiums are adequately provided. {(h) Deposits or amounts recoverable from underwriting associations, syndicates and reinsurance funds, or from any suspended banking institution, to the extent deemed by the Commissioner to be available for the payment of losses and claims and values to be determined by him. (i) Electronic data processing machines, as may be authorized by the Commissioner to be acquired by the insurance company concerned, the acquisition cost of which to be amortized in equal annual amounts within a Period of five (5) years from the date of acquisition thereof. () Investments in mutual funds, real estate investment ent trust funds and -onditions as may THE PHILIPPINES ANNOTATED Seay) Sec 208 ‘THE BUSINESS OF INSURANCE. so. Tile3— Assets SEC. 203. In addition to such assets as the Com- missioner may from time to time determine to be non- admitted assets of insurance companies doing business in the Philippines, the following assets shall inno case be allowed as. litted assets of an insurance company doing business ippines, in any determination of its financial condi Goodwill, trade names, and other like intangible ass {b) Prepaid or deferred charges for expenses and ‘commissions paid by such insurance company. (c) Advances to officers (other than policy loans), which are not adequately secured and which are not previously authorized by the Commissioner, as well as advances to employees, agents, and other persons on mere personal security. (d) Shares of stock of such insurance company, such shares of surance company (f) Items of bank credits representing checks, drafts or notes returned unpaid after the date of statement. ‘The amount, if any, by which the aggregate value tents as carried in the ledger assets of such ins ‘company exceeds the aggregate value thereof as determined in accordance with the provisions of this ported, to the extent assets of suchsea THEINSURANCE CODEOF THEHILIPPINES ANNOTATED Sec 2p3 Classification of assets of an Insurance company. : In the determination of the financial condition of any insurance company doing, business inthe Philippines, its assets may be: 41) Admitted assets or those assets enumerated in Section 202 legally or beneficially, by an insurance company which fare allowed and admitted by law as assets of such company in the determination ofits financial condition’ (Sec. 202.); or (2) Non-admitted assets or those assets enumerated in Section 203 owned by an insurance company which are not allowed by law to be admitted as assets of such company in the determination of its financial condition, including such assets as the Commissioner may from time to time determine to be non- admitted assets. Any investment madei of Title 4 of the Code shal (Sec. 213.) olation of the applicable provisions considered non-admitted assets. asad depeits” by the Philippine Deposit I Corporation (PDIC) are ‘of the following imitations: (1) The exces deport 10% ofthe total admitted assets of the ina ‘ec 208 ‘THE BUSINESS OF INSURANCE. sas Title3 — Assets ‘Treatment of premium receivables as admitted assets. For purposes of determi of solvency requirement of compliance with the margin enc life insurance companies, the ‘Commission may, in addition to the assets enumerated in Section 202 of the Insurance Code, consider as admitted assets, premiums due from the following, ) The Government of the Philippines, its political sub- instrumentalities, including government-owned held by such entity as trustee of the said company. agents and insurance brokers) covering policies within 90 days from inception as of the cut-off date, provided that these les are supported by an aging schedule showing details per policy and copies of policies and other pertinent documents are made available to the examiners for verification. (3) “Jumbo” risks, for purposes of this Circular Letter shall refer to risks where the annual premium on any one policy which case, premiums may be in any insta supported by an aging schedule showing details per ies and other pertinent documents sl examiners for verification. Premiums Receivable accounts due over 90 days from inception date as of the cut-off date which were disallowed but were collected and remitted to the Head Office within the first quarter following the cut-off date shall be considered as after- date transactions, provided that the following documents shall be submitted together with the submission of Annual Statement: (a) Schedule of Premiums Receivable with full details of insurance policies over 90 days due;sot THEINSURANCECODEOFTHEPHILIPPINES ANNOTATED Se. 293 schedule of afterdate collections with details of official receipts and amount; (6) Copies of official receipts validated deposit stips, passbooks and/or bank statements; (d) General Ledger of Premiums Receivable account; (6) Production and Remittance reports of general agents and insurance brokers as stipulated in the General Agency Insurance Broker's agreements; and (Other pertinent documents as may be required during. the verification /examination process. (Ins. Cir. Letter No, 22- 07, Nov. 8, 2007, supersedes No. 27-2006.) i —000— TITLE 4 INVESTMENTS ‘SEC. 204. A life insurance company may lend to any of its policyholders upon the security of the value of its policy such sum as may be determined pursuant to the provisions of the policy. No insurance company shall loan on any of its money ‘or deposits to any person, corporation or association, ‘except upon the security of any of the following: (n) (a) First mortgages or deeds of trust of rogistered, unencumbered, improved unimproved real estate, including condominiums; (n) {b) First mortgages or deeds of trust of actually (4) Bonds or other instruments of indebted or guaranteed by the Government of th its political subdivisions authorized obligations or issue such guarantees of ‘owned or -controlled corporations including the Bangko Sentral ng Pilip Obligations issued or guaranteed by universal ‘commercial banks, offshore banking units, investment houses or other finar registered with the Bangko Sent (f) Obligations issued or banks or corporations, each of shall have total 505506 THEINSURANCE CODE OF THE 1e hundred fifty million US dollars "uch other higher net worth as may turance Commission, aS shown in ‘of the immediately preceding net worth of at lea: statements a5 Bangko Sentral ng Pilipin Pledges of shares of stock, bonds or other insteononts at indebtedness specified in Section 208; (n) or ()Chattel mortgages over equipment not more than three (3) years old; (n) and () Such other security as may be approved by the Commissioner. (0) The loans provided in the preceding subsection shall bbe subject to the following conditions: (1) The amount of loan secured by real estate merigage over a non-agricultural land shall not exceed praised value, and in the (2) Unless approved by the Commissioner, no loan ‘may be granted upon the security of a mortgage on improved real estate if the improvements thereon do ng to the owner of the land, and the owner of land need not be a party to expiration date of the lease shall precede the maturity of the loan. The phrase ‘improved real PHILIPPINESANNOTATED Sec 95, secs. 205-206 ‘THE BUSINESS OF INSURANCE ‘7 Titled — Investments estate’ as used herein shall mean meant building or builngs erected teres (oo (3) Lease-agreements or similar securities received on the sale of real estate property shall not exceed one hundred percent (100%) ig price of sald property, or one hundred percent (100%) of its market value at the time of its disposition, whichever amount Is lower. However, in no I such agreement have a maturity period not exceeding thirty (30) years; (n) (4) Loans secured by shares of stock of solvent The weighted average market price for we hundred eighty (180) days preceding the Loans secured by the chattel mortgages over ‘equipment shall not exceed seventy percent (70%) of the market value of said equipment. (n) insurance company on the (a) An insurance company may purchase, ‘convey such property, real and personal, benefit on account of money loaned by id personal property as may have been borrowers in satisfaction and dischargesag THE NSURANCECODEOFT of loans made by the company in ont ee on ot eatin made by the COME Te rapany within shall Be tt eto has been vested in yy may purchase, hold, and serve as its main place wien pices: Provided, That in the overall exceed twenty ‘worth as shown by its latest proved by the Commissioner. eal properties ‘or other instruments of debt of rporations and (3) Bonds government-owned or -control ‘entities, including the Bangko S (4) Bonds, debentures or other indebtedness of any solvent corp rd or existing under the laws of the Philip- tion create: pines; Provided, however, That the issuing, assuming br guaranteeing entity of its predecessors shall not have defaulted in the payment of interest on any of its securities and that during each of any three (3) in- ) fiscal years next n by such insurance eluding preceding the date of aci ‘company of such bonds, /-first next preced- ing the date of such in ipMILIPPINES ANNOTATED Sec ang 0c. 206 ‘THE BUSINESS OF INSURANCE 4 Investments funded and unfunded det " ization of debt discount, and rentals for leased properties. (a) ‘created or existing under the Provided, That if the stocks the guaranteeing corporation; ‘finally ‘That no life insurance compar pared pen obi any shall invest in or loan ‘such insurer as of December thirty-first next the date of such investment. a — (©) Common stocks of any solvent corp institution created 4 os ye oe the Philippir as shown by its aforesaid financial statement unless previously authorized by the Commissioner. (n)510. THEIN ificates, notes and other obligations issued oy ences ere of any Inston created or laws of the Philippines which, or being adi under the 3h, are being powen Interest. Equipment trust obligations or certificates which are adequately secured or other adequately se- ‘ured instruments evidencing an interest in equipment ‘wholly or in part within the Phi Provided, how- ‘vor, That there Is a right to receive determined por- tions of rental, purchase or other fixed obligatory pay- ments for the use or purchase of such equipment. (10) Any obligation of any corporation or insti- tution created or existing under the laws of the Philippines which is, on the date of acquisition by the insurer, adequately secured and has qualities and characteristics wherein the speculative elements are not predominant. (11) Such other securities as may be approved by the Commissioner. domestic insurer which has outstanding ¥%) times the amount of under such contracts or the and ‘SEC. 207. An insurance company may: (1) Invest in equities of other financial institutions; SURANCE.CODEOF THEPHILIPPINES ANNOTATED Sec. 257 secs. 208-208 ie "THE BUSINESS OF INSURANCE ou Tile 4 — Investments (2) Acquire or construct housi ing projects and, in connection with any such project, may acquire land or any interest therein by purchase, lease or otherwi land acquired pursuant to any other provision of Such company may thereafter own, maintain, collet or receive Income fom nd convey, any land or interest therein so acquired a mer or intere equired and any Improvements the production of incom be improved or devel pursuant to a program t shall not exceed twenty-five percent (25%) of its assets as of the thirty-first day of December next instruments of debt of the Government of the PhilippinesIILIPPINES ANNOTATED Sec.219 512 THE INSURANCE CODE OF THE PH tical subdivisions or instrumentalities or of rolled corporations andentities, i-owned or cont ig aed govern Including the Bangko Sentral ni That such investments shall at al tposug eure bligations under depositing insu ol contracts. The provisions of Section 198 shal the securities deposites wise provided in this Code, no judgment jimant shall have the right to levy upon the insurer held on deposit under ‘deposit pursuanttto the requirement classes of investments described in Section 206, including ‘securities issued by any “registered enterprise,” as this term is defined in Executive Order No. 226, otherwise known as ‘The Omnibus Investments Code of 1987" and such other classes of investments as may be authorized business; and (b) The total investment of an ‘or encumbrance, aggregate amount shall be at least equal in amount _s THE BUSINESS OF sR The tnvenent rer or twenty capital ofthe fssuing compeny, wh otherwise approved by the Commi SEC. 212. After satisfying the minimum capital Investment required in Section 209, any life insurance company may invest its legal policy reserve, as provided in Section 217 or in Section 218, in any of the classes of securities or types of investments described in Sections and in any securities issued by any “registered ise” mentioned in Section 210, free from any lien imbrance, in such amounts as may be approved by the Commissioner. Such company may likewise invest any measurement methods which are generally -eptedinthe industry and acceptedby the Commissioner. 51351 THEINSURANCE: r to determine the cr tm oe aie te yulation prescribe or for amortization, btedness which in require any class or wire by oil regulation P= Ciabey ef rsuer,oher thane inurance companies, Tire in tis country, t0 value thelr autorize te gman ofindebtednessn accordance sunty, except securities, subject xcept jise provided in id may cause an examination to be made of any iary or affiliate of such insurer as appropriate to specific investments as provided in appropriate circulars issued by the Commissioner. ( (c) Investments in equity of an insurance company shall be valued as follows: (1) Listed stocks shall be valued at market value and periodically adjusted to reflect market changes CopeOF THE PHILIPPINESANNOTATED Sec. 24g > a sec.214 ‘THE BUSINESS OF INSURANCE sts Tiles — Investments through a special realizable value wher at adjusted book value based on Ungualited audited financial statements of the company which issued and company earnings or losses of the cor company after acquisition of such stocks. (n) last report on examination, whichever is more recent. The book val ts common stock issued and outstanding. (a) Notwithstanding the foregoing provisions, insurer and any amount or amounts thereafter paid by ‘such insurer or any assessments levied for improvements in connection with the property. (f) Purchase money mortgages received on dispo- sitions of real property held pursuant to Section 208 shall be valued in an amount equivalent to ninety percent (90%) of the value of such real property. Purchase money516. THEINSURANCE CODE OFTHE PHILIPPINES ANNOTATED Secs. 20¢215 sitions of real property in an amount not exceeding of such real property as determi ‘an apprai ‘about the time of disposition of such real property. ) The stock of a subsidiary of an insurer shall bo valued on the basis of the greater of: The value of only such of the assets of such investments for directly by the insurer; (2) Such other value determined pursuant to stan- dards and cumulative limitations, contained in a regu- lation to be promulgated by the Commissioner. (h) Notwithstanding any provision contained in this ‘section or elsewhere in this chapter, if the Commissioner finds that the interests of policyholders so permit or require, he may permit or require any class or classes of insurers authorized to do business in this country to value investments or any class or classes thereof as of date heretofore or hereafter in accordance with any applicable valuation or method. SEC. 215. It shall be the duty of the officers of the insurance company or of every month all such investments as may be m: them during the preceding month, and the Commis may, if such investments to him, require the shall also include a by the company during Investments by insurance companies. ‘The importance of a sound investm overemphasized because of the consider necessarily in the hands of insurance funds which are s panies and which are essential to their business. Profit from investment is a vital source of income, and surers so control their investment policy as to secure the highest rate of interest consistent with maintaining the value of ‘THE BUSINESS OF p "hae S| CEINSURANCE 37 invested and the requisite convertibility, as and when fe insurance policies are in the nature of permanent contracts and long-term securities a f perma greater part of the life i re, therefore, suitable for the however, are present insurances because (2) In any event, investments should be well spread in order to smooth out market fluctuations, and insurance companies, therefore, need to watch the market closely. Of course, are not limited to stock exchange be evident from a glance at any company’s surers grant mortgages, purchase freehold and leasehold ground rents, and, indeed, are always prepared to find new avenues for the investment of their funds as long as the capital is secure and the gener ions satisfactory. (Dindsdale & McMurdie, op. cit, pp.2 Investment of the amount of paid-up capital. ions of Section 209 and have the securities deposited ance Commissioner. (2) A domestic professional reinsurer shall invest 25% of its paid-up capital in securities satisfactory to the Commission in accordance with and as specified under the provisions of Section 289 and have the securities deposited with the Insurance Commissioner. Under Section 209, the securities are held as a contingency answer for all the claims against the insurance company policy holders and their beneficiaries in the event the518 THE INSURANCE CODE OF THE PHILIPPINES ANNOTATED Secs 205.5 insolvent or otherwise unable to satisfy the (ece Sec. 198.) Thus, a single claimant may securities to the exclusion of all others, The to the fund is dependent on the solvency of obligations of the company company become: claims against i right to lay cli the insurer and is subject to all other ob! arising from its insurance contracts. Being a mere expectancy an inchoate interest, it has no attribute of property. (Republic vs. De] Monte Motors, Inc., 504 SCRA 53 [2006].) Investment of legal reserve. Every non-life insurance company, domestic or foreign, must set aside and maintain an amount corresponding to the legal reserves required under Section 219 (infra.) of the Code, (1) The amount corresponding to the aforementioned legal reserve shall, together with the amount corresponding to the reserve fund held for reinsurance ceded to authorized insurers as provided for in pertinent treaty provisions, be invested as follows: (a) In the case of a domestic company. — In the classes of investments described in Section 206 of the Insurance Code, including securities issued by any “registered enterprise,” as this term is defined in Executive Order No. 226, otherwise known as the Omnibus Investments Code, and such other classes of investments as may be authorized by the ‘Commissioner, provided that (i) in case of a company's investment in the lot and building in which its business, not more than twenty per ce net worth of such company as shown by statement approved by the Insurance Commissioner shall be considered for purposes of this investment requirement and Gi) the iment of such company in any Il not exceed twenty per centum (20: P of the registered enterprise excluding the intended investment, unless previously authorized in writing by the Insurance Commissioner. (see Sec. 210.) _(b) In the case of a foreign company. — In the classes of Philippine securities described of Section 206 of the Insurance Secs, 205-215 ‘THE BUSINESS OF INSURANCE 0 Tile — investments Code, provided that no investment in stocks or bonds of any single entity shall, inthe aggregate, exceed twenty per centum (20%) of the net worth in the Philippines of the investing ‘company as shown by its latest financial statement approved by the Insurance Commissioner or twenty per centum (20%) of the capital of the issuing company, whichever is the lesser, unless otherwise approved in writing by the Insurance Commissioner, provided, further, that the securities so purchased and kept in the Philippines shall not be sent out of the Philippines without the written consent of the Insurance (2) The full amount of the legal reserve required to be set up in the books of and held by an insurance company doing business in the Philippines for reinsurance ceded to unauthorized foreign any there be, shall be invested only corporations and including the Central Bank of the Philippines, and/or ot securities acceptable under Section 206 of the Insurance Code. (see Sec. 225.) The investments mentioned above must at all times be free from any lien or encumbrance. (Ins. Memo. Cir. No. 5-75, Oct. 15, 1975, effective Jan. 1, 1976.) Foreign currency denominated investments and insurance policies. The following guidelines shall govern foreign currency denominated investments and insurance policies: currencies allowed. — Only foreign currencies 1e Bangko Sentral ng Pilipinas (BSP) as part of its international reserves shall be allowed. vestments. — The following foreign currency denomi- sstments may be allowed: (a) Issues of the Philippine government or Philippine government-owned or controlled corporations;20 THEINSURANCE CODE OFTHE PHILIPPINES ANNOTATED Secs 205.215, porations provided t to oF better than (©) Issues of Philippine priv these shall have a credit rating € that of the Philippine government; ici Issues of foreign governments provided these shalt tv pi cet fating of BB* as rated by S &e P, reveal as rated by Moody's, or its equivalent as rated by other international credit rating agencies acceptable to the Insurance Commission; or one notch above the credit rating of the Philippine government, whichever is higher; (a) Issues of foreign corporations provided these shall have a minimum credit rating of: BBB as rated by S & P, or Baa as rated by Moody's, or its equivalen ating agencies accep\ Insurance Commission; or two (2) notches abov ‘of the Philippine government, whichever i Loans against mortgageson real properties outside| Philippines which shall be considered surplus investments and which shall be made only if the laws of the country where the property is located allow the lender to own real estate property in the event of foreclosure; (© Loans guaranteed by banks of foreign countries provided the guarantor bank has a minimum of BBB as rated by S & P, or Baa2 as rated by Moo its equivalent as rated by other internatiot agencies acceptable to the Insurance Commi notches above the cred whichever is higher; an (g) Investments. in venture capital which shall be considered as surplus investments if made in accordance with rules and regulations, and upon prior approval of the Insurance Commission. tments for each type of issues mentioned shall not exceed 25% of the company’s latest tted assets for life company and 20% of the net worth for non-life company. Reserves and other liabilities in a foreign currency must be matched with assets in the same currency to at least 50% a ae 215 ‘ees 205+ ‘THE BUSINESS OF INSURANCE sa. “Tile 4— Investments ions may be granted where the aggregate liabilit liabilities in a currency are les than 10% of the total fo ies of the company. The perti ce Code on investments provisions of the likewise be applicable (3) Insurance policies. — (a) All liabilities resulting from the issuance of a foreign currency denominated policy shall be valued in the same currency used in the insurance policy. (b) All foreign currency assets shall be booked in the currency stated in the underlying instrument/document. In the absence of any instrument/ document, it shall be booked in the currency of the country where the asset is physical located. a eat in acceptable foreign currencies allowed. Premium related taxes and documentary stamp taxes 3 based on the peso equivalent of the premium or sum assured, as the case may be, at the time the taxes are due in accordance with BIR regulations. (©) Commissions shall be paid in accordance with the currency agreed upon in the agency contract. (®) Policy benefits and claims shall be payable in the currency of the insurance policy issued. However, payment may be made in another currency subject to the agreement between the claimant and the insurance company. Premiums shall be billed in the same currency as the policy issued. However, payment may be made in another currency subject to the agreement between the policyholder and the insurance company. (h) Income arising from foreign currency investments shall be recognized in the currency of the instrument, unless such instrument specifies another currency, in which case the investment income shall be valued in that currency.522 THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Sees 205-215 transaction, be recorded ed in tes (2) and) we, converted to Philippine peso based on the exchange ae ‘being used by individual insurance company at the ime they were acquired or incurred, provided a it these are revalued periodically as explained in item (), below. fl i id anni ) For purposes of periodic ané value of the foreign currency assets and liabilities converted to Philippine peso based on the BSP guiding rate at the end of the reporting period. (&) Unrealized foreign exchange gain or loss shall be recognized as Fluctuation Reserve Foreign Exchange. (I) Realized foreign exchange gain or loss shall be recognized as income or loss in the Income Statement. (m) Schedules showing balance sheet currency values and their peso equivalent, with the Annual Statement. In case an accou multiple currencies, a sub-schedule showing the currency breakdown shall likewise be submitted. (4) Rationale for ofshore investments. — Offshore investments described in No. (2) above may be allowed toenable the insurance ‘companies to achieve any or all ofthe following: (a) Risk diversification; (b) Enhanced portfolio liquidity; or (©) Ability to sell foreign currency-denominated insurance products which offer clients a whole range of investment outlets from purely Philippine to non-1 risk or a combination of both, depending on the cl and yield preferences. (Ins. Cir. Letter No. 29-05, Sept. 23, 2005; supersedes Cir. Letter No. 9-197.) Necessity of approval of investments by the Insurance Commission. (1) Investments not subject to approval. — Investments which qualify under Sections 204, 205, 206(1), 206(2)(a) to (i), 206(3), 208, ees. 205.215 ‘THE BUSINESS OF INSURANCE 3 ‘Tile &— Investments 210,211 and 212 of the Insurance Code d. i lonot requit ay val ate ues Como poe tions set forth in said provisions of by reason of loai bonds of the government and government-owned ot controlled corporations and entities; bonds, preferred stocks and common stocks of “solvent” corporations as the term “solvent” is defined Life insurance companies may, in addition, invest in housing projects and real estate for the production of income, subject to the limitations set forth under Section 208 of the Insurance Code. They may also invest their legal policy reserves in any of the classes of investments mentioned in Sections 204, 206, 207, and — Prior approval of the those investments which fall under: ssioner”; vest in equities of other financial the buying and selling of short- term debt instruments. (€) Sections 197, 2 in excess of the 20-20% (4) Section 299 — “ insurer and any person i loans or extensions of credi or more of the insurer's December next precedi For life insurance companies: Prior approval as enumerated in N and 211 —only for investments tations set forth therein; and insactions between a controlled Iding company system. . wwestments, involving 5%, ssets as of the 3ist day of investments not requiring, (1) above are considered /stg SURANCECODE OF THEPHILIFINES ANNOTATED Sex 5), 2 ts while investments enumeray (qualified as reserve jnveon prior approval by the Tnsurare’ omeneltced ray, ed / qualified aseither reserve or surplus eee only investments fe insurance companies: ments made ner eon rr oe are considered /qualified as reserve investments. Investments made under the following sections are classified a5 surplus investments: Sections 204, 207, 206(b)(1) (in excess of 20%-20%, limitation), and 211 (in excess of 20%-20% limitation). ‘All other investments enumerated under No. (2) by both life and non-life insurance companies may, upon prior approval by Insurance Commission, be considered /qualified as either reserve or surplus investment. (Ins. Cir. Letter No. 23-94, Dec. 1, 1994.) Security deposit immune from levy on execution. Section 209 (par. 2.)expressly and clearly exempts the security deposit from levy by a judgment or any other claimant free from any lions or encumbrances at all times, for all ol depositing insurer under its insurance contracts. The securities are in the nature of a trust fund held as a contingency fund to answer for claims against the insurance company by all the policy holders and their beneficiaries in the event that the company becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay claim on the securities to the exclusion of all other parties who may have their own claims against the insurance company under other insurance contracts it has entered into. In other words, the right to claim against the security deposit is dependent on the solvency of the insurance company and is subject to all other obligations of the company arising from its insurance contracts. (Capital Insurance and Surety Co,, Inc. vs. Del Monte Motor Works, Inc., 777 SCRA 1 [2015]; Republic vs, Del Motors, Inc, 504 SCRA 53 [2006].) esas "TH ust seo Tie 4 —inestnts NE 5 Dual nature of the business of insurance. insurance business undervriting and investment Asageneral ule noone would buy insu that does not have a substantial net worth in aaa ove ant above its current premium income. Obviously, these assets must be invested and must produce an investment income. Except for ' operating on a cooperative basis, the therefore, necessarily a combination of ¥8 and the business of investment. In view of the dual nature of the business of insurance, an insurance company’s investment whether derived from real estate, or stock or money loaned, is essentially income from the business of insurance if the invested assets are held either as reserved funds to provide for policy obligations or as capital and surplus to provide an extra margin of safety which will be surance buyers. (8 Mertens, Law of Federal Income | pp. 8-9, cited in the Phil. American Assur. Co., Inc. vs. Comm., CTA Case No. 2318, May 6, 1974.) As the lending of money is @ form of investment, insurance ies are not considered lending investors under the ternal Revenue Code imposing the lending investor's tax. (See Sec. 116 thereof.) Insurance companies and lending investors are different enterprises in the eyes of the law. Lending investors cannot for a consideration, hold anyone harmless from loss, damage or liability, now provide compensation or indemnity for loss. The underwriting of risks is the prerogative of insurance, the great majority of which are incorporated insurance companies. (Comm. of Internal Revenue vs. Philippine American Accident Insurance Co,, Inc., 453 SCRA 668 [2005].) consists of two major activities: —000—TITLE 5 RESERVES Everylife insurance company, doing busi ines, shall annually make a valuation unpaid dividend Se cnae -first day of December ns shall be made, the company, as accordance with standard table of mortality by the Insurance Commis When the preliminary term basis is used, the term insurance shall be limited to The results of such valuation shall be reported to the Commissioner on or before the thirtieth day of April ‘of each year accompanied by a sworn statement of a designated company officer and assumptions used in arriving at ilities; and it shall be the having verified, to such Necessary, the valuation of a the company has suc oun! securities after all other debts and cl been provided for. anil The reserve liability for variable contracts defined im Section 236 shall be established in accordance with 526 secs. 216220 ‘THE BUSINESS OF INSURANCE eo Tite 5— Reserves actuarial procedure that recogni nature cof the benefits provided, and shall be approved by the . Every life insurance company, conducted on n oF plan in which policyholders are by the policies entitled to share in the profits or 38 of life insurance heretofore the conditions of which the is deferred to a fixed or specified the policy being in force and the actual interest earnings and accretions to such fund, as a distinct and separate liability to such class of policies ‘on and for which the same was accumulated, and no ‘company or any of its officers shall be permitted to use any part of such apportioned surplus fund for any purpose whatsoever other than for the express purpose for which the same was accumulated. (a) ‘SEC. 219. Every insurance company, other than life, Reserves in general. surance business is an important economic force srge amount of assets that it accumulates and y investing. Most of the assets of the company50m THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Ses.216:25 are needed to provide the backing for the company’s financia| obligations. “These obligations are measured by the policy reserves and other insurance reserves. (“Reserves,” by William, H. Schmidt, in LHIH, p. 158.) Modem statutes require insurers ‘reserves to assure the payment of losses covered by ies and the return of unearned premiums. (Maryland 0. v. US, 251 US. 342) ‘The term “reserve” or “reserves” in the law of insurance means a sum of money variously computed or estimated, which, with accretions from interest, is set aside, “reserved,” as a fund with which to mature or liquidate either by payment ‘or reinsurance with other companies, future unaccrued and contingent claims and claims accrued but contingent and indefinite as to amount or time of payment. (43 Am. Jur. 2d. 120.) Insurance companies are required by law to possess and ‘maintain substantial legal reserves to meet their obligations to policyholders. This obviously cannot be accor ied through the collection of premiums alone, as the legal reserves and capital and surplus insurance companies are obligated to maintai essential to the business of insurance.’ ‘The creation of investment income in the manner sanctioned by the laws on insurance is thus part of the b and the fruits of these investments are esser the insurance business. This is particularly true assets are held either as reserved funds to provi Obligations or as capital and surplus to provide an extra margin of safety which will be attractive to insurance buyers. (Comm. of Internal Revenue vs. PI “Asa pation agaist thr ut ling bow the amount necessary tothe serve in the event of lens fain exes thse aside, out of income, a fund in ad bass “cotingeny sane dtr wi sece. 216220 ‘THE BUSINESS OF INSURANCE. 9 TitleS — Reserves Reserves in life insurance. Policy reserves and the assets behind them arise because, I premium approach, the gross premiums paid in years usually exceed the expenses, and death claims in those years. These “overpaymen early years are accumulated and invested in order to off-set the effect of increasing mortality costs in the later years. (“Reserves,” supra, p. 158.) (1) Aggregate net value of policies. — The term has a distinctive meaning in respect of life insurance maintained on the level- premium basis. In such a situation, the amount of the premium is ‘greater than the mortality fable and an assumed rate of i amount constitutes the “reserve” against th value. The insurer Under Section 216, every life insurance company doing business in the Philippines is required to annually make, upon the net premium basis, a valuation of all policies, additions thereto, unpaid dividends and all other obligations outstan: day of December of the pt reserves the GP isa (consistent approach and sepresnts dhe best estimate ofthe insurance company’s abilitiessso THIEINSURANCE CODEOF THE PHILIPINES ANNOTATED See. 21629) ficance only in ly P1,000 one. have si (2) Computation. — Policy reserves have BBrES le, if a company sells the BaF ics, It should have a reserve of snot. Since it cannot know in advance the uals in each category, ituses the death rates ity table to determine the aggregate amount to the beneficiaries of policy owners who die, ‘This amount, when related to each P1,000 policy purchased, is Known as the reserve per P1,000 policy. It is also known as the “average reserve” per P1,000. ‘Thus, the average reserve is merely a convenient permitting a company to determine the extent of under certain given assumptions about interest rates and mortality rates. The purpose of a policy reserve calculation is to arrive at ble, usually conservative, estimate as to how much ting assets must be conserved to assure payment of id how much might be spent, perhaps ends to policy owners or stockholder endangering the company’s ability to meet its If the assumptions are changed, the reserves or decreased. On the other hand, the assets of a company are more readily and objectively valued. Accordingly, the surplus and stockholders (i.e., difference between the assumptions that underlie computations. (“Reserves,” by William H. Schmidt in LHIH, p. 158) a reasonal of the exi Reserves in property insurance. (1) Unearned premium reserve. — In the field of property insurance, the unearned premiums must at all times be adequate to pay a full proportionate return premium to pol the event of the cancellation of a policy before it reserve should be adequate to reinsure the business, if necessary. ‘The basic purpose of the reserve is to meet all liabilities under the contract and to pay expenses of claim services in the future. At the same time, it accounts for income received but not yet earned and repayment if the contract is discontinued. (D.L. Bickelhaupt, op. cit. p. 211.) _ ‘THE BUSINESS OF INSURANCE ss Tile 5 — Reserves secs. 216220 not received the full term of protection for which the premium was collected. It is the natural result of collect and delivering the product in the future. (Riegel, Jr, op. cit, p. 568.) The amount of reserve which every non-life insurance company doing business in the Philippines is required to maintain for unearned premit cies in force which Sections 219 and 220. — A second type of reserves required of (2) Loss reserve. property insurers is the “loss reserve.” Since many contracts of this type do not involve immediate payment of all losses that have occurred, reserves must be set up to assure their payment. For example, a workmen's compensation claim may be made against the insurer today. In many cases, be made gradually according to law during a long period of disability. In automobi ty cases, it may be several years after a loss before a court decides who is liable and how much. In such ‘cases, an estimate of the reserve that will be needed to pay the insurer's obligation is made and carried on its book as a loss reserve. In this way, losses and loss expense for claims that are known but not yet paid are provided for by the insurer under the loss reserve laws of the state. (D-L. Bickelhaupt, op. cit,, pp. 211- 212.) Valuation of reserves and cash surrender values in life policies. (1) The reserve ofa life insurance contract representing the difference between the actuar value of future benefits payable and future pres The funds accumulated in support of these reserves are invested by the insurance company in assets that are the property of the companyS32 THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Secs 216-229 (2) Cash surrender values in life insurance, contracts insurance company’s obligation to the policy owner aera ee jcnes to surrender the contract. Thus, while in the event he desires to su cash surrender values arise out of the level premium concept, are necessarily equal to the reserve in any particular policy ro Mintenurn rach eurrender values are specified by law. Life insurance companies, however, may provide surrender values in excess of those required by law. (“Savings Functions of Life Insurance,” by Vane B. Lucas, in LHIH, p. 42.) ‘Cash surrender value, an asset of policy owner. Schedules of cash values are incorporated in life insurance contracts and become obligations binding on the company. Thus, although the pooled life insurance assets in which accumulated funds are invested are the property of the company, the cash surrender value of each contract is a liability of the company and an asset ofthe policy owner. The principal sum accumulated as cash values is guaranteed. This “guaranteed valuation of principal” is one of the most attractive features of life insurance. bid.) While the amount of the surrender value is based on the reserve value of the policy, itis generall value for the purpose of discouraging cancellation. (J.F. Dobbyns, op. cit, p. 40.) (1) Life insurance on the level premium basis. —It is quite unlike most other forms of insurance because the risk of death increases rapidly with age, and because the premium level ided period of time. Under a level premium policy, the premium in the early years is more than is necessary to cover mortality costs; and in the later years, it is less than is necessary to cover mortality costs. The excess of the premiums in the early years is accumulated to provide sufficient assets to offset the deficiency in the premiums in the later years. Secs. 216220 ‘THE BUSINESS OF INSURANCE 533 Tile — Reserves The so-called “non-forfeiture provisions” define the equity to which the policy owner is entitled in the event the policy is terminated other than by death. Non-forfeiture values are available in various forms, as may be elected by the policy owner. (“Non-forfeiture Values and Policy Loans,” by Charles EB. Richardson, in LHIH, p. 173.) (2) Recovery by policyholder of unabsorbed part of premiums already paid. — The rationale of the minimum legal requirements for non-forfeiture values was stated as q “Itis fundamental in business relationships that contracts, other than insurance, which are terminated prior to their normal termination date, shall involve no loss to the party to the contract who is willing to continue the contract, and the party effecting discontinuance shall bear whatever loss is involved as a result of the termination of the transaction. It is stated elsewhere in this report that, in the case of life insurance, full forfeiture upon lapse is repugnant to the public interest and that it should be the policy of the State to establish a basis whereby the purchaser may recover in some form the unabsorbed part of the payments already made. However, it cannot be regarded as proper public policy to st that the party to the contract who is willing to continue shall be made to suffer loss through the inability or lack of desire of another to continue his contact. Equity, therefore, would appear to demand, as a general principle, that an insurance company transacting any type surance, as one contracting party, shall be left in as favorable a position following the termination of a policy by a policyholder as it was prior thereto, and equity does not demand that the seceding policyholder shall be in as favorable a position after termination as he was prior thereto.” (“Reserves,” by William H. Schmidt, in LHIH, pp. 175-176.) Tn 1059, in order to conduct a study of non-forteiture provisions, the National Associa headed by Alfred M. Guertin which rendered its report in 194[534 THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Secs. 216229 Company reserves as a measure of solvency. ‘The true financial health of a life insurance company cannot be determined merely by looking at the annual report prepared for the regulatory authorities. From an actuarial point of view, the basic test of a company’s solvency is whether or not it has sufficient sound assets to equal its liabilities under a “gross reserve calculation. (1) Prospective calculation of reserve. — Such a calculation would be made prospectively based on: (a) anestimated mortality table closely equivalent to the individual company’s experience; istic interest and expense assumptions, both for the present and for the foreseeable future; and (©) the fact that future premiums received ‘gross premiums less the anticipated expenses. This is a complex calculation in practice; itis rarely made. Q) Minimum valuation standards. — The minimum valuation standards of the various regulating bodies are intended to produce aggregate reserves in excess of a gross premium Valuation through the use of: (a) mortality tables with some margin for extra mortality, and (b) a maximum interest rate less than the yield expected to be received by the company over the long term on its investments, The policy and other insurance reserves are a measure, in the aggregate, of the liability of the company with respect to its contractual future guarantees. Allowance is made for expected future premiums. Valuation standards are set by the various regulatory authorities on bases which are intended to be conservative within a wide range of conditions. “Reserves,” supra, p. 171) be the —000— TITLE 6 LIMIT OF SINGLE RISK SEC. 221. No insurance company other than life, ‘whether foreign or domestic shall retain any risk on any ‘one subject of insurance jount exceeding twenty percent (20%) ofits net worth. For purposes ofthis section, the term, “subject of insurance” shall include all propertios ‘or risks insured by the same insurer that customarily are considered by non-life company underwriters to be subject to loss or damage from the same occurrence of any hazard insured against. ‘The Commissioner may issue regulations providing for ‘amaximum limit on the overall retained risks of insurers to serve as a catastrophe cover requirement for the same. (n) surance cededas authorized underthe succeeding to surety risks, deduction shall also be made of the amount ‘surety business and the value of any security mortgages pledged, or held subject to the surety's control and for the surety's protection. Retention limit. ) Factors in setting retention timit, — The maximum amount large amounts. (a) Although determination of a retention an actuarial problem, it also involves consi ss536 -THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Sec. 23) subject to precise qu set i f pected mortality, the distribution jon of new issues of insurance by size, the distribution of in-force insurance and new issues by age at issue and underwrit i underwriting skill, the degree of earning, st and the cost of the reinsurance ceded. (b) Reinsurance agreements provide that the ceding company may increase its limit of retention on new business and also specify the conditions under which amounts of {sting reinsurance may be reduced because of the increased ints of reinsurance so reduced are said ,” by Walter W. Steffen, in by aseries of big losses. As to surety risks, the amount assumed by any other company authorized to transact surety business and the value of any security mortgaged, » for the surety’s protection shall be deducted in determining the risk retained. (par. 2.) set actual Practice insurance companies seldom, ifever utilize .eir maximum retention limit but would adopt a self-imposed schedule of limits based on their estimate of the insured risk, TITLET REINSURANCE TRANSACTIONS 222. An insurance company doing business in ippines may accept reinsurances only of such retain risk thereon within such limits, as it Is ‘authorized to insure. ance company doing business In cede all or part of any risks situated ippines by way of reinsurance directly to any duly registered with the Commissioner as required in this Code. ‘The residentagent of such unauthorized foreign insurer or nonresident broker shall immediately upon registration furnish the Commissioner with the annual statement of ‘such insurer, mpany or companies where ‘such broker lace Philippine business as of the year preceding such registration, and annually thereafter as ‘soon as available. ‘SEC. 224. All insurance companies, both life and non- ippines shall cede authorized to do such arrangements id be consistent with sound underwriting practices before they enter into reinsurance arrangements with unauthorized foreign insurers. SEC. 225. Any insurance company doing business in the Philippines desiring to cede their excess risks to foreign insurance or reinsurance companies notauthorized sw‘538 THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Secs, 226-227 Si do so under ness in the Philippines may trae ne nm Pes cnt ay prescril et reinsurance agreement be for any reason cane *ULminate, the cosa company concerned fonn the commissioner in writing of such lation or termination within thirty (30) days from the notice or information of such canc received by such company, as the case may be. ‘SEC. 226. Every insurance company authorized to do businessin the Philippines shall reporttothe Commissioner ‘on forms prescribed by him the particulars of reinsurance treaties or any new treaties or changes in existing treaties within three (3) months from asset or as a deduction from liability, to any cedi for reinsurance made, ceded, renewed, or otherwise becoming effective after January 5 reinsurance shall the contract or contracts reinsurance agreement provides that assuming insurer shall be made dire insurer or to its liquidator, receiver or statutory successor except: (a) Where the contract specifically provides another payee of such reinsurance in the event of the insolvency of the ceding insurer; and (b) Where the assuming insurer with the consent of or insureds has assumed such policy ceding insurer as direct obligations of rer to the payees under such for the obligations of the ceding to such payees. soe 222-28 THE BUSINESS OF RSL The? — Ramen Bae ‘SEC; 228. No life insurance company doing business. s in the N reinsure its whole risk on any Incvidual int Hives, or substantially all of ite }out having first obtained the written permission of the Commissioner, Power to engage in reinsurance business. As a general rule, a corporation authorized in g insurance business may issue terms to engage of reinsurance; hei is required before an insurance company may ente1 expressly states that ‘doing an insurance business” includes “reinsurance business.” However, mutual insurance companies not given the specific power to reinsure risks, which power ‘companies, have no power to reinsure. Ins. Co,, 116 NW 274; see, however, Sec. 270.) Ceding of excess risks. ns 226 and 225 are designed to curb the activiti insurers. They also insure the retention of the premiums iippines, and consequently, provide for conservation of ‘change. through brokers, to fore brokers not authorized to transact business in the Philippines, are i to the satisfaction of the Insurance Commission abroad. To insure observance of the requirement, reinsurance transactions are now subject to the inder the present provision, the cession of done “under the terms and conditions which the Commissioner may prescribe.”snsuraNce CODEOFTHEPHILIFINES ANNOTATED, Se. 2329, 540 THE Rules and regulations on life reinsurance transactions. i ee ‘wing rules and regulations promulgated ang acted oy he Tesurance Commission govern life reinsurance transactions in the Philippines: fe insurance company on any one ineured shall not be less than the amount equal to the latest verified stockholders equity. (2) The minimum retention on substandard lives shall be from standard in accordance with sound ded downwards the schedules of retention era s ‘underwriting practice. ; aaaetttad te the insurance Commission prior to its adoption in any reinsurance agreement. (3) No reinsurance shall be placed abroad where the amount of risk is P3 million or less, per life standard risk, graded down for substandard lives. (4) No reinsurance shall kewise be placed abroad on fent risk does not exceed PLS provision for recapture of previously ceded bi the company against unusual number of ‘of jumbo policies issued, the company may a catastrophe or stop loss cover abroad. (6) Reinsurance abroad on other life insurance riders, group surance and all other life insurance business may be only after s been shown by the ceding company that such risk cannot be absorbed by the Philippine market. Likewise, facultative reinsurance placements are subject 0 prior approval by the Insurance Commission. (Ins. No. 12-09, March 10, 2009.) Secs. 222-228 THe INSUR ‘ie? Romane ae 2 Rules and regulations on non.life reinsurance transactions, (1) Non-life insurance companies whose treaty limits and premiums cessions as of 31st of December of the preceding year on the following lines of business donotexceed the corresponding, limits hereunder indicated: Lines of Business Treaty Limit Premium Cession (a) Fire P 10,000,000 5,000,000 (b) Marine 5,000,000 2,000,000 (©) Other lines (except motor car) P 3,000,000 P 1,000,000 They shall not enter into outward treaties with companies not authorized to transact business in the Philippines, unless the authorized ceding companies can first show to the satisfaction of the Commission that they will receive from such authorized by way of reciprocity, inward business of comparable in which case, the above treaty limits and premiums jions maybe reduced by an amount not exceeding 20% thereof, or that they can not secure locally the cover sought abroad under the best terms and conditions consistent with sound reinsurance underwriting practices. (2) Reinsurance abroad of Motor Car Business shall not be allowed except on an excess of loss basis, where such coverage could not be available locally. (3) As required under Section 226 of the Insurance Code, every insurance company shall report to the Commission on forms prescribed by it (copy attached), the particul new treaty or changes in existing treaties together treaty itself as of the first day of January yearly for consideration to determine the company’s comy pertinent laws, rules, and regulations on reinsurance, (4) The rules set forth under Section 225 of the Insurance Code are hereby quoted hereunder: xx x (8) Conformably with the above-quoted provision of the Code, facultative reinsurance placements are still subject to ce with the542 THEINSURANCE CODE OF THE PHILIPPINES ANNOTATED Secs, 222.295 prior approval by the Commissioner All circulars and orders inconsistent herewith are hereby revoked cancelled. (Ins. Cir, Letter No. 2-93, Dec. 12, 1992.) Glossary of important reinsurance terms. ‘The glossary of selected reinsurance terms below will give us an overview of reinsurance tet logy. (1) Assumption reinsurance. — An agreement between two insurers under which one insurer disposes of its entire in-force portfolio, or a specific block thereof, and the other jligations to the insured connected with the policies involved. Assumption certificates are issued by the assuming insurer to all insureds, notifying them has replaced the original writing company and that it responsible for the obligations under the directly written icies previously issued by the original insurer. Automatic reinsurance treaty. — An agreement between an insurer and a reinsurer under which the insurer is obligated to cede and the reinsurer is obligated to accept as reinsurance the amounts written by the insi excess of its retention limits, within prescribed limits outlined in the agreement. The ity commences simultaneously with the insurer. (3) Catastrophe reinsurance. — A form of non-proportional reinsurance (infra.) under which a reinsurer indemnifies an insurer for losses in excess of a pre-established deductible arising from a single catastrophic occurrence. The reinsurer’s liability is subject to a maximum amount per occurrence.! (4) Coinsurance. — A plan of indemnity reinsurance under which the reinsurer assumes the obligation on the amount teinsured in the same fashion as t! surer is obligated to the insured (excluding pol isk, the insurer usually ays to the reinsurer the gross expense allowances) it has col from the insured on the amount reinsured. (It should be noted, the reinsurer has no relationship with the insured or beneficiary.) "Catstophe reinsurance Isa special typeof excess eineurance, (No.5) Secs. 22-208 [THE BUSINESS OF INSURANCE cy Tile? — Reinsurance Transactions (5) Excess of loss. — A form of Ronproportional reinsurance under which the reinsurerindemnifies the insurer fori share of a loss occurrence only after the loss to the insurer exceeds a stipulated amount or percentage, the reinsurer paying only the portion of the loss exceeding such amount or percentage.* (©) Facultative reinsurance reat, — An indemnity reinsurance agreement under which there is no obligation on the part of the insurer to cede or the reinsurer to accept individual risks. The reinsurer retains the “facult scept or reject each risk offered by the insurer. The reinsu ity commences after definite approval or acceptance of (7) Modified coinsurance. — Same as coinsurance except the reinsurer lends the mean reserve to the insurer each year. (Each year the current year’s mean reserve on the reinsured portion less the preceding year’s mean reserve, plus interest thereon, is insurer, if this amount is positive, or returned to the negative.) ited with the Risk is the reinsurer’s ty in the event of death, mount reinsured the terminal reserve thereon, according to surer’s valuation basis for the plan of insurance issued to the insured. (9) Non-proportional reinsurance. — A plan of reinsurance under which the reinsurer provides protection in any one occurrence beyond the stipulated loss, deductible, or retention accepted by the reinsured regardless of the number of risks involved. The retention is stated in terms of the loss, either as a percentage or absolute amount, and as a function of either one event or a period of time during which several events producing losses take place, and is not proportionate or directly related to the risk assumed in the original policy issued to the insured. Catastrophe, stop-loss, excess of loss, or aggregate excess of loss reinsurance are examples of nor-proportional reinsurance. TEnces insurance should not be confused with surplus reinsurance. (No, 18)D Seen 224 sts THEINSURANCE CODE OF THE PHILIPPINES ANNOTATE re der surance, ~ A plan of reinsurance un oe eerie vides protection in any one occurrence When the lose exceeds the retention or risk assumed by the iasined ‘The retention is stated in terms ot eed or absolute amount, is the function of one care oe propentionate or related to the risk assumed inthe original policy issued to the insured. d Risk premium reinsurance, coinsurance, and modified co- insurance are examples of tional reinsurance, pro rata basis (eg, 60%, insurer and 40%, reinsurer). This plan of reinsurance is particularly applicable to group-underwritten business. (12) Reinsurance (or indemnity reinsurance). — A business assumed by the latter party under a policy or pol which it has issued. The reinsured may also be referred to as the reassured, original company, insurer, primary insurer, direct writing company, or ceding company. issued by the rei administrative dete reinsurance cession as the counterpart of the policy issued by the insurer to the insured, (14) Reinsurer. — The party to a reinsurance agreement who agrees to indemnify the other party to the agreement for losses arising out ofan insurance policy written by the latter party. (15) Retention limit. — The maximum amount which a company will carry on one life or one event risk without reinsurance protection, (16) Retrocession. — A reinsurance d transaction between reinsurers. This can best be defined by an example. ‘Secs, 222-228, “THE BUSINESS OF INSURANCE 35 ‘Tie7 — Reinsurance Tensions ‘Company B accepts reinsurance from Company A; Comy B then obtains reinsurance from Company for» tion atthe (17) Risk premium reinsurance (RPR), — A plan of reinsurance under which an insurer purchases reinsurance for the net amount at risk allocable to amounts of insurance for which the insurer res reinsurance. (see “Reinsurance,” by Walter W. Steffen, pp. 1004-1005.) }) Surplus share. — A plan of reinsurance in which the reinsurer does not participate in every risk ofthe original insurer but accepts only that part of the risks that go over certain it ‘The reinsurer does not participate unless the insurance exceeds the net retention limit. (see D.L. Bickelhaupt, op. cit, p. 164.) The amount of the retention is conveniently referred to as a “line.” pany, may retain P10,000 of every policy, I insurance in excess of this amount up to 'Y and all of any insurance over P25,000 wer Z. Company X's treaty thus covers 1 1/4 lines. AA loss of P4,800 would be shared in the same proportions, ‘or P3,600 by the ceding company and P1,200 by reinsurer Y. (Riegel, Miller & Williams, Jr, op. cit, p. 132.) rovide that losses up to P10,000 are covet ah yt tt P1090 lees een P10,000 and P30,000 is paid by X, and the rest by Y, and that losses exceeding P30,000 are paid 30% by X and 70% by Y. —000—TITLES ANNUAL STATEMENTS doing business ‘SEC. 229. Every insurance company doing in the Philippines shall terminate Its fiscal period on f December every year, and shall annually ear Tofore the thiteth day of Apil of each year render to the Commissioner a statement signed and sworn to by the chief officer of such company showing, in such form and details as may be prescribed by the Commissioner, the exact condition of its affairs on the preceding thirty- first day of December. addition, the Commissioner may information. The form and details of formation shall be prescribed by the ‘Commissioner and shall form part of the supplementary ‘schedules to the annual statement. (n) ‘Any entry in the statement which is found to be false ‘a misdemeanor and the officer signing shall be subject to the penalty provided ‘company authorized under le, deliver or use vé with the Commis: Separate annual statement of its separate variable accounts. Such statement shall be on a form prescribed or approved by the Commissioner and shall inclu secs. 229-231 THE BUSINESS OF INSURANCE Pr The — Annual Steno ” with the annual hy Statement required by the preceding SEC. 231. Within annual statement approved by react te insurance company doi shall publish in a newspaper of synopsis ofits annual financial stetomentahoumnc riya and setting forth its resources fance with such form prescribed by loner shall have the authority to make, id such accounting rules and regulations, amend, and rescin as may be necessary to carry out the provisions of the Code: Provided, That such shall be in accordance with internat set forth, Items or details to be shown in the balance sheet and n of accounts, appraisal or valuation of assets , determination of recurring and nonrecurring to require insurance companies ments and reports concerning their requiring insurance companies to make annual statements of their business and financial condition, enacted under the police power, does not impair the obligation of the contract evidenced by the charter of a company previously incorporated. (Eagle Ins. Co. v. Ohio, 153 US. 446.) Itis immates : or insolvent. (43 Am. Jur. 2d. annual statements is the primary means of alerting the Ins“HE INSURANCE CODE OF THE PHILIPPINES. ANNOTATED Secs 229251 38 ‘ommi .d insolvency (With the is danger of threatened wouling ‘nab ‘2 honor obligations to insureds) on the part of any insurance company. (.F- Dobyns oP: cl P- ) —000— "The insurance Commision has adapted i = ws adapted the General Infomation Sheet (G8) eeutes and Exchange Commision (SEC) as among the reports for periodic insrace and reisurnes brokers mil 2Py forthe surance Commision ofthe GIS subrane| oena atach 9 duplicate ede te ered aati 0 SEC an oped esived TITLE 9 POLICY FORMS ‘SEC. 232. No policy, certificate or contract. shall be issued oF delivered within the Phiigpinee unless in the form previously approved by the Commis no application form shall be used with, and no warranty or endorsement shail be attached to, stamped upon such policy, certificate or the form of such application, rider, claus ‘endorsement has been approved by the Cor Standardization of insurance contracts. Insurance contracts are highly standardized through statutory or administrative regulations, voluntary agreement, or customary practice. (1) Standardization makes it easier for consumers to study insurance contracts and to compare contracts issued by different insurers. (2) Both insurers and insureds gain from greater meaning they can attach to court interpretations of earl and from the reduction of policy conflicts in adjusting claims. Standardization, on the other hand, may reduce or delay the advantages of experimentations and competition. (3) Even when there is no statutory or voluntary standardization, competition and tradition favor some standardization. There are advantages to selling a contract that does not differ too much from that of a competitor and from the use of language that has been tested in practice. (Riegel, Miller & Williams, Jr, op. cit, pp. 58-59.) 38‘pa nsuRANCECODEOETHEPHTLFPINESANNOTATED Sep 50 Power to prescribe insurance contracts ee Strong public policy consid to regulate. — li sid. eae re pearance contacts andthe operation g reinsurance companies be regulated by law. ts power to regulate the insurance business, a oi ht presrbethe Kind and character of istrane contracts that may be made. There seems to be no doubt that the legislature may prescribe a standard form of insurance policy and to permit or require insurers to use it, or provide that, in the alternative to the use of such a policy, the policy issued must contain or include certain provisions. (New York K. Ins. Co, v, Gardison, 85 NE 410.) Furthermore, the State may delegate to an insurance official or board authority to see that the requirements prescribed by standard policy statutes are complied with. But it may not delegate to such official or board the power to draft such a policy and force the insurers in the state to adopt it. (King v. Concordia E Ins. Co,, 103 NW 616; State v. Great Northern R. Co,, 111 NW ___Q) Different types of control. — The legislation to standardize insurance contracts has resulted in four different types of control ‘over the contents of such contracts: (a) complete and compulsory standard policies; () required standard provisions; rohibited provisions; and !) optional forms filed in connection wit 4 proval (EW Patron ion with rate filing an Object. — The object of statu es Policies hasbeen stated tobe, practically, fo have | pes oe os a different form for each company doing escape the consequen spiny changing its form in order #0 (Gregerson ‘Pivenie ee ‘new decision made by the court. Ins. Co,, 77NW752.) * Co., 99 Wah, 639; Straker v. Phoenix Sec, 232 "THE BUSINESS OF INSURANCE Tie 9— Pai Forme =e (a) The chief is insured and ang POs of such legislation is to protect the contracts against unfair or ' having claims under insurance deceptive provisions, unscrupulous Tivals who would, because. beirut sink of scrutiny or inability to determine the value ofthe contract offered him, be able to sell a poorer contract at a lower price. In the popular lines, poor insurance will tend to drive out 00d insurance. (©) Moreover, where ‘on the same risk (as in fir rata part of the insurer with restrictive clauses while the more generous insurers 3s. (E.W. Patterson, op. cit, p. 33.) (4) Effect of noncompliance with standard policy statutes. — Under some statutes, policies varying from the standard form are unenforceable by the insurers issuing them and subject the insurers to penalties, but are binding upon them. Under such a statute, a vision more favorable to the insured than the may be enforceable by the insured. (Ottems v. 275 NW 900; 43 Am Jur. 2d 118-119.) ‘Submission of policies for approval. tothe Insurai rm or contract of insurance from wiih Philippines, as well as the application, rider, or enclorsement form which will be used wit, atached to, oF tinted or st ‘upon, such policy, certificate or contract of Turn form ecm. cet dated Ap 21976 se Sec. 232.) The approval protects purchasers of insurance o froma oe ‘of poliey which doesnot meet the legal requirements tobe enforceable. Of course, an insurance. commission approve a form of policy oF rider which 4 provisions of governing statutes. (Barnet issioner has no power to learly contravenes the vy. Merchants’ L. Ins.snug nsuRANCECODEOFTHEPHILPPINES ANNOTATED S23 ss ,) The view is Fa 271; 43 Am. Jur. 2d. 116.) the courts, (Drogula v. Federal Ins Co, : lark v E291.) The view Federal ins Ca, 136SE251) Thee ee exe that he approval ofthe ort ts the courts fom holding such the applicable law relating to the (2) Contents of policies. — Statutes which provide that insurance boards or officials shall have the power or duty to approve or disapprove policiesin accordance with statutes which prescribe in substance what shall be the provisions of policies issued within the State have generally been upheld or recognized ‘as a proper delegation of authority. Under such statutes, the approval or disapproval is not limited to purely formal matters such as the print type or make-up of the policy, but extends to representative matters of conformity with statutory provisions relating to the clauses and stipulations which must, may or may not be included in insurance contracts.' (New York L. Ins. Co. v. Hardison, 85 NE 410.) Ifa statute mandates the inclusion of certain provisions in an insurance contract, they shall be deemed contained in the policy although they are actually not included in the language ofthe contrac SEC. 233. In the case of individual life or endowment insurance, the policy shall contain in substance the {following conditions: (a) A provision that the policyholder is entitled to a ‘grace period either of thirty (30) days or of one 23 aan ‘THEBUSINESS OF INSURANCE Tile 9— Poicy Forme within which the may be made, subj the payment ofthe premium, durin v during which period of grace the policy shall continue infullfore, But ncece the Deon sche nfulforce, butin case the policy fe overdue premium is paid, the amount of such , premium with interest may be deducted from the amount payable in settioment; issue as shown in the policy, or date of approve reinstate xcept for nonpayr (c) A provision that the policy entire contract between the parties, but if the company desires to make the application a part of the contract It may do so provided a copy of such application shall be indorsed upon or attached to sion that the policy and the application therefor shall constitute the ‘entire contract between the part (2) A provision that if the age of the insured is considered in determining the premium and the benefits accruing under the policy, and the age of the insured has ‘been misstated, the amount payable under the policy shall bbe such as the premium would have purchased at the iey is participating, a provision that the ‘company shall periodically ascertain and apportion any divisible surplus accruing on the policy under conditions specified therei A specifying the options to which the poteyhol led to in the event of default in a Premium after three (3) full annual premiums shall have been paid. Such option shall consist of: (1) Acash surrender value payable upon surrender of the policy which shall not be less than the reserveS54 THEINSURANCE CODEOF THE PHILIPPINES ANNOTATED Sex. 235 (2) One or more paid-up bene plans specified in the policy of such purchased by the cash surrender value; ) Aprovision that at any time afte lable under the policy and existing indebtedn ce of the pre icy year, which provision ‘may further provide that such loan may be deferred for not ‘exceeding six (6) months after the application therefor is made; (t) A table showing in figures cash surrender values and paid-up options available under the policy each year policyholder shi ‘same by reason of hi iat the policyholder shall be entitled {0 have the policy reinstated at any time within $00. 233 ‘THE BUSINESS OF D¥SURAN Ties Peg rane o years from the date of default of premium payment unloss value has been duly paid, or the 'od has expired, upon production of evidence Satisfactory to the company and upon vazaue premiums and any indebtedness c pon said policy, with interest rate exceeding that which would have been sppllcable to sald premiums and indebtedness in th rreslines sed in the policy years prior to Any of the foregoing provisions or portions thereof not applicable to single premium or term policies shall to that extent not be incorporated th id any such policy may be issued and delivered i lippines which in the opinion of the Commissioner contains provisions on any one oF more of the foregoing requirements more favorable to the policyholder than hereinbefore required. This section shall not apply to policies of group life or industrial life insurance. General form of a life insurance policy. (1) No standard form but mi contracts but all policies of life insurance must include the “standard provisions” (sometimes called “general in the policy) prescribed by Section 233. (see Appendi It was earlier felt that a standard form of policy resulted in too much uniformity of available coverages. To provide more leeway with respect to coverages and at the same adequately safeguard the interests of the policyholders, the law makes certain standard pro mandatory. Since the standard provisions establish minimum requirements only and an insurer th more liberal provisions, the law permits life insurance contracts than under a standard ‘ment. At the same time, a considerable degree ‘developed in the contracts offered by most insurance companies. (D.L. Bickelhaupt 5.290.) ions and privileges given to policyholder. — Feurance policy is a promise by the insurer policy of uniformity has BasicTHE: sssuRaNCE CODE OF THE PHILIPPINES ANNOTATED ae 586 0 icyholder (or hi tof money to the policy an beneficiary). The umowfyons under which the benefits are aercaeant and may include death some tYPe® Ofc «din case of endowments, @ ce and in ca ee to pay a stated amou igned. The owner of the z has the right to: stop or change premium payments; (©) change the recipients of the benefits; (6) assign the contract rights; change use of the dividends; change to a different policy; reinstate coverage; (@ take cash or loan values; (h) cancel the policy and receive accumulated benefits in of ways; and (use the policy proceeds by receiving lump sum or installment payments. (Ibid., p. 288.) Major classes of life insurance. The life insurance business has develo 2) ba veloped two (2) basic methods of distributing life insurance contracts: npr The, Protection is issued on the in ication and involves a separate poli ‘contract for each purchase. Under the method falls. ordinary fe insurance (Sec. 233) and industrial life insurance (Secs. 235-236.) 2) Group insurance it of selection tthe eet af tan the individual. Sec. 234.) In the United Hats ce if insure ally a method using group : this cat f life insurance is based on life insurance he basi put of credit fe insurance ito repay a deb the bertnas hace as ‘THE BUSINESS OF INSURANCE 7 Till’ 9— Policy Forme ‘The purpose of utilizing more than oe : ‘one system of marketin life insur reach thelargest posible number of insureds methods are called the major classes of life insurance. (see Ibid., pp. 255-260.) as an instrument through which savings and. financial ing are enhanced, In addition, several special considerations arise from the manner in which lawmakers and the courts have attached significance to life insurance proceeds. (1) Loan privilege. — The availability of cash values gives rise to the policy loan privilege, under which the insurance company will advance on the security of the contract an amount that, with interest as specified in the c guaranteed cash value. The is not more than 5% or 6%. ‘guaranteed for accumulating cas ‘of which is the administrative expense of handling policy loans. ‘The due date of policy loan is at the maturity of the contract or anytime prior to this date at the option of the borrower. (see Sec. 233Ig)) The contracts of many companies include a provision for ‘automatic premium loans. This provision protects against the ional lapse of the contract by advancing, in the form of policy loan, the ung due. The automatic premium loan is advantageous to the policy owner because it helps to continue the contract and all its features in full force and effect. (2) Policy insurance contracts may be “parti ing” ‘non-pat ting.” Participating contracts are characterized by higher annual premiums based ‘on relatively conservative mortality, investment earnings, and ‘expense assumptions. If actual results are better than assumed, the difference is reflected in surplus. This surplus is available for return to policy owners. The amount returned to the policyqumReSURANCECODBOPTHEPHILPPINES ANNOTATED Se.25 8 annually and is called a “policy dividend.” 5 for the insurance company to These dividends are @ mec nd should not be confi redundancy sa refund the premium stockholders. with dividends payable to corporates fdends usually are made a ofl del son oe Sec, 233{e]) The dividend may be taken in one of four (4) basic 1 option of the policy-owner: (a) in cash; (b) applied toward the payment of the next premium under the contracts; (6) applied to the purchase of a paid-up addition to the contracts; or (@) left on deposit with the company to accumulate at interest. In addition, many companies offer a fifth option, under which all or part of the dividend may be used to buy one-year term insurance. (G) Surrender options. — The savings feature in cash value life insurance also gives rise to the availability of surrender benefits should the policy owner wish or need to discontinue his insurance coverage. Surrender benefits may be received at the option of the policy owner in one of three forms: cash; paid-up (econ) reduced amount; or extended term insurance. (4) Supplementary benefits. — The for of abit intrest orc naa charge by virtually all companies in connection wi owmer is determined forms permanently disabled as defined i entitled to have waived a Oo after the disability co ; mes (by the insurer) any premium falling due affect any other pr ison ofthe Aida premium does not (©) Exemptic claims of the pitas | ‘creditors. — Protection against the itors or the beneficiary's credi ‘THE BUSINESS OF INSURANCE. 50 Tile 9— Poy Forme le through the life insurance contract itself or islation, Although the nature of non-statutory ection varies, the avoidance of claims of creditors can be of reat practical importance in preserving saving forthe purposes Legislative protection takes the form of state exemption statutes. These laws generally reflect the public a higher priority on an individual's obligation fami than to his creditors. The broadest statutes exempt all ty life insurance benefits from attachment by all types of creditors, while some statutes exempt only a modest amount payable to the widow and children of the insure: Court, Rule 39, Sec. 13{k]; Chap. U, Title 5.) (6) Income tax treatment, — Itis beyond the scope of this work to discuss fully the income tax treatment of life insurance and annuities. However, several aspects of the income taxation of life insurance related to financial planning should be acknowl- edged. Of major significance s the fact that proceeds of life insurance paid by reason of death generally are income tax exempt Endowment proceeds and cash surrender values, received other than by reason of death, are to be included in gross income to hat they exceed the aggregate net premiums or other ions paid. (see National Internal Revenue Code of Insurance,” by Vane B. Lucas, in LHIH, pp. 47-49.) Life insurance as property. Compared with other property. — It may be significant to icy as property and to compare it with other property which the deceased insured owned at the time of his death. One's “life insurance” does not transfer to heirs or beneficiaries, Rather, death transforms the life insurance0 snap sun aNCE CODE OFTHE PHILIPPINES ANNCTATED i . promi teime was only a bundle of promises, policy, which daring jen leaveshis land and buildings his oodeatd bonds to his heirs, life insurance on his life cannot be so anyone after is deat Instead, he leaves them the csh Bre which the policy has been transformed. teed value at death. seme, a propery, with the other forms of ich are owned, one significant difference stands out, ways guaranteed — When the life insurance proper Itis that to be its maximum (the face of the pol death of the insured occurs. This character the property at death — can never be known in advance for other property which one may own during his lifetime. Itis true of life insurance, whether the policy was purchased today or 40 years Significance. — The insured can counton He can use itas the foundation for the support. after his death. Furthermore, health insurance provides a method Health Insurance,” by T. Beadles, in LHIH, Pp. 36-38.) Protection functions of life insurance, i {1 Poting ios = Her ' policy is in force, how can a life su \gree to pay whenever an i ists thefactthatallinsranceisa mater of oolng of aeeachaai had been issued in. earlier i sarap eas and which are stil (2) Prediction of numberof deat 1s. — In addition to the Pooling principle, life insurance re ‘on the ability of the insurer Sec. 283 ‘THE BUSINESS OF INSURANCE so Tie 9— Poi Forms to predict with reasonable accuracy the number of death claims it can expect to have in a given year. Operation of law of large numbers. — This surprising result arises partly from the operation of what is called “the law of large numbers. i deathbed, and even then, the predictions may accurate. Yet, while the life insurers cannot predi of death of any single insured, they are able deaths in a certain period from a iteds. That which is impossible idual is entirely feasible when a aged 40, and on the basis of past experience, two out of every thousand could be expected to die during the year. This, would indicate the probability of death, and experie shown that, within broad limits, the greater the number in the group, the closer would the actual experience approximate the probable experience. probi statistics and by insuring enough lives for the law of large numbers to be relied upon, insurers are able to do the spparently impossible. The basic purpose of life insurance .d number of pesos, payable whenever death occurs and provided only that the insured’s policy be in full effect at the time of death. (see Ibid, pp. 28-29.) ‘Savings functions of life insurance. Through the medium of life insurance, hundreds of thousands of individuals have accumulated savings while providing financial protection for their families. These savingsa2 THEINSURANCE CODEOF THEPHILIFPINES ANNOTATED Sec.233 jected back into the : jes and inj are pooled by insurance compa 1m of investments, the economy in th alo tos any Philippines, along with savings and loan associations, sav banks, and commercial banks. resent ensic lans ‘The savings elemer scent in insured pension plans and ects ns sa ch a proportion of savings is accumulated through the ownership Of life insurance by individuals. ("Savings Functions of Life Insurance,” by Vane B. Lucas, in LHIH, p. 39.) ‘Apportionment and distribution ‘of policy owner dividends. AA dividend is a refund of that portion of the premium paid that is in excess of the amount necessary for current benefit ‘payments, expenses, and reserves required to cover future policy guarantees, Apportionment. — Apportionment of (@) First, a policy pro\ called a participating policy; a policy which does for payment of dividends is a non-participating (b) A mutual company is owned entirely by li ‘ownersand normally writes only participati: in some states, mutual companies are prot (with minor exceptions) from writing non-p: polis. A stock company is owned by its and generally writes primarily non-participatin, es, athough many stock companies offer participating po ies aap US and Dividends,” by Robert 7, Jackson, in (2) Distribution, — determined, the next st owners. Once the dividend fund has been *ep is distribution on individual policy See. 238 ‘THE BUSINESS OF INSURANCE 5 Tile 9 — Pot Forms The whole theory of equitable dividend distribution is based. lass,” a term which has peculiar Ww) that shall be as closely as Proportion to its contribution to the general funds distribution. A dividend class would be defined by all of the following common characteristics: the same type of coverage, the same year of issue, the same age of issue, the same number of premium payments made, and the same attained age. (Ibid, p. 187; see Sec. 195,) Misstatement of age. Since the annual premium on a policy written with a level premium is based upon the attained age at the inception of the policy, applicants have sometimes deliberately misstated their age. In other instances, the misstatement has been the outgrowth icies contain a special clause covering the subject that is equitable to both the insured and insurer. The clause provides that if the age of the insured has been misstated, the ‘This is determined by the application o} If an applicant states his age to be such that 1,000 insurance at that age is P20 and at the time of proves the correct premium should have been P25, the amount proceeds payable (x) is determined as follows: P1,000: x 20,000 P80 P25: P20 Hence, P25 x ooo age misinterpretation is covered by a special clause ), it cannot fall within the scope of the incontestable clause. ancies are most frequently discovered when proofs of death are being filed. Regardless of the time of discovery, the amount due under the policy is adjusted to coincide with the amount the premium would have purchased had the age been correctly stated. (DL Bickelhaupt, op. cit, pp. 297-298.)HNESANNOTATED See 253 1 F THE PHILIP 564 THBINSURANCE COO! Rights of insured under a lapsed fe polley. sed policy are determined ‘Therights ofthe insured amet sa Geen by the terms ofthe policy supplemente< YO rfelture of ‘The usual consequences of a lapsed policy are: of all ights; extension of insurance for a certain peri granting insurance for a certain amount. (Vance, op. cit, p. 319,) ‘ — Anon-forfeiture clause guarantees that forfeits any built-up values or investment expires or lapses after a certain period. The malty to be imposed is the absolute forfeiture of all of the rights. The law holds forfeitures with such disfavor that unless the intention is clearly expressed, nonpayment of premiums shall not confer upon the insurer a power to a forfeiture. However, the practice of insurers to stipt insurance policies that nonpaymer rer (except as to any paid-up or extended insurance) shall result in forfeiture is so general that cases involving contracts without such stipulation are rare. reserve Value of their policies at the time of default. Hence, came the provisions for extended insurance for so long a time as the reserve value of the policy could suffice to purchase such term insurance, or for paid-up insurance in such an amount as could bbe purchased by a sum equal to the value of the policy. (Ibid, pp. 319-320; see Sec. 233(g].) The nonforfeiture clause in a life insurance (except term insurance) guaranties the insured that the investment rights cannot be forfeited after the policy has been in effect for a number of years, (2) Extended insurance. — Where a term is is term insurance is “extended,” the insured is given the r ight, upon default, after the Payment Of at east three full annual premiums (see Sec. 233(f).), weave the Policy continued in force from the date of default for 2 Hime either stated or equal to the amount as the net value of the Sec. 233 ‘THE BUSINESS OF INSURANCE 68 Tite — Policy Forms policy taken as a single premium, will purchase. In case of death of the insured within the extended term, he may recover the face value of the policy. In other words, the coverage called for in the policy will only be for as long as the cash value will purchase it. Extended insurance is sometimes called “term insurance,” “temporary insurance,” or “paid-up extended insur: (3) Paid-up insurance. — Where insurance is “paid-up,” the insured is given the right, upon default, after the payment of at ree annual premiums (Ibid.) to have the policy continued force from the date of default for the whole period of the insurance without further payment of premiums. In case of death of the insured, he may recover only the “paid-up” value of the pol lly less than the “paid-up” premiums, under ions as the original ‘Technically, the term “paid-up” insurance is often referred to 1s “reduced paid-up” insurance. Options avaitable to insured in life insurance. ‘The law requires that in case of life or endowment insurance, the policy shall contain a provision specifying the options to which the policyholder is entitled in the event of de! premium payment after three full annual premiums shal been paid. (Sec. 233(f1.) In addition to the two mentioned rights or options (extended. insurance and paid-up insurance) usually granted to the insured, insurers also make provision for the so-called “cash surrender value option.” Pursuant to Section 25 by the Insurance Commission be issued or delivered in the PI on Premium Loan and Automat i premium payment conform with the following conditions:6 smignisuRANCECODEOFTHERHILPPINES ANNOTATED Ses.23 Jaultin premium payment, the Premium, if requested in writing by the ication or at any time before the policyholder either in the a expiration of the grace period. : ) The moment there is default in premium payment and canal has been elected either in the application or within the time specified in the policy, one of the paid-up options specified therein shall automatically take effect. (Cir. Letter No. 18-94, ‘Aug. 15, 1994.) Cash surrender value defined. Cash surrender value, as applied to a life insurance policy, is the amount that the insured, in case of default, after the payment of at least three full annual premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. This built-up cash value of the policy is investment value based on the premiums paid. ‘The more premiums the insured has paid, the greater will be the cash surrender value, but the value is always a lesser sum than the total amount of premiums paid. Nature of cash surrender value. The cash surrender value arises from the fact that the fixed annual premium is much in excess of the annual risk during the ‘earlier years of the policy, an excess made necessary in order to balance the deficiency of the same premium to meet the annual risk during the latter years of the policy. This excess of the premium paid over the annual cost of insurance, with accumulations of interest, constitutes the ‘Though this excess of Premiums paid is legally the sole beesoieae oop Still in practical effect, though not in advance tommake ge acute deposited with the company in oan ey ater premiums to cover the ba -ad of being retained tothe company in thece by the assured premiums, when the risk is greatest, shape of greatly-increased ‘THE BUSINESS OF INSURANCE on ‘Tie 9 — Policy Forms the net reserve required by law to be ki i t by the the benefit ofthe assured ei the credit ofthe policy, assured and to be maintained to (4) So long as the polic practically no beneficial inter the obligation to mai ins in force, the company has except as its custodian, with to the incontestable provision (Sec. 233{b]; see Sec. insurance policy is also required to include several policy provisions. Among them are: Grace period provision. — Grace period is a present time ‘beyond the due date for premium payment during which the insurance remains in effect and the insured is permitted to pay the premium without losing coverage. The purpose of the provision (Sec. 233{a].) is to give the policyholder an additional period of time within which to pay a premium he has not paid on or before the due date, keeping the policy in effect, In addition, the provision clarifies the respective rights of the beneficiary and the insurance company if the insured dies after the due date of the unpaid premium but within the grace period. In that event, the insurance is considered to be in force on the same basis as .e premium had been paid but the insurance company is .d to deduct the unpaid premium from the proceeds before g settlement; wovision. — The policy is also required cy, and also if desired by the a copy of which is attached policy, s i sween the .nce company and the policy owner. (Sec. 233Ic].) In the very early days of life insurance, insuring organiza- tions sometimes include in life insurance contracts, by reference, the provision of such documents as the charter and by-laws ofsxnanceconk OF THEPHFFINESANNOTATED See.) so THEIN the legal effect of making the indicateg sort Tsha en a athough there wasn way to know the contents of such nove ‘without examining the documents themselves. i cy owners did not have access to these Soe hs and privileges under the life insurance polly could be significantly modified without any opportunity bn their part to know the extent of such modifications, The warranties (3) Misstatement of age provision. — The age provision of the insured is of basic importance in determining the correct premium rate for life insurance. If his age has been misstated no matter how innocently, the result may be a significant error paid as compared to the premium that should have been paid. Such errors could be corrected either by appropriate premium adjustment or by adjusting the amount of insurance. The required provision (Sec. 233{d].) specifies the ter method; and tatement provision. — The purpose of the provision t to clarify the requirements for restoring a poli root 4 policy t has lapsed. To reinstate a policy means to restore the same (Lalican vs. Insular Life Assurance Co. Limited, 597 SCRA 159 [2009], citing De Leon, Insurance Code of the Philippines Annotated [2002 ed.], p. 538.) to premium-paying status after it has been permitted to lapse. The law requires i Fare een longs period, being more favorable tothe “Bvidence of insurability” referred to i it ( vide a to in Section 233(j) gene rally . i : be consid ably a broader phrase than Ree io ‘00d health’ “and includes such other factors as the "cupation, habits, financial condition, and other risk see. 233 ‘THE BUSINESS OF INSURANCE. 0 Tile 9— Policy Forms selection factors. (see “Legal C¢ by J.E. Greider, in LHTH, pp. and Contract Provisions,” Optional policy provisions. In addition to the provisions that are required by law to be included in the ce policy, several provisions customarily are included for other reasons, though they are not required. Among them are: (1) Suicide provision. — In the absence of specific policy exclusion, the proceeds of a life insurance policy would be payable in the event of the suicide of the insured just as they “If within two: (2) years from the date of isue the insured shall die by suicide, whether sane or insane, the amount payable by the company shall be the premiums paid”; Section 183 requires that the exclusion be limited to two years. ‘This period is thought sufficient to avoid the possibilty that an for life insurance will be submitted by a person who contemplates taking his own life. At the same time, suicide of the insured after two years from the issue or stances, prompted the purchase of the insurance. period of the incontestable clause (Sec. 233; ‘Sec. 48.) and that of the suicide clause ( ) run concus for a period of two (2) years from the clause, however, merely defines the risk the insurer is willing to assume. Denial of a claim because the insured’s death resulted from suicide the two-year period, therefore, is not a contest of the under the incontestable provision;ANNOTATED See. 235 sm THEINSURANCE CODE OF THE PHILIPPINES assignment. follows: “The company assumes nO respon’ t icy oreffect of any assignment of i Pa o policy ifand as he wishes. ent provision, therefore, is included to = of the company in the event the policy G) Ownership provision. — The provisio clarify the rights of the owner and the circur which those rights may be exercised. The exact wording of such provisions differs widely from company to company but the following provision is illustrative: “The owner is as designated in the application for this policy unless otherwis ifetime ive every subject to the rights of any irrevocably from the coverage provided by the policy generally are referred to as “war clauses.” Life insurance companies make use of such clauses except in times of w: and when the war emergency has ended, the clauses usually are cancelled. Itis customary to divide war clauses into uses, fo wit: : 8 clause or that which s insured’ death occurs wie he isk ptany series the 38 the more liberal, status lause, is more widely used than the sme 7ae ‘THE BUSINESS OF INSURANCE sn Tile 9— Policy Form (5) Payor clause. — A life insurance life ir comy may offer a waiver of premium beneftoten calle a “payor benefit” which the coverage) prior to the child’s attainment of a specified age such as 21 oF 25, ‘The purpose of the payor clause is to assure that the insurance ‘on the life of the child will be kept in force until the child reaches the specified age though the premium payor may die or become totally disabled prior to that time; and (6) Policy changeprovison. — Most life insurance contracts can be changed with the consent of the company, to a different plan. of insurance, if the owner wishes. Policy provisions granting this right range from very simple to relatively complex. The purpose of such provisions is to set forth the conditions governing such changes. Usually, a change may be made to higher premium plans for ‘smaller amount of insurance without evidence of Ithough the owner customarily will be required pay the difference in cash values or reserves between the he is exchanging and the one he is receiving, If the change is to ‘a lower premium plan, it is customary uire satisfactory evidence of insurability and the difference in the reserves for the plans is usually refunded by the company. (Ibid. pp. 118- Insurance shall be ‘SEC. 234, No policy of Issued and delivered in the in substance the following br in the opinion of the Commis the persons insured, ort least as favorable to the parsons Insured and more favorable to the policyholders: ‘A provision that the policyholder is ewes rtd of ‘ither thirty (30) days or of one (1) month