Insurance Corporation PDF

INSURANCE COMPANY
by
Beatrixe Marie G. Calpo
Chazedelk G. Cerdena
Ash Macalalad
Joebeth Espinosa
Jm Avila
Bradford Bailo
Joshua Almira
Kristel Manahan
Pauline De Joya
Daniel David
4ELM
A Research Portfolio Submitted

in Partial Fulfillment of the Requirements
in Other Commercial Laws (LMG 13)
SAN BEDA COLLEGE

638 Mendiola St., San Miguel, Manila
October 31, 2015
INSURANCE CORPORATION: A Research Portfolio

PREFACE
The purposes of this paper it to introduce to the readers the

environment of insurance corporations. Insurance today plays a vital role in
the economy of any country and world trade. Insurers can make or break
new investments or stop existing businesses from expanding as if they
decline to insure then Banks will refuse the necessary loans. Most businesses
have to rely on Bank finance for their development and Banks oblige them to
insure their exposures. Insurers allow communities to recover from the
disastrous financial consequences of natural catastrophes (Earthquakes,
Tsunamis, Tropical Storms) or human related events (September 11th 2001
being the most recent memorable event). Insurers also play a social role in
society by sponsoring sporting events, educational programs and youthorientated schemes to name but a few of the philanthropic contributions
Insurers make to society.
If we take a modern country such as Canada we find that major
Canadian companies and financial Institutions derive more than 25 percent
of their debt financing needs from Life and Health Insurance Companies.
This source of long term capital is crucial to a vibrant and growing economy.
On top of this by helping to protect individuals, their families and their
businesses against the financial risks of death, illness and retirement with
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financial
security
products
the
insurance
industry
complements
and
supplements the public sector social security systems.

This paper will typically include six main sections: The Business
Environment, Finance/Investment, Investment policies and Laws, The tax
system, General Registration requirements and BDO Offices.
This paper is primarily addressed to students, who play a very
important role in the growth and development of the economy. An
understanding of the background of insurances will help them understand
better in terms of our economic needs.
Grateful acknowledgment is here made to those who helped these
researchers gather data for this paper and to our Commercial Law professor,
Mr. Guiller Asido, for providing much information and insight about our
research topic and that for this work would not have reached its present
form without their invaluable help.
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BUSINESS ENVIRONMENT
Insurance is one of the very important financial services from all over
the world. It is one of the most grooming sections of the economic growth
and development. This industry is the major source of the long term funds
which is required for the development of the necessary infrastructure for the
country.
The insurance business environment consists of set of factors and
variable that provides various threat and opportunity to the operations of the
insurance business. The Factors and variable may not always be poisonous;
they may bring much good news to the existing business players. The
insurance business environment can be broadly classified as follows:
INTERNAL INSURANCE BUSINESS ENVIRONMENT

The insurance industry in a country is affected by a large number of
factors for its healthy development and growth. A congenial (comfortable)
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environment is a prerequisite, which is governed by many factors such as
the economic state of the country, political stability, awareness amongst the
public, awareness of investment for surplus generated and good steady and
reasonable returns, and better corporate governance. There are certain
other internal factors which have been direct or indirect effect on the
insurance environment. These internal factors are explained as follow:
Since all insurance companies have the same business environment, the
researchers elect to do a research on Indian insurance companys business
environment. And will set it as an example.
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Risk Management
Insurance is the business where insurance company transfers the risk
of the company. This is the concept of pooling of risk. The risk is thus an
integral part of every insurance organization. The company which promises
the transfer of risk will have to manage the risk of its own. The risk
management is an integral part of the insurance business. The sum received
as premium for the insurance policy is invested in derivative market which is
highly volatile. It is now well known in the financial world, as to how risk can
destroy corporate value and how value additions can be achieved through
Risk Management. At present, risk assessment and risk hedging models are
being increasingly used in the corporate sectors. Financial engineers are now
well equipped with the latest tools and techniques and products of the risk
management.
number
of
insurance
companies
are
selling
risk
management products, and insurance multiplies are being placed directly in

the capital markets and the corporate sectors. Thus proper risk management
strategies are required at each level of the insurance company. The firms
capacity to absorb risk is determined by its current exposure to other risk.
And thus all this risk is the important constituent of the internal environment
of the insurance company.
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Transparent Rules and Regulations
Now there are large numbers of insurers in the life and non-life
insurance business. These organizations deal in the variety of their own
products / policies. These require proper control while formulating and
implementing their respective rules and regulations. If there will not be any
standards for the operations and rules and regulations, it will be very difficult
for the insured to manage his policy. The IRDA have come a long way, since
its inception in November, 1999. The following regulations have already
been notified and the others are in the process:
i. Appointed Actuary
ii. Actuarial Report and Abstract
iii. Asset liability and solvency margin of insurers
iv. Licensing of insurance agents
v. General insurance reinsurance
vi. Registration of Indian insurance companies
vii. Insurance Advertisement and disclosures
viii. Regulation on investment life and non-life
ix. Regulations of accounts
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x. Surveyors Regulation
Thus the transparent and better the regulations in place, better would
be environment for generation and growth of insurance business in the
country.
Technology
Technology plays a strategic role in providing a competitive edge, be it
in aiding design and administering of products and building lifelong customer
relationships. The use of better technology will help to enhance service and
ensure
effective
and efficient service, delivery and
lead to
greater
customization of products and greater efficiency. Most of the insurer has to

set up national call centers, interactive voice response service system, and
web site etc. to grab the maximum business. It will help and create brand
position. Before the emergence of information technology, no insurer could
ever think of such advantage. The technology has helped in providing value
added services and a great facilitators to the agents and the customer
residing at faraway places. Moreover, it will also help the insurance sector to
conduct proper training and development programs. Use of internet for
purchase of products, catering to ones servicing needs, payment of
premium etc. The various services offered are as follow:
b. Providing for tele-services offering
c. Advising on right kind of insurance covers
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d. Advising on extent of life cover required
e. Advising on right investment decision
Thus role of technology also brings various threats and opportunities
of the insurance business environment.
Scope of Rural Insurance
Rural market in India is biggest as compared to any other nation in the
world. It was untapped source of funds for the insurance company but due
to lack of purchasing power of the people this sector of insurance remains
untouched and not explored fully. Then IRDA came into scene .The IRDA has
now defined it and has been made compulsory to do a certain percentage of
rural business by the private sector players. It has a wide scope and remain
untapped to the extent it provide opportunity. In rural areas the policies are
of smaller denominations, but this is compensated by the large number of
policy holder in urban areas. It is necessary to identify the right agent that
can target and cultivate the rural sector. The rural insurance should be
looked as an opportunity not as an obligation. A number of innovative
products and an efficient delivery system are two aspects that have to be
developed in order to penetrate the rural areas. Now the new entrants in the
insurance sector will definitely form their efforts on rural sector. Although
this sector presents number of challenges, it will provide great opportunities
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also. It is necessary to tap into the rural society. It is one of the very
important internal factors of insurance business environment in the country.
The Business of Retailing Risk
The extent of risk that an insurance company can bear is determined
by its net worth. The minimum capital requirement by IRDA for insurance
companies is 100 crores. Now all private non-life insurance companies are
looking at the corporate sector as they do not have sufficient funds for the
retail segment. Going by the solvency norms, the insurance company cannot
maintain proper solvency if all sum received is invested. This creates high
risk and thus reinsurance come into picture. To build up national reinsurance
capacity, the Government of India designated the General Insurance
Corporation of India as the national reinsurer. All no life insurer has to
compulsorily part with 20 % of their premium to GIC. In return this company
will be secured if in case the claim in any particular year due to extra
ordinary event increases rapidly. Therefore, it is evident that better the
business of retailing risk, the better will be considered the internal
environment for the insurance business.
Specified Training and customization program
The insurance business environment in any country is affected by the
reflection of the training and its quality on implementation to the various
intermediaries and agents. The IRDA has stipulated that all insurance sales
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agents have to undergo 100 hours of training and clear examination
conducted by insurance institute of India. The reason is that all the players
entering the insurance market need to have sales agent trained by the IRDA
accredited institutions. The syllabus rest on 60 % technical and remaining
based on the motivational task a sales agent has to perform. On line and
distance learning are providing a boon in training of insurance agents in
India. The more the trained personnel, the better it will be for the insurance
business of a country
Pricing of the Products
The pricing of the policy in insurance sector has a definite being ON
INSURANCE BUSINESS. The price always has an impact of the demand and
supply of the products and the services. So the pricing of the insurance
products will have a bearing impact on the insurance business in the
country. The pricing of the product undergo change and the regulator will
have to monitor it in order to create a healthy competition and insurance
market in the country in view, entry of private players. The provider and the
receivers both will have to interact very closely to secure a fair deal on the
pricing of the deal, as the good state insurance sector will no longer be in a
monopolized position. There should be meaningful and viable price for any
product to be marketed and sustained. However the responsible company
can afford to cut prices to a certain point, if they are to preserve their own
financial stability and ability to meet their obligations. This is an area which
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provides unlimited opportunities in the Indian context for consultancy,
broking, and education in the post privatization phase with new employment
opportunities.
Growing consumerism
The Indian economy with its growth of around 6% is now moving
towards the standard of living of the people. The very base of the middle
class population is broadening to around 300 million. It is a knowing fact
today that China and India are attracting the maximum attention of the
world, as they are only most populated countries, but also the most closely
viewed developing economies of the world. The openness of the economy
from the closed one has led to an era of well-defined consumerism. There is
a new kind of pressure on the consumer profile aspiring for quality,
effectiveness, and adaptability. Theses parameters would now determine the
survival of the market operators. With the competitiveness, the emphasis
would be in innovative of new products, and value added customer service.
Thus, aggressive market approach would be significantly required to Ancash
the opportunity. The newly opened insurance sector has been evincing the
maximum interest only in one direction, i.e. the customer, by way of
devising new methods to reach him with the kind of products and services
which he expects today. The opinion of having a choice and that too varied
has certainly raised customer expectations. Today, the reality is that the
customer is more aware not only for his rights but also the alternatives
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available to him for better products and services as well as new avenue for
redressal of grievances. To achieve this goal, it calls for continued focus on
the customer which calls for total quality performance with continued
growth. The new players shall have to be committed to the TQP in products
and services so as to provide total customer satisfaction.
Consumers perspective
The emerging scenario will provide the customer with:
f. Choice of insurance, wide range of new and innovative products
g. Competitive pricing of the products and services
h. Access to information about the companies and products.
i. Continuous consumer education
j. A well trained and highly professional sales force
k. Prompt and courteous front office response
l. Greater focus on customer service
m. World class pre and post sales services
n. Efficient and customer friendly claim administration system.
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Long term savings and investments
The long term savings generated will be a big boon for the Indian
economy catalyzing additional funds for the infrastructure investments.
Insurance companies will also bring long term capital to the market, which
will add to the depth and breadth of our financial sector. It is hoped that it
will bring in long term investors in the primary and secondary markets and
will also lead to market stability.
Organizational Control and efforts
There are generally three modes to which the business especially in
insurance deals with. They are as follows:
o. Business General Mode (This involves selling of insurance products)
p. Maintenance Mode (This deals with retaining the current market share)
q. Payout Mode ( When the claims are settled)
All these three modes bring opportunities and threat to the insurance
environment. The effort in all the three modes put in up by the management
of the insurance company is an important factor for the insurance business
environment. The management also includes controlling the insurance
business in such a dynamic environment.
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Challenges and strategies of privatization
The insurance sector is not free from the challenges thrown open by its
privatization and entry of more and more players to operate within the
regulatory framework of IRDA. Some important challenges to be faced by
this sector of the economy in the coming years may include:
r. Providing more jobs: U.K. which is equivalent to MP in size and with the
Population of 55 million provides six lakh insurance jobs whereas India with
one billion employs close to 5 lakhs.
s. Fear of job loss
t. Private insurer coexist with LIC and GIC
u. Managing and motivating risk of cross border operations
v. Upcoming more products and more complex features
EXTERNAL INSURANCE BUSINESS ENVIRONMENT
The external environment of the insurance business has been classified
in four parts, namely, legal, economic, financial, and commercial.
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Legal Environment
The insurance sector cannot work in isolation. Its operations, growth,
and development are always conditional by various factors of which external
business environment is one of the significant factors. There are various
laws and acts which have direct or indirect applications in the insurance
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sector, the knowledge of which is a pre-requisite for all those who are
concerned with the business of insurance in any capacity. Some of the
important acts which are applicable in insurance are as under:
a. Insurance Act, 1938
b. Life Insurance Act, 1956
c. General Insurance Business Act, 1972
d. IRDA Act, 1999
e. General Insurance Business Amendment Act, 2001
f. Some provisions of Contract Act, 1872
g. Some provisions of Companies, 1956
h. Service Tax Act
Extensive regulation of insurance business in India was brought into
effect with the enactment of the insurance Act, 1938. It tried to create a
strong and powerful supervisory and regulatory authority in the controller of
insurance with powers to direct, advice, caution, investigate, inspect, search,
seize, amalgamate, authorize, register, and liquidate insurance companies.
However, consequent upon the nationalization of insurance business (Life in
1956 and general in 1972) applications of the insurance contract was greatly
modified by the nationalizing enactments and Government notifications
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issued there under. Most of the regulatory functions were taken away from
the controller of insurance and vested in the insurers themselves.
IRDA Act, 1999
The preamble to the Insurance Regulatory and Development Authority
Ac, 1999 reads:
An Act, to provide for the establishment of an authority to protect the
interests of holders of insurance policies, to regulate, promote, and ensure
orderly growth of the Insurance Industry and for matters connected
therewith thereto. Section 3 of the Act provides for the establishment and
incorporation of Authority. The Authority established shall be a body
corporate having perpetual succession, and common seal with a power to
acquire, hold and dispose of property, both movable and immovable and
shall sue and be sued by the said name. Section 4 lays composition of the
Authority. It shall have a chairperson and other members not exceeding nine
in number, of whom not more than five shall be whole-time members
appointed by the Central Government from amongst persons having
knowledge of general insurance, life insurance, actuarial science, finance
economics, law, and administration. Section 14 of the Insurance Regulatory
and Development Authority Act, 1999, lays the duties, powers, and functions
of the Authority. The Authority shall have the duty to regulate, promote, and
ensure orderly growth of the insurance business and reinsurance business.
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Economic Environment
The economic conditions of the economy lay heavy impact on the
insurance sector of the economy. The following factors of the economic
environment have an impact on the insurance sector:
a. The state of insurance business
b. Industrial Policy of the country
c. System of economic planning
d. LPG policies
e. Comparative worldwide insurance environment
Financial Environment
The Indian Financial Sector is dominated by Public Sector whether it is
in the segment of Insurance, Banking or development finance. But the scene
is fast changing. With the passing of Insurance Development and Regulatory
Act in January 2000, the Insurance Industry has opened the way for
participation by private sector entities. It is hoped that the new entrants will
bring
with
them
experience
of
financial
and
commercial
business
environment that will enrich the Insurance Sector. Most of the Private Sector
players who have entered the Insurance Sector so far have rich experience
of working in the Financial Sector with vast commercial acumen and scope of
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handling the varied type of activities. The fact is that no business entity can
grow unless it has proper systems and mechanism relating to its financial
and commercial activities. The Insurance Sector, therefore, is no exception
to the above corporate business principle.
Financial institutions play a key role in the growth process. They help
mobilize large savings. They also help to allocate resources more efficiently
among competing demands. Financial institutions are called financial
intermediaries because they act as a conduit for the transfer of financial
resources from net savers to net borrowers. This basic function of
intermediation is performed through transformation mechanism which are:
1. Liability assets transformation,
2. Size transformation,
3. Maturity transformation,
4. Risk transformation, and
5. Commercial and Marketing Transformation.
The gain to the real sector of the economy depends on how effectively
or
efficiently
the
financial
sector
performs
this
basic
function
of
intermediation. However, institutions, like Insurance Companies perform

additional function over and above being financial intermediaries. They
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provide risk coverage. The risk to be insured must result in a loss which is
measurable in financial terms.
Capital Adequacy Requirement
The Insurance Regulatory and Development Authority have prescribed
the following scale of capital Adequacy requirement in the shape of paid up
equity capital for the entities doing Insurance Business.
(I)
Companies engaged in the business of Life Insurance
(II)
Companies engaged in the business of General Insurance
(III) Companies doing the business of Reinsurance

No company or other entity can do/or will be allowed to do Insurance
Business unless it comply with the minimum Capital Adequacy Requirement
as mentioned above
Investment of Assets New Norms
Every Insurance company includes investment of its funds from time
to time. It is not open to a company to make investments as it may like.
These are prescribed yardsticks for making investments in different forms.
The following percentages have been prescribed by the IRDA for making
investments by the Insurance Companies:
(1) 50% of Funds in Government Securities.
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(2) 20% of Funds in Corporate Debts.
(3) 15% of Funds in Market Investments.
(4) 15% of Funds in Social Sector.
The Social Sector includes Infrastructure, viz. roads, highways,
bridges,
airports,
ports,
railways,
water
irrigation
projects,
telecommunications, housing, generation, distribution, and transmission of

power. Investment in Government Securities tends to be highly liquid,
particularly in the following interest.
COMMERCIAL ENVIRONMENT
The insurance industry and business have to be made itself fully aware of
the breadth and depth of the:
(a) Knowledge
(b) Experience
(c) Expertise of its officers and other intermediaries.
It should make constant efforts in assessing problems, and finding out
their solutions in the most scientific professional and cost effective manner.
It should have a clear vision and be ready to implement advanced
management systems, procedures, and controls wherever required in its
working. It should have a clear goal to achieve high levels of efficiency
productivity
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and
competitiveness.
We
should
not
forget
about
the

competition which is likely to be faced in between the large number of
operators in the public and private insurance sector. Therefore, to have
effective commercial viability the players in the insurance sector should
update themselves and acquire new levels of knowledge and expertise with
clear dimensions.
Product Development and Innovations
There has been a lot of efforts for the development of various products
and these innovations both in the life and non-life insurance in the country.
With the entry of private sector players and the demand of the prospective
customers in view of mounting competition, more and more products are
likely to be developed to cater to the requirement of the customers at
different levels. The insurance sector has to provide to its customers wide
choice of products and price. The competition will ensure innovation and
constant improvement of service. The non-life sector will face much
competition. In the case of existing players, they are already in the process
of connecting their distribution channels. Their managements have realized
that if they do not come up with new products and better services they may
stand to lose in the face of stiff competition.
Thus, innovative products should be made available as per the
developments
of
technology
particularly
in
service
industry,
viz.
telecommunication, satellite, computers, and entertainment, etc. product
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development, and research will attract greater attention of players and they
have to update themselves as far as their products are concerned. The
marketing concept of general insurance will undergo a major change by
infusion of research and design of the products and the innovation of new
products.
Customer Service
The insurance sector is operating in the service providers sector,
where the customer service is very important. Customer service is an
organizational approach to delight a customer and not merely satisfy him by
simply fulfilling all his expectations. A very positive approach, tone of speech
and appearance are attitudes that create a first and last impression on
customers. Feedback is the best way of delivering quality services.
Therefore, the moment license is issued to a new player in the market; there
could be competition of a very high quality new products and services. New
thinking and new perceptions will arise to make excellence sustainable in a
liberalized insurance market in India.
Customer Expectations
In the present day competitive insurance environment, the role of
insurer has expanded tremendously. Beyond issuing traditional insurance
policies, they have to act as a consultant, advisor, and advocate to meet
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with the requirements of the prospective customers. At different stages, an
insured may expect:
1. Value added service from the insurance,
2. Development of new products,
3. Excellence in pricing and services,
4. Financial security,
5. Technological development,
6. Quality training to its staff,
7. After sales services, and
8. Customer satisfaction
Thus, the customers expectations have to be studied, reviewed from
time to time so as to get better business in the prevailing competitive
environment in the insurance sector.
Marketing Insurance
In the process of marketing of various insurance products we cannot
ignore two vital constituents of it, i.e. demand, and supply. The supply side
of insurance and the demand of the need will now undergo a major shake up
with the advent of new players in the market. The general insurance market,
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which consisted of 107 companies in the 1970s produced a market premium
of Rs. 15 crores, whereas at the end of 2000, the premium figure of the
state insurers stood at around Rs. 10,000 crores. The focus of the marketing
by the state insurance during all the three years was on laying the
foundation of infrastructure, creating need-based cover also caters to the
social insurance requirements of the Indian population. Therefore, with the
emergence of new players there will be emphasis on the marketing of
general insurance products both by Government owned as well as the
private sector players.
It is expected that the penetration of players will enhance the growth
of general insurance premium. Thus, marketing will be a focus item if
change in the coming days due to competition in the insurance sector, there
is going to be a drastic change in the distribution channel for marketing of
general insurance products. Reinsurance concept will also play a major role
in the marketing of general insurance products. Technology is changing very
fast, and Information Technology is one which will revolutionize the
marketing of insurance products. E-commerce and internet will enable the
direct purchase without intermediaries and thus, this is a major change
which the marketing field in insurance is going to face. Customer
relationship management and culture of insurance players as a quality
service provider will have its own role to play in marketing of various types
of innovative insurance products.
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Pricing of the product, i.e. Tariff
The pricing of the insurance product will also undergo changes and the
regulator will have to monitor it in order to create a healthy insurance
market. However, the tariff system for certain risk is bound to continue. This
is due to the reason that there would be more presence on the market for
flexibility and the players; both the providers and receivers will have to
interact closely to secure a fair deal on the pricing of the product. It is a fact
that insurance is after all a fund of many to take care of the calamities of
few and there should be a meaningful and viable price for any product to be
marketed and sustainable. There will thus be a definite pressure to move
away from the tariff rating and the market will determine the price especially
for personal insurance.
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FINANCE / INVESTMENT
Insurance companies are like any other business in the world. They
have to make a profit to stay in business. There are two basic ways this can
be accomplished. They can earn underwriting income, investment income, or
both.
Underwriting Income
Underwriting income is derived from the difference between how much
money is collected for all policies sold versus how much money is paid out
in insurance claims for those policies in any given time period.
For example, Insurer A may collect $1,000,000 in premium for
polices issued or renewed in a given year. If they pay less than $1,000,000
in claims, they have made a profit. If they pay more than $1,000,000 is paid
in claims, they suffer a loss. Insurers have a unique way to earn massive
amounts of additional profit. Unlike many other types of businesses,
insurance companies collect huge sums of cash throughout the year and
may not have to pay on claims on those policies for many years.
Investment Income
This unique situation allows insurance companies to invest that money
while its not being used. Huge profits can be reaped, or lost, as a result.
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This is exactly why Warren Buffet formed the Berkshire Hathaway Insurance
Companyso he could generate capital to invest in the stock market.
In fact, insurance companies can knowingly charge too little for insurance
policies and plan for an underwriting loss if they believe they can make a
profit from investing the money they receive before having to pay claims. In
the early 2000s, when the stock market was booming, this practice was
taking place.
On the flip side, insurance rates may be raised to make up for stock
market losses.
Additionally, some insurance companies may enter a new line of
insurance or a new state and purposely charge less than their competitors,
causing an underwriting loss, simply to make a name for themselves. Then,
the following year, raise their rates and hope to hang on to some of the
business they wrote.
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At its core, insurance is all about managing risk . Driving a car is risky.
Most people do not have the funds to pay for vehicle damage and medical
bills from a serious car accident. Insurance companies take on that risk and
cover the customers expenses in the case of a covered event. In return, the
insurance company collects a monthly premium from the customer. This
money provides a pool of funds used to pay out customers and the customer
gets peace of mind. This is ultimately the insurance companys bread and
butter: managing risk on behalf of their customers.
For any business to be profitable, income must be greater than
expenses. Insurance companies receive income in the form of monthly
premiums and investment returns. Their main expense is paying for covered
losses. For example , Wellpoint, which is one of the largest health insurance
companies in the country, made about $57 million in revenue from collected
premiums in 2008. The amount of health benefits paid out to customers that
year was about $44 million, which is about 84% of their premium revenue.
This makes the underwriting process a key component for any successful
insurance company. Underwriting is the process of evaluating the risk that
each prospective client poses. There are actuaries who pore over endless
amounts of demographic data to determine if the company should take on
the client on and how much they should charge the client to remain
profitable. A good underwriting process will allow the insurance company to
minimize the amount of money it pays out in losses.
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Working in the insurance industry is potentially very profitable, but
there are certain steps to take if you decide to sell insurance. Starting an
insurance company is not as easy as hanging a shingle in front of an office.
The insurance industry is highly regulated, and regulations vary from state
to state. The best thing to do is to check with your states insurance
commissioner office to find out what steps to take in order to become an
independent insurance agent. One thing that is required to start an
insurance agency is errors and omissions insurance, which is specialized
liability insurance for businesses that goes beyond traditional business
coverage.
As mentioned previously, the job of an insurance company is to
manage risk. This is true for a large insurance company as well as an
independent agency. But what happens when insurance companies feel they
have too much risk? This is where something called reinsurance comes into
play, which essentially is insurance for insurance companies. An insurer may
have too much risk in their portfolio and will decide to transfer it to another
party, in this case the reinsurance company. This company will take on a
portion of the risk in exchange for the money the original insurer received.
By spreading risks across different institutions, insurance companies are
protecting themselves by not letting one small part of their portfolio destroy
their finances.
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Policies and Laws
An Insurance company adapts to the policies and Laws based in its

country of incorporation. Therefore, different country differs in their
insurance laws.
Common law jurisdictions in former members of the British Empire,
including the United States, Canada, India, South Africa, and Australia
ultimately originate with the law of England and Wales. What distinguish
common law jurisdictions from their civil law counterparts are the concept
of judge-made law and the principle of stare decisis - the idea, at its
simplest, that courts are bound by the previous decisions of courts of the
same or higher status. In the insurance law context, this meant that the
decisions of early commercial judges such as Mansfield, Lord Eldon and
Buller bound, or, outside England and Wales, were at the least highly
persuasive to, their successors considering similar questions of law.
At common law, the defining concept of a contract of commercial
insurance is of a transfer of risk freely negotiated between counterparties of
similar bargaining power, equally deserving (or not) of the courts'
protection. The underwriter has the advantage, by dint of drafting the policy
terms, of delineating the precise boundaries of cover. The prospective
insured has the equal and opposite advantage of knowing the precise risk
31 | P a g e

proposed to be insured in better detail than the underwriter can ever
achieve. Central to English commercial insurance decisions, therefore, are
the linked principles that the underwriter is bound to the terms of his policy;
and that the risk is as it has been described to him, and that nothing
material to his decision to insure it has been concealed or misrepresented to
him.
In civil law countries insurance has typically been more closely linked
to the protection of the vulnerable, rather than as a device to encourage
entrepreneurialism by the spreading of risk. Civil law jurisdictions - in very
general terms - tend to regulate the content of the insurance agreement
more closely, and more in the favour of the insured, than in common law
jurisdictions, where the insurer is rather better protected from the possibility
that the risk for which it has accepted a premium may be greater than that
for which it had bargained. As a result, most legal systems worldwide apply
common-law principles to the adjudication of commercial insurance disputes,
whereby it is accepted that the insurer and the insured are more-or-less
equal partners in the division of the economic burden of risk.
Insurable interest and indemnity
Most, and until 2005 all, common law jurisdictions require the insured
to have an insurable interest in the subject matter of the insurance. An
insurable interest is that legal or equitable relationship between the insured
and the subject matter of the insurance, separate from the existence of the
32 | P a g e

insurance relationship, by which the insured would be prejudiced by the
occurrence of the event insured against, or conversely would take a benefit
from its non-occurrence. Insurable interest was long held to be morally
necessary in insurance contracts to distinguish them, as enforceable
contracts, from unenforceable gambling agreements (binding "in honor"
only) and to quell the practice, in the seventeenth and eighteenth centuries,
of taking out life policies upon the lives of strangers. The requirement for
insurable interest was removed in non-marine English law, possibly
inadvertently, by the provisions of the Gambling Act 2005. It remains a
requirement in marine insurance law and other common law systems,
however; and few systems of law will allow an insured to recover in respect
of an event that has not caused the insured a genuine loss, whether the
insurable interest doctrine is relied upon, or whether, as in common law
systems, the courts rely upon the principle of indemnity to hold that an
insured may not recover more than his true loss.
Utmost good faith
The doctrine of uberrimae fides - utmost good faith - is present in the
insurance law of all common law systems. An insurance contract is a
contract of utmost good faith. The most important expression of that
principle, under the doctrine as it has been interpreted in England, is that
the prospective insured must accurately disclose to the insurer everything
that he knows and that is or would be material to the reasonable insurer.
33 | P a g e

Something is material if it would influence a prudent insurer in determining
whether to write a risk, and if so upon what terms. If the insurer is not told
everything material about the risk, or if a material misrepresentation is
made, the insurer may avoid (or "rescind") the policy, i.e. the insurer may
treat the policy as having been void from inception, returning the premium
paid. Reinsurance contracts
(between
reinsurers
and
insurers/cedents)
require the highest level of utmost good faith, and such utmost good faith is
considered the foundation of reinsurance. In order to make reinsurance
affordable, a reinsurer cannot duplicate costly insurer underwriting and claim
handling costs, and must rely on an insurers absolute transparency and
candor. In return, a reinsurer must appropriately investigate and reimburse
an insurers good faith claim payments, following the fortunes of the cedent
Warranties
In commercial contracts generally, a warranty is a contractual term,
breach of which gives right to damages alone; whereas a condition is a
subjectivity of the contract, such that if the condition is not satisfied, the
contract will not bind. By contrast, a warranty of a fact or state of affairs in
an insurance contract, once breached, discharges the insurer from liability
under the contract from the moment of breach; while breach of a mere
condition gives rise to a claim in damages alone
34 | P a g e

Regulation of insurance companies
Insurance regulation that governs the business of insurance is typically

aimed at assuring the solvency of insurance companies. Thus, this type of
regulation governs capitalization, reserve policies, rates and various other
"back office" processes.
European Union
Member States of the European Union each have their own insurance
regulators. However, the E.U. regulation sets a harmonized prudential
regime throughout the whole Union. As they are submitted to harmonized
prudential
regulation,
and
in
consistency
with
the
European
Treaty
(according to which any legal or natural person who is a citizen of a Union

member State is free to establish him-, her- or itself, or to provide services,
anywhere within the European Union), an insurer licensed in and regulated
by e.g. the United Kingdom's financial services regulator, the Financial
Services Authority, may establish a branch in, and/ or provide cross-border
insurance coverage (through a process known as "free provision of
services") into, any other of the member States without being regulated by
those States' regulators.
35 | P a g e

India
The insurance sector went through a full circle of phases from being
unregulated
to
completely
regulate
and
then
currently
being
partly
deregulated. It is governed by a number of acts. The first statute in India to

regulate the life insurance business was the Indian Life Assurance
Companies Act, 1912. The Insurance Act of 1938 was the first legislation
governing all forms of insurance to provide strict state control over
insurance business. Life insurance in India was completely nationalized on
January 19, 1956, through the Life Insurance Corporation Act. All 245
insurance companies operating then in the country were merged into one
entity, the Life Insurance Corporation of India.
The General Insurance Business Act of 1972 was enacted to
nationalize
the
about
100
general
insurance
companies
then
and
subsequently merging them into four companies. All the companies were
amalgamated into National Insurance, New India Assurance, Oriental
Insurance and United India Insurance, which were headquartered in each of
the four metropolitan cities.
Until 1999, there were no private insurance companies in India. The
government then introduced the Insurance Regulatory and Development
Authority Act in 1999, thereby de-regulating the insurance sector and
allowing private companies. Furthermore, foreign investment was also
allowed and capped at 26% holding in the Indian insurance companies. In
36 | P a g e

2015 the limit of FDI in insurance sector has been raised to 49% subject to
certain conditions.
In 2006, the Actuaries Act was passed by parliament to give the
profession statutory status on par with Chartered Accountants, Notaries,
Cost & Works Accountants, Advocates, Architects and Company Secretaries.
A minimum capital of US$80 million ( 400 Crore) is required by legislation
to set up an insurance business.
United States
As a preliminary matter, insurance companies are generally required
to follow all of the same laws and regulations as any other type of business.
This would include zoning and land use, wage and hour laws, tax laws, and
securities regulations. There are also other regulations that insurers must
also follow. Regulation of insurance companies is generally applied at State
level and the degree of regulation varies markedly between States.
Regulation of the insurance industry began in the United States in the
1940s, through several United States Supreme Court rulings. The first ruling
on insurance had taken place in 1868, with the Supreme Court ruling that
insurance policy contracts were not in themselves commercial contracts and
that insurance was not subject to federal regulation. This "judicial accident",
as it has been called, influenced the development of state-level insurance
regulation. This stance did not change until 1944 when the Supreme Court
37 | P a g e

upheld a ruling stating that policies were commercial, and thus were
regulatable as other similar contracts were.
In the United States each state typically has a statute creating an
administrative agency. These state agencies are typically called the
Department of Insurance, or some similar name, and the head official is the
Insurance Commissioner, or a similar titled officer. The agency then creates
a group of administrative regulations to govern insurance companies that
are domiciled in, or do business in the state. In the United States regulation
of insurance companies is almost exclusively conducted by the several states
and their insurance departments. The federal government has explicitly
exempted insurance from federal regulation in most cases. In the case that
an
insurer
declares bankruptcy,
many
countries
operate
independent
services and regulation to ensure as little financial hardship is incurred as

possible.
In the United States and other relatively highly regulated jurisdictions,
the scope of regulation extends beyond the prudential oversight of insurance
companies and their capital adequacy, and include such matters as ensuring
that the policy holder is protected against bad faith claims on the insurer's
part, that premiums are not unduly high (or fixed), and that contracts and
policies issued meet a minimum standard. A bad faith action may constitute
several possibilities; the insurer denies a claim that seems valid in the
contract or policy, the insurer refuses to pay out for an unreasonable
38 | P a g e

amount of time, the insurer lays the burden of proof on the insured - often
in the case where the claim is unprovable. Other issues of insurance law may
arise
when price
fixing occurs
between
insurers,
creating
an
unfair
competitive environment for consumers. A notable example of this is

where Zurich Financial Services - along with several other insurers - inflated
policy prices in an anti-competitive fashion. If an insurer is found to be guilty
of fraud or deception, they can be fined either by regulatory bodies or in a
lawsuit by the insured or surrounding party. In more severe cases, or if the
party has had a series of complaints or rulings, the insurer's license may be
revoked or suspended. It should be noted that bad faith actions are
exceedingly rare outside the United States.
Rest of World
Every developed sovereign state regulates the provision of insurance
in different ways. Some regulate all insurance activity taking place within the
particular jurisdiction, but allow their citizens to purchase insurance
"offshore". Others restrict the extent to which their citizens may contract
with non-locally regulated insurers. In consequence, a complicated muddle
has developed in which many international insurers provide insurance
coverage on an unlicensed or "non-admitted" basis with little or no
knowledge of whether the particular jurisdiction in or into which cover is
provided is one that prohibits the provision of insurance cover or the doing
of insurance business without a license.
39 | P a g e

The Tax System
The taxation of Insurance Companies varies to its country of residence

and the countries to where it transacts its business.
The primary and predominant business activity of an insurance
company is the writing of insurance or the reinsuring of risks underwritten
by insurance companies, which are subject to the supervision by the
Insurance Commission.
It is in the nature of insurance companies to be constantly exposed to
the risks against which they contract to indemnify their clients. For the
assumption of risks, these companies engaged in the insurance business
receive, as consideration, premium payments from the insured.
Recently, the Bureau of Internal Revenue has come up with RMC 3008 and RMC 59-08 touching on the taxability of insurance companies for
minimum corporate income tax (MCIT), business tax, and documentary
stamp taxes (DST). The circulars clarify the scope of the taxability of
insurance companies to the above-mentioned taxes.
In the first circular issued, it was provided that for purposes of
computing the gross income on the sale of services which shall be the basis
of the 2-percent MCIT, the gross revenue of insurance companies shall
40 | P a g e

include direct premium and reinsurance assumed (net of returns and
cancellations); miscellaneous income, investment income not subject to final
tax; released reserve; and all other items treated as gross income under the
tax code. Cost of services or direct cost and revenue-related deductions
were identified as those incurred costs which are exclusively related or
otherwise considered indispensable to the creation of the revenue from their
business activity as an insurance company, including the generation of
investment income not subject to final taxes, and shall be limited to: (a)
claims, losses, maturities and benefits net of reinsurance recoveries; (b)
additions required by law to reserve fund; and (c) reinsurance ceded. RMC
59-08 was later issued which expanded the cost of services to include: (a)
salaries, wages and other employee benefits of personnel directly engaged in
underwriting, claims and benefits, actuary and policy owner services; (b)
commissions on direct writings/reinsurance; (c) cost of facilities directly
utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies; and (e) and inspection and medical fees. The
amendatory circular further clarified that investment expenses should not
form part of the direct cost nor be a deductible expense in the determination
of the net taxable income of life and nonlife insurance companies. However,
in the case of investment expenses relating to investment income that has
not been subjected to final tax, the same shall be allowed as deduction to
41 | P a g e

arrive at the taxable income although they do not form part of the direct
cost.
For their various business-related activities, life-insurance companies
may be subject to business tax (value-added tax [VAT] or premium tax) and
documentary stamp tax. Thus, under RMC 59-08, direct writings or
premiums are to be subjected to the 5-percent premium tax same as
premiums on health and accident insurance, whether received by a life or
nonlife insurance company, which should be considered as premium on life
insurance and, therefore, likewise subject to premium taxnot VAT.
For unrelated services such as management fees, rental income or any
other income earned by the life-insurance company from services which can
be pursued independently of the insurance business activity, these are not
subject to the premium tax but subject either to VAT or percentage tax, as
the case may be. Also, the amendatory circular provides that re-issuance
fees, reinstatement fees, renewal fees, as well as penalties paid to lifeinsurance companies shall be considered as income of life insurance
companies for services rendered to customers, which shall either be subject
to VAT or to percentage tax, whichever is applicable.
Investment income realized from the investment of premiums earned is
exempt from VAT or gross receipts tax. While investment income from
investment of funds obtained from others (solicited and pooled from
42 | P a g e

policyholders) which are recognized by the insurance company as liabilities
and which are invested in marketable securities, instruments and other
financial products are considered income from quasi-banking functions, and
are, therefore, subject to gross receipts tax. Likewise, funds invested in
other financial products and in real estate are also considered income from
quasibanking activities or similar banking activities, and are likewise subject
to the gross receipts tax.
As regards their liability to DST, RMC 59-08 clarified that life-insurance
policies are subject to DST under Section 183 of the Tax Code. For
certificates issued, DST under Section 188 of the Tax Code is imposed. For
group insurance policies issued, the premium collected therefrom is subject
to Section 183; while for the individual certificates issued to each and every
employee covered by the group insurance policy, the issuance is subject to
DST under Section 188.
With regard to health and accident-insurance policy issued whether
underwritten by a life or nonlife insurance company, the basis of the
payment of DST shall be Section 183 where previously under RMC 30-08,
the health and accident insurance policy was subject to DST under Section
185. With these provisions, the taxability of insurance companies, both the
life and nonlife industries, are clarified.
43 | P a g e

General Registration Requirements
Aside from wages, employees are entitled to benefits as mandated by

law. Under the Philippine Labor Code, there are six benefits employees are
entitled to: Social Security Systems (SSS) contribution, contribution to
National Health Insurance Program (NHIP) or Philhealth, contribution to
Home Development and Mutual Fund (HDMF) or Pag-ibig, 13th month pay,
service incentive leave and meal and rest periods.
The term employee denotes any person legally employed in the
Philippines,
any
person
compulsorily
covered
by
the
GSIS
under
the Commonwealth Act 186, or any person compulsorily covered by the SSS
under Republic Act 1161. Such employee is automatically covered for these
government mandated employee benefits.
As an employer, whenever you hire a new employee, you are required
to update the following government agencies about his new employment:
Bureau of Internal Revenue (BIR)
Social Security System (SSS)
Philhealth Health Insurance Corporation (PHIC)
Home Development Mutual Fund (HDMF/Pag-ibig)
44 | P a g e

Here are the steps you need to do to ensure the employee is properly
reported to concerned government agencies.
Employee Registration
Bureau of Internal Revenue (BIR)
The first thing you need to do for your employees is update their
employment status at the BIR.
If the employee has no TIN yet, you need to require the employee to
file BIR Form 1902 to the revenue district office (RDO) where your
company is registered.
If the new employee has TIN No. with a previous employer registered
in the same RDO as your company, either your employee or HR
personnel
needs
to
submit BIR
Form
2305 to
update
his/her
information.
If the new employee already has a TIN No. but his/her previous
employer is registered in a different RDO as your company, then the
employee will need to submit a BIR Form 1905 in the RDO where his
previous employer is registered.
45 | P a g e

Philippine Health Insurance Corporation (PHIC)
The Philippine Health Insurance Corporation is the medical insurance
company of the Philippines. All employees are required to be contributors of
this
service
(Republic
hospitalization
Act
subsidies
7875).
Members
should
they
or
are
a
given
health
and
dependent
be
hospitalized. Monthly contributions are based on actual employee monthly

salaries and the amount of employee contribution is matched equally by the
employer.
For Employees:
Each new employee will need to fill up and sign a PHIC form PMRF regardless
if the employee is already a PHIC member or not. For PHIC members, they
need to submit to you their Philhealth ID number. A filled-out form should be
submitted in the PHIC office where your company is registered.
For Employers:
You will also need to fill up and submit a PHIC Form ER2 that contains the
list of your new employees. The PHIC Form ER2 should be submitted in the
PHIC office where your company is registered or you can submit it online
through their online portal.
46 | P a g e

Social Security System (SSS)
All employees hired by private companies are required to become an
SSS member (Republic Act No. 8282).
This system aims to protect its
members for when they are unable to work such as sickness, disability,
maternity, old age and death, or other such contingencies not stated but will
result in loss of income or result to a financial burden.
The amount of SSS monthly contribution is determined from the actual
monthly salary an employee receives 30% of total monthly contribution is
deducted from an employees salary, while 70% is subsidized by the
employer.
Before you can update your employees SSS, you need to ask for your
employees SSS No. If your new employee is not yet an SSS member, you
should require him/her to register in the SSS office where your company is
registered.
You as employer will also need to fill up and submit an SSS Form R1A
that contains the list of your new employees with their respective SSS No.
The SSS Form R1A should be submitted in the SSS office where your
company is registered or you can also do it online using their online portal
for employers.
47 | P a g e

Home Development Mutual Fund (HDMF)
Employers are also required to contribute, on behalf of their
employees,
7835).
to
the
Home
Development
Mutual
Fund
(Republic
Act
Also known as the Pag-ibig Housing Development Program, this
government agency provides the lowest interest housing and land acquisition
loans to its members that are payable for up to 30 years. This gives every
Filipino worker an opportunity to own a house in easy-payment plans that
can directly be deducted from their monthly wages.
For new employees, they can register as a new member online. All
your new employees can be easily updated through the Pag-ibig online web
portal. Or you can just add the employee in the HDMF Form MCRF, and then
mark as NH (Newly Hire), when you are filing the monthly HDMF
contribution.
48 | P a g e

BDO Offices
49 | P a g e

Reference(s):
Camora, G. A. (n.d.). taxation of insurance companies. BDBLAW, pp. 1-5.
class
notes.
(n.d.).
Retrieved
from
insurance
business
environment:
http://nakulanand.in/files/documents/insurance-businessenvironment---an-introduction.pdf
Full suite Corporation. (n.d.). An Employer's guide to registering employees
in
the
Philippines.
Retrieved
from
Full
suite:
http://full-
suite.com/blog/employers-guide-registering-employees-philippines/
How do Insurance companies make money. (2008). Retrieved from the truth
about
insurance:
http://www.thetruthaboutinsurance.com/how-do-
insurance-companies-make-money/
HUssain, S. (n.d.). The secret to how insurance companies make their
money. Retrieved from http://insurance.credio.com/stories/3670/howinsurance-companies-make-money
Wikipedia.
(2015).
Insurance
Law.
Retrieved
https://en.wikipedia.org/wiki/Insurance_law
50 | P a g e
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wikipedia:

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INSURANCE COMPANY

A Research Portfolio Submitted

SAN BEDA COLLEGE

October 31, 2015

INSURANCE CORPORATION: A Research Portfolio

The purposes of this paper it to introduce to the readers the

INSURANCE CORPORATION: A Research Portfolio

supplements the public sector social security systems.

INSURANCE CORPORATION: A Research Portfolio

INTERNAL INSURANCE BUSINESS ENVIRONMENT

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

management products, and insurance multiplies are being placed directly in

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

and efficient service, delivery and

customization of products and greater efficiency. Most of the insurer has to

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

intermediation. However, institutions, like Insurance Companies perform

INSURANCE CORPORATION: A Research Portfolio

Companies engaged in the business of Life Insurance

Companies engaged in the business of General Insurance

(III) Companies doing the business of Reinsurance

INSURANCE CORPORATION: A Research Portfolio

telecommunications, housing, generation, distribution, and transmission of

INSURANCE CORPORATION: A Research Portfolio

telecommunication, satellite, computers, and entertainment, etc. product

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

An Insurance company adapts to the policies and Laws based in its

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

Insurance regulation that governs the business of insurance is typically

(according to which any legal or natural person who is a citizen of a Union

INSURANCE CORPORATION: A Research Portfolio

deregulated. It is governed by a number of acts. The first statute in India to

INSURANCE CORPORATION: A Research Portfolio

INSURANCE CORPORATION: A Research Portfolio

services and regulation to ensure as little financial hardship is incurred as

INSURANCE CORPORATION: A Research Portfolio

competitive environment for consumers. A notable example of this is

INSURANCE CORPORATION: A Research Portfolio