Alfredo A.

Fernandez
Report in Insurance Law Professor: Atty. Estrelleta Abelardo October 5, 2013

REGULATION OF FOREIGN INSURANCE COMPANIES

A state, in the exercise of its police powers, has very broad powers to establish a condition for the admission of foreign insurance companies to do business within the state. (Employers Liability Assurance Corporation vs. Frost, 107 ALR 1413.) After admission, they become subject to its laws. The power of local control over foreign companies has been held to extend even to preventing them from concerted action in withdrawing from the state and cancelling the policies in force, because of changes made in the laws under which they are doing business. (State ex rel. Broker vs. Assur. Co. Of America, 158 SW 640; see Am. Jur. 2d 142-145.) WITHDRAWAL OF FOREIGN COMPANIES (SECT. 273 TO 277). 1. SEC. 273 TO SEC. 277. Prescribe the procedure to be followed upon cessation of business of a foreign insurance company. The foreign insurer must apply. Its application must: 1. Be published in two newspapers of general circulation. 2. It must discharge its liabilities to policy holders creditors in this country 3. Insuring Philippine residents to be taken up by other qualified insurers. Note: The Insurance Commissioners shall make an examination of the books and records of the withdrawing company and if upon such examination he finds the insurer has no outstanding liabilities to residents of the Philippines, he shall permit the insurer to withdraw. RATIONALE BEHIND: The procedure outlined is intended to govern the conduct of the Insurance Commissioner where petitions are made for return of the deposit upon withdrawal of foreign insurers. It does not attempt to regulate the liquidation of liabilities of such foreign insurers, nor the rights of claimants against them. Of course, there is no doubt that if the Insurance Commissioner is advised that there are unpaid claimants against the foreign insurers, INSURANCE he will refuse to allow withdrawal or the return of the securities deposited with him or such portion thereof as may be necessary to satisfy the local claimants. Yet it would be incorrect to assert that whenever he allows the return of such securities, there are factually and legally no unpaid claimants. (Scottish Union & Nat. Insurance Company vs. Macadaeg, 91 Phil. 891 (1952)). 2. WHEN PERMIT TO WITHDRAW MAY BE GIVEN. Under SECT. 276, the Insurance Commissioner may permit the foreign insurer to withdraw (and get back the securities it has deposited for the benefit of the policy holders) only when he finds that such foreign insurers has no outstanding liabilities to residents of the Philippines. If the Commissioner is fully aware of pending cases against the foreign insurer, he may not declare that the insurer has no outstanding liabilities to residents of the Philippines. (Ibid) JUDICIAL REVIEW COMMISSIONER OF DISCRETION OF

When the Insurance Commissioner approves the withdrawal of a foreign insurance company from business in the Philippines, the courts may review the discretion exercised by him and substitute their own judgement therefore, where the insurers has accrued liabilities which the law requires it to discharge before withdrawal. The law should not be interpreted as to permit foreign

Manuel L. Quezon University

School of Law

Alfredo A. Fernandez
Report in Insurance Law Professor: Atty. Estrelleta Abelardo
insurers to escape the results of pending actions against them by withdrawing from the Philippines with all the securities they have deposited, provided they get the sanction of the Commissioner. That would be giving the Commissioner discretion to frustrate orders of courts in litigations against foreign insurers and to liberate the latter from claims of local policyholders, whose interest it is his principal duty to protect, and whose benefit he is given broad powers of supervision over insurance companies as are seldom conferred upon parallel agencies. (Ibid.) SECT. 278. States when a foreign life insurance company that withdraws from the Philippines shall be considered a servicing insurance company. Before it can act as a servicing company, it must obtain a special certificate of authority to act as such from the Insurance Commissioner. (SECT. 279.) REINSURANCE BY WITHDRAWING FOREIGN INSURER 1. SUBSTITUTION BY ANOTHER INSURER WITHOUT THE CONSENT OF INSURED NOT ALLOWED. The whole idea of the law is to require the foreign insurance company to show that it has no more responsibilities to any resident here, and may, therefore, go home with its securities. It is not correct to construe the second part of SECT. 276 as permitting the withdrawing foreign reinsurer, without the consent of the insured, to transfer to another insurer his accrued liabilities under a policy, thus, foisting a new debtor upon the insured, It is fundamental in our civil laws (see Arts. 1205, 1293, Civil Code) that the debtor (insurer) may not have himself substituted by another without the consent of the creditor (the policy holder).

October 5, 2013

2. RESPONSIBILITY TO DISCHARGE ACCRUED AND CONTINGENT LIABILITIES. It was clearly analyzed, the SECT. 275 consist of three (3) parts. 1. The first speaks of liabilities of foreign insurer to policy holders and creditors. 2. The Second and third obviously refer to its outstanding policies, i.e., policies on which no claim has as yet arisen because the risk insured against has not yet happened. In other words, the first refers to accrued liabilities (outstanding claims) to be discharge, the second and third, to contingent liabilities (outstanding risk) to be insured. The third permitting cancellation obviously contemplates outstanding policies on which the risk has not happened, because evidently, the insurer may not cancel a policy on which a claim has already accrued by the occurrence of the risk. Now the second part requires the foreign insurer to reinsure. CONTEMPLATION OF REINSURANCE Reinsurance as defined in Sec. 95 is not obviously what SECT. 275 contemplates because the foreign reinsurer is not thereby relieved of local responsibility. The term reinsurance is also sometimes applied to a contract between two insurers by which the one assumes the risk of the other and becomes substituted to its contracts, so that on the consent of the original policyholders, the liability of the first insurer ceases, and the liability of the second is substituted. (46 C.J.S. 196). This is naturally the kind of the reinsurance contemplated in the second part of SECT. 275, i.e., reinsurance that frees the original insurer form liability. (Scottish Union & Nat. Ins. Co. Vs. Makadaeg, (supra).

Manuel L. Quezon University

School of Law

Alfredo A. Fernandez
Report in Insurance Law Professor: Atty. Estrelleta Abelardo
TYPE OF REINSURERS 1. BASIC TYPE There are two basic types of reinsurers, namely: (a) Professional reinsurers or insurers that do reinsurance business only (Sect. 280, par. 1.); and (b) Non-professional reinsurers or insurers that do not specialize in reinsurance only. They are primary insurers which maintain reinsurance departments. They may accept reinsurance regularly or only occasionally. 2. SPECIAL TYPE A special type of reinsurer is the reinsurance pool, which is an association for the exchange of reinsurance among two or more insurers according to automatic agreement. (Many of these pools are technically associations of insurers rather than reinsurers; thus, they are insurance pools instead of reinsurance pools, but the purposes of each are similar.) Each reinsurers receives a certain amount or proportion of the risk or losses of the other reinsurer or reinsurers, and each cedes or gives to all the others a predetermined part of its risk or losses. These pools are also for spreading infrequent catastrophic types of risk among insurers of a company group or fleet. a. Much greater capacity is obtained by companies joining in pools wherein six or seven companies agree to accept a share and the pool itself reinsures the writings of the individual members and sometimes the business given to it by companies outside the pool. b. Not only is greater capacity obtained by this practice but the share in any one risk of an

October 5, 2013

individual smaller

company

is

made

c. It may also serve as a means of stabilizing premium rates because the business must transferred to the pool on a uniform basis. Of course, a reinsurance company may be a member of a pool in addition to other insurance business. (Riegel, Miller and Williams, Jr., op.cit., p126.) REGULATION OF HOLDING COMPANIES A holding company means any person who directly or indirectly controls any authorized insurer; while control means the possession directly o indirectly of the power to direct or cause the direction of the management and policies of an authorized insurers or other person or corporation within the holding company system. (Sec. 282.) Under the Insurance Code, no insurance company may be acquired by a holding company without prior review by the Insurance Commissioner (Sec. 294.), all insurance companies controlled by a holding company are required to register with the Commissioner, furnish the Commissioner with the with the required information concerning the holding company (Sec. 286.), and file such reports concerning operations which may materially affect the operations, management or financial condition of the controlled insurer (Sec. 287.); and all holding companies are subject to examination on matters affecting an insurance company which is held or on such insurance companys treatment of its policy holders. (Sec. 288.) Conflicts of interest in transactions between an insurance company and its parent holding company or its affiliates are prohibited. (Secs. 290-293.)

Manuel L. Quezon University

School of Law

Alfredo A. Fernandez
Report in Insurance Law Professor: Atty. Estrelleta Abelardo October 5, 2013

WHY NEED FOR REGULATIONS?

1. While holding companies are not themselves new, the dominant motive for their information might change from desire to facilitate the conduct of the insurance business to a desire to shift away from the insurance business and to subordinate insurance to other business objectives. This change would increase the strain on the established regulatory system. 2. Moreover, the opportunities for the pyramiding and excessive accumulation of economic power through the use of holding companies are real and potentially contrary to the public interest. 3. When a non-insurance holding company system includes an insurance company within it, its potential for specific harm becomes greater since tempting reservoirs of liquid assets become accessible to persons without appreciation of the security needs of the insurance enterprise, and the interest of the public policyholders thus become vulnerable. 4. Furthermore, the interest of the controlling persons are potentially in conflict not only with those of the policy holders and the public but with those of the other shareholders of the insurance company. 5. Ideally, an insurance business, which is fiduciary in nature, affected with the public interest and intensively regulated, should not be controlled by companies neither charged with such fiduciary-like responsibilities nor regulated to assure their adherence to appropriate standards of conduct. (Supervisions and Regulation of the Insurance Business in the Philippines, Journal of the IBP, First Quarter, 1976, pp.25-26, by Commissioner G. CruzArnaldo.).

Manuel L. Quezon University

School of Law