IN a bid to encourage insurance companies to make a stake in infrastructure investments, the Insurance Commission (IC) has issued a circular letter providing for better capital charges when investments are part of the infrastructure blueprint under the Philippine Development Plan (PDP).

Insurance Commissioner Dennis B. Funa recently signed Circular Letter 2019-19, which reduces risk charges for investments for insurance companies, answering the clamor of local insurers. The regulator sees the new charges as making it more attractive and cheaper for them to foray into PDP-listed infrastructure investments.

“The risk calibration for debt instruments has been reduced to 6 percent, while the risk charges for investment in equity shares were likewise reduced to 9 percent,” Funa said.

Under the previous regulation, the risk charges for debt and equity instruments related to infrastructure investments were the same as ordinary debts and equities, with the risk calibration reaching as high as 24 percent for debt instruments and 55 percent for equity investments.

“This is a substantial improvement compared to the previous calibration. Before the issuance of this new circular letter, capital charges relating to investments in infrastructure projects were subject to risk calibration ranging between 1.25 percent and 24 percent for debt instruments and [between] 40 percent and 55 percent for equity investments,” he explained.

In the new regulation, debt and equity instruments related to infrastructure projects under the PDP are now, in effect, a new classification of assets—distinct and separate from ordinary debt and equity investments.

“In other words, under the previous regulation, the risk charges for debts and equities used in calculating insurers’ capital requirements under the risk-based capital [RBC2] were without distinction as to whether or not the same are infrastructure-related,” he said.

Funa pointed out that the lowering of risk charges for insurers’ debt and equity investments in infrastructure projects was in response to a clamor of the insurance industry.

“Recognizing the ability of investments in infrastructure to drive economic growth in line with the priority of the government to narrow infrastructure investment gaps vis-à-vis the capacity of insurers to invest in long-term assets, I convened a committee to review the appropriate risk charges for this investment class, with the goal of crafting a prudentially sound mechanism to facilitate investment in infrastructure and at the same time safeguarding the financial stability of insurers,” he added.

Investments in infrastructure projects under the PDP shall be allowed and admitted as assets of insurance companies provided that the same are approved by the IC.

Covered activities

The activities which may be undertaken as provided under the PDP include highways, railways, nonrail-based transit facilities, port infrastructure, airports, warehouses, environmental and solid waste management-related facilities and climate-change mitigation and adaptation infrastructure projects.

“Considering that we have favorably responded to the clamor of the insurance industry for the lowering of the risk
charges, we hope that they will take advantage of this change and utilize their capital and be key enablers for investments in infrastructure that the country needs,” he said.

In February 2019, the IC gave insurance companies in the country the go-ahead to invest their funds in state-led infrastructure projects, in a bid to boost the growth of the Philippine economy and help these firms meet the higher net worth requirement imposed on them for this year.

Funa issued Circular Letter 2018-74, which enumerates the guidelines on how local insurance companies can invest their funds in government infrastructure projects under the PDP.

Under Circular Letter 2018-74, insurance and reinsurance firms may now invest in debt or equity security instruments for infrastructure projects under the PDP, participating either through the project proponents, financiers or sponsors, or through operation and maintenance contracts.

This year, insurance companies are required to comply with the increased net worth requirement of P900 million, coming from P550 million in 2016.

Under Republic Act 10607, or the Amended Insurance Code of the Philippines, new insurance industry players are required to have P1 billion in paid-up capital, while existing insurance companies need a paid-up capital of P550 million by December 2016, P900 million by December 2019 and P1.3 billion by December 2022.