INSURANCE CORPORATION: A Research Portfolio

INSURANCE COMPANY

byBeatrixe Marie G. CalpoChazedelk G. CerdenaAsh MacalaladJoebeth EspinosaJm AvilaBradford BailoJoshua AlmiraKristel ManahanPauline De JoyaDaniel David4ELM

A Research Portfolio Submitted in Partial Fulfillment of the Requirements in Other Commercial Laws (LMG 13)

SAN BEDA COLLEGE638 Mendiola St., San Miguel, Manila

October 31, 2015PREFACE

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 youth-orientated 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 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.

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 ENVIRONMENTThe insurance industry in a country is affected by a large number of factors for its healthy development and growth. A congenial (comfortable) 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.

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. A 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.

Transparent Rules and RegulationsNow 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 Actuaryii. Actuarial Report and Abstractiii. Asset liability and solvency margin of insurersiv. Licensing of insurance agentsv. General insurance reinsurancevi. Registration of Indian insurance companiesvii. Insurance Advertisement and disclosuresviii. Regulation on investment life and non-lifeix. Regulations of accountsx. Surveyors RegulationThus the transparent and better the regulations in place, better would be environment for generation and growth of insurance business in the country.TechnologyTechnology 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 offeringc. Advising on right kind of insurance coversd. Advising on extent of life cover requirede. Advising on right investment decisionThus role of technology also brings various threats and opportunities of the insurance business environment.Scope of Rural InsuranceRural 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 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 RiskThe 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 programThe 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 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 countryPricing of the ProductsThe 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 provides unlimited opportunities in the Indian context for consultancy, broking, and education in the post privatization phase with new employment opportunities.Growing consumerismThe 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 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 perspectiveThe emerging scenario will provide the customer with:f. Choice of insurance, wide range of new and innovative productsg. Competitive pricing of the products and servicesh. Access to information about the companies and products.i. Continuous consumer educationj. A well trained and highly professional sales forcek. Prompt and courteous front office responsel. Greater focus on customer servicem. World class pre and post sales servicesn. Efficient and customer friendly claim administration system.

Long term savings and investmentsThe 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 effortsThere 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.

Challenges and strategies of privatizationThe 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 losst. Private insurer coexist with LIC and GICu. Managing and motivating risk of cross border operationsv. Upcoming more products and more complex featuresEXTERNAL INSURANCE BUSINESS ENVIRONMENTThe external environment of the insurance business has been classified in four parts, namely, legal, economic, financial, and commercial.

Legal EnvironmentThe 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 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, 1938b. Life Insurance Act, 1956c. General Insurance Business Act, 1972d. IRDA Act, 1999e. General Insurance Business Amendment Act, 2001f. Some provisions of Contract Act, 1872g. Some provisions of Companies, 1956h. Service Tax ActExtensive 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 issued there under. Most of the regulatory functions were taken away from the controller of insurance and vested in the insurers themselves.IRDA Act, 1999The 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.Economic EnvironmentThe 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 businessb. Industrial Policy of the countryc. System of economic planningd. LPG policiese. Comparative worldwide insurance environmentFinancial EnvironmentThe 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 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, and5. 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 provide risk coverage. The risk to be insured must result in a loss which is measurable in financial terms.Capital Adequacy RequirementThe 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 ReinsuranceNo 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 aboveInvestment of Assets New NormsEvery 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.(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 ENVIRONMENTThe 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 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 InnovationsThere 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 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 ServiceThe 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 ExpectationsIn 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 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, and8. Customer satisfactionThus, 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 InsuranceIn 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, 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.Pricing of the product, i.e. TariffThe 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.

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 IncomeUnderwriting income is derived from the difference between how much money is collected for all policies sold versus how much money is paid out ininsurance claimsfor those policies in any given time period. For example, Insurer A may collect $1,000,000 in premium for polices issued orrenewedin 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 IncomeThis unique situation allows insurance companies to invest that money while its not being used. Huge profits can be reaped, or lost, as a result. 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.

At its core, insurance is all aboutmanaging 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. 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 calledreinsurancecomes 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.

Policies and LawsAn Insurance company adapts to the policies and Laws based in its country of incorporation. Therefore, different country differs in their insurance laws. Common lawjurisdictions 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 ofjudge-made lawand the principle ofstare 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 Eldonand 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 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.Incivil lawcountries 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 indemnityMost, 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 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 theGambling 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 faithThe doctrine ofuberrimae 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. 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.Reinsurancecontracts (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 cedentWarrantiesIn 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 aloneRegulation 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 UnionMember 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, theFinancial 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.

IndiaThe 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 1938was 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, theLife 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 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 ofUS$80 million (400 Crore) is required by legislation to set up an insurance business.United StatesAs 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 theUnited Statesin the 1940s, through severalUnited States Supreme Courtrulings. 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 upheld a ruling stating that policies were commercial, and thus were regulatable as other similar contracts were.In theUnited Stateseach state typically has astatutecreating 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 regulationsto govern insurance companies that are domiciled in, or do business in the state. In theUnited Statesregulation 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 declaresbankruptcy, 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 againstbad faithclaims 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 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 whenprice fixingoccurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is whereZurich Financial Services- along with several other insurers - inflated policy prices in ananti-competitivefashion. 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 WorldEvery 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.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 30-08 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 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 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 life-insurance 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 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.

General Registration Requirements

Aside from wages, employees are entitled to benefits as mandated by law. Under thePhilippine 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 theCommonwealth Act 186, or any person compulsorily covered by the SSS underRepublic 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)Here are the steps you need to do to ensure the employee is properly reported to concerned government agencies.Employee RegistrationBureau 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 noTINyet, you need to require theemployee to fileBIR Form 1902to therevenue 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 submitBIR Form 2305to 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 aBIR Form 1905in the RDO where his previous employer is registered.

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 Act 7875). Members are given health and hospitalization subsidies should they or a 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 aPHIC form PMRFregardless 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 aPHIC Form ER2that 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.

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 toregisterin 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.

Home Development Mutual Fund (HDMF)Employers are also required to contribute, on behalf of their employees, to the Home Development Mutual Fund (Republic Act 7835). Also known as thePag-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 memberonline. All your new employees can be easily updated through thePag-ibig online web portal. Or you can just add the employee in theHDMF Form MCRF, and then mark as NH (Newly Hire), when you are filing the monthly HDMF contribution.

BDO Offices

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-business-environment---an-introduction.pdfFull 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/how-insurance-companies-make-moneyWikipedia. (2015). Insurance Law. Retrieved from wikipedia: https://en.wikipedia.org/wiki/Insurance_law

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