The Philippines

During the administration of former President Fidel V. Ramos (1992-1998), the Philippine insurance industry, among others, was extensively liberalised. Prior to 1994, foreign involvement in insurance was limited almost completely, primarily by regulation through the Insurance Commission, to participation in companies with no less than 60% Filipino-ownership. That changed with the promulgation of the First Regular Negative List of the Foreign Investments Act on 24 October, 1994. The insurance business was opened to full foreign ownership. In addition, Circular 87-95 of the Banko Sentral ng Pilipinas, the central bank, ended the division between banks and insurance. From 20 September this year, foreign or local commercial banks with expanded authority, otherwise known as universal banks, were allowed to own 100% of the shares of insurance companies.

Foreign insurance or reinsurance companies may enter the Philippine market through the acquisition of an existing company, through the formation of a domestic corporation under Philippine laws, or through the establishment of a branch of a foreign company. To regulate the entry of foreign companies, the Commission has set up certain minimum criteria. The applicant must belong to the top 200 foreign re/insurance entities in the world, or to the top ten in their home country, and have been in business for at least ten years. Applicants must be widely owned and/or publicly listed, unless majority-owned by the government, if they wish to establish a branch or organise a Philippine subsidiary. “Widely-owned” means that no single stockholder owns more than 20% of the voting stock.

Minimum paid-up capital requirements are imposed. For insurance companies, minimums are P250 million and a contributed surplus fund of P50 million if foreign equity is 60% or more, P150 million and a contributed surplus of P50 million if foreign equity is more than 40% but less than 60%, and P75 million and a contributed surplus fund of P25 million if foreign equity is 40% or less. For reinsurance companies the figures are P500 million if foreign equity is 60% or more, P300 million if foreign equity is more than 40% but below 60%; and P150 million if foreign equity is 40% or less. In addition, branches of foreign insurance or reinsurance companies that intend to operate in the Philippines need to deposit with the Commission securities with actual market value of at least P300 million and P500 million, respectively.

Under the Insurance Code, insurers must maintain a margin of solvency which shall be, in the case of a domestic company, an excess of the value of its admitted assets, exclusive of its paid-up capital. In case of a foreign life insurance company, the amount must be an excess of the value of its admitted assets in the Philippines, exclusive of its security deposits, over the amount of its liabilities, unearned premiums, and reinsurance reserves of at least P2 for every P1,000 of the total insurance, as of the preceding calendar years, on all policies except term insurance. For non-life and reinsurance companies the formula uses P10 for every P100 of the total net premium written during the preceding calendar year.

The Code also specifics reserving requirements. For life companies, the reserve must be equivalent to the aggregate net value (on net premium basis) of all policies, unpaid dividends, and all other obligations outstanding in the preceding year. For non-life companies it is equal to 40% of gross premiums (less returns and cancellations) received on policies with less than a year to run, and pro rata on all gross premiums received on policies with more than a year to run.

By Edgardo M. De Vera and Michelle Q. Martelino-Yu, Quisumbing Torres, associated with Baker & McKenzie.

Hong Kong

The Insurance Companies Ordinance, which outlines regulation of the insurance industry in Hong Kong, is reviewed and revised periodically to ensure that it is in line with international supervisory standard. In 1999, the Insurance Companies (Amendment) Ordinance 1999 was enacted, introducing amendments which will:

1. subject Lloyd's to similar financial and reporting requirements as those applicable to other authorised insurers in Hong Kong;

2. advance the submission of the financial information of general insurance business from six to four months after the close of the relevant financial years; and

3. extend the number of development years for claims statistics relating to Hong Kong general business required to be submitted by insurers from eight to 12 years.

Of more recent interest are new measures regarding intermediation. Before 1995 Hong Kong relied on a self-regulatory system for administering intermediaries, developed by the Hong Kong Federation of Insurers, the representative body of local insurers. The system was first given statutory recognition in June 1995 through the enactment of Part X – Insurance Intermediaries of the Insurance Companies Ordinance (ICO).

Under Part X, an insurance agent is defined as a person who holds himself out to advise on or arrange contracts of insurance in or from Hong Kong as an agent of an insurance company. On the other hand, an insurance broker is defined as a person who carries on the business of negotiating or arranging contracts of insurance in or from Hong Kong as the agent of the policyholder. The legislation prohibits any person from acting as an agent and broker at the same time, although surprisingly, the difference in the legal status of an insurance agent and an insurance broker is too subtle to be recognised by the general public. Part X also provides that any person who holds himself out as an insurance agent or broker without proper authorisation commits an offence and would be subject to a hefty fine of HK$1,000,000 and imprisonment of two years.

The number of insurance intermediaries has grown rapidly since the introduction of Part X. At 31 December, 1999, there were 350 insurance brokers and 51,605 insurance agents. As the sector continues to experience a high turnover rate, and as insurance product features become more and more sophisticated, the Hong Kong Insurance Authority (HKIA) feels there is a need to better assure the insuring public of the quality of the intermediaries, both in terms of their insurance knowledge and standard of services. With this objective in mind, the HKIA launched the Insurance Intermediaries Quality Assurance Scheme (IIQAS) on 1 January, 2000.

Under the IIQAS, insurance intermediaries, their responsible officers and chief executives, and technical representatives are required to pass a publicly held Qualifying Examination (unless they are exempted by virtue of their existing professional qualifications) before they can carry out any insurance broking or agency functions. All individuals are given two years to pass. However, new entrants must pass the exam before they are registered or authorised as agents or brokers. According to statistics released by the HKIA, by the end of April this year only around 9,000 persons had successfully passed the exam. The pass rate was approximately 50%. Market analysts suspected that the IIQAS was probably the main reason behind a drop in the number of new intermediaries in 2000.

From 2002, insurance intermediaries will also need to satisfy Continuing Professional Development (CPD) requirements in order to renew their authorisation. The details of the CPD are yet to be released by the HKIA.

By Michael Olesnicky and Shara Lo, Baker McKenzie Hong Kong.


The Asian economic crisis of 1997 did not significantly affect the legislation that governs insurance businesses in Thailand. Instead, the driving force behind changes in insurance-related legislation over recent years has been Thailand's admission to the World Trade Organisation (WTO). As a condition of joining the WTO, the Thai government agreed to liberalise numerous restrictions on foreign ownership of controlled businesses.

At present, a foreign entity is not allowed to hold more than 25% of the shares in an insurance company, as stipulated in the two main acts governing insurance, which were issued in 1992 (Life Assurance Act, B.E. 2535 and General and Casualty Insurance Act, B.E. 2535). However, the Thai government's current commitment to the WTO necessitates that this percentage be increased, first to 49%, and five years thereafter, to 100%.

Pursuant to these WTO commitments, the Ministry of Commerce has drafted two new pieces of legislation, the Life Insurance Bill and the General and Casualty Insurance Bill (Amendment), which would modify some of the provisions of the 1992 acts. If enacted, these amendments would increase the permitted level of foreign ownership to 49%. Five years after enactment, that level would then automatically increase to 100%. The bills have both been approved by the Cabinet, but must be ratified through three readings in both the Lower and Upper Houses of Parliament before becoming law. The bills are a topic of hot debate in the Thai political arena, but most outside observers are confident that they will eventually be passed into law.

In response to the changes that these new laws are expected to bring about, foreign investors have been expressing increased interest in the Thai insurance industry over the past two or three years. Already insurance companies based in Australia, Europe, Korea, and North America have begun to invest in local Thai insurance companies. Once the level of foreign ownership is raised to 49% it is expected that these foreign investments will increase dramatically.

One major reason for the recent upsurge of foreign interest is the low level of market saturation. As a concrete example of this, current industry estimates indicate that as little as 12% of Thais now own life insurance. This suggests that there is great room for expansion and development. Consequently, many large foreign insurance companies are anxious to be the first to get their foot in the door as the Thai insurance industry begins to open.

In order to strengthen Thai insurance companies financially, the government is hammering out several pieces of legislation that are intended to reform the domestic industry. At present, with a few exceptions, the Thai insurance market is dominated by a large number of small-scale insurance companies. Approximately 100 companies in Thailand currently sell insurance. Being small, the majority of these companies lack the capital funds required to meet the insurance demands of larger businesses. In addition, the proliferation of companies has produced a less than ideally competitive market.

To bolster the industry, the Thai government plans to introduce measures that would reduce the overall number of insurance companies, while increasing the strength and vitality of each business that continues to operate. With this in mind, the Ministry of Commerce incorporated provisions in the draft bills that would increase the amount of capital funds that are required for an insurance company to operate. The proposed minimum registered capital is significantly higher than what existing laws require. Therefore, once enacted many existing Thai insurance companies would have to merge in order to obtain sufficient capital to continue operating. The end result of these legislative reforms should be fewer companies, each of which will have considerably more capital at its disposal. This should have the double benefit of making Thai insurance companies both more responsive to current market demands and more competitive with large international insurance firms.

A number of other measures are also under consideration that could considerably affect the insurance industry. The Ministry of Commerce has already issued a new set of regulations that permit insurance companies to invest in certain types of securities that were previously prohibited. However, insurance business operators still feel that these reforms have not gone far enough. Consequently, they are putting pressure on the government to give insurance companies greater flexibility to invest outside of the insurance industry.

The general trends in Thai insurance legislation, therefore, are towards greater openness to international competition, as well as increasing responsiveness to the needs of consumers. This suggests that Thai insurance companies will begin to improve their own practices, as international companies increasingly invest in developing the Thai market.

By Thomas F Aylward II and Sorachon Boonsong, Baker McKenzie Thailand.


Japan's insurance industry has traditionally been one of the most heavily regulated sectors of the financial industry in Japan. The basic law that regulates this industry is the Insurance Business Law. The IBL is administered by the Financial Services Agency (FSA).

However, the industry is being gradually deregulated as part of the “Big Bang” deregulation of the Japanese financial services industry, which commenced in 1996. The principal features of the reforms affecting the insurance industry are as follows:

Composite insurers Different licenses were granted under the IBL for life and non-life insurers. Previously these two types of business were required to be entirely separate, but by amendment to the IBL in April 1996 it became possible for life insurance companies to establish non-life subsidiaries, and vice versa.

Holding companies The Anti-Monopoly Law had prohibited financial and other types of holding companies, but this was changed in March 1998 to permit, among other types of holding companies, insurance holding companies. They must be approved by the FSA in accordance with the IBL. An insurance holding company can have as its subsidiary a life or non-life insurance company, a conventional or long term credit bank, a securities company, a foreign company engaged in insurance, banking, or securities business, and a company engaged in business ancillary to insurance, banking, or securities business.

Product distribution A number of new channels for the sale of insurance products have been added. In 1996, the concept of an insurance broker was introduced under the IBL. In December 1998 the IBL and the securities laws were changed to allow securities companies to sell insurance products. Banks are expected to be able to sell insurance products from April 2001.

Range of products In December 1998 an amendment to the IBL enabled insurance companies to sell investment trust products (toushi shintaku), and to enter into derivative transactions.

Liberalisation of rates Until June 1998 most insurance premiums were strictly regulated, and insurance companies were required to use rates decided by the industry. In July 1998 rates for fire, motor and personal injury insurance products were liberalised. Following this, fierce competition has emerged among insurers with respect to premiums – particularly with respect to corporate customers. This competition has also resulted in the introduction of a variety of new insurance products.

Liberalisation of commissions The rules relating to the use and training of insurance agents have been liberalised. Most importantly, it has been announced that the commission rates for insurance agents will be entirely free with effect from April 2001.

Early warning system (Souki Zesei Sochi) The concept of “solvency margin” was adopted in April 1996, and an “early warning system” was introduced in 1999. Under the system, if the solvency margin of an insurance company is 200% or more, no measures are to be taken by the FSA. If the solvency margin is 100% or more but less than 200%, the company will be required to submit and implement a management improvement plan. If the solvency margin is 0% or more but less than 100%, more detailed measures may be ordered by the FSA. If the margin is below 0%, the FSA may order suspension of part of all of the business.

Policyholder protection In 1998 the Life Insurance Policyholder Protection Organisation and the Non-Life Insurance Policyholder Protection Organisation were established following amendment to the IBL. This is a compulsory insurance system. Funds are contributed by all insurers operating in Japan. Under the system, if an insurer fails and another insurer is willing to take over its business, the Organisation will provide funds to assist such business transfer. The funds available are limited to ¥400 billion for a life company and ¥50 billion for a non-life company. When no company is willing to take over the business, the Organisation will use the funds to satisfy the obligations of the failed company to its policyholders. Until May 2001, payment of 100% of the amount due by the fund will be guaranteed by the government, but after that the payment will, in principle, be limited to 90% of the payment reserve of the failed insurance company.

By Jeremy Pitts, partner, Baker McKenzie Tokyo, and Shinji Toyohara, attorney with Tokyo Aoyama.


Important legislative and regulatory reforms are set to change the landscape of the Singaporean insurance industry. The island city is keen to become Asia's leading insurance hub, and therefore the direct insurance market, which has traditionally been closed to new entrants, has recently been liberalised. But at the same time, regulation by the Monetary Authority of Singapore (MAS) has been tightened, in order to strengthen corporate governance, management practices and disclosure.

On 17 March 2000 the MAS announced that it intends, with immediate effect, to open up entry into the direct insurance market. Virtually no direct insurers have been admitted in recent years, but there will now be no limit on the number of new entrants. However, entry will be paced, and the award of direct insurance licences will be subject to the following criteria:

(i) domestic and international rankings;

(ii) present and past credit ratings;

(iii) track record and reputation;

(iv) commitment to contribute to Singapore's development as a regional insurance hub.

Potential new entrants with a strong record in product innovation and in the use of alternative distribution channels will receive favourable consideration from the MAS.

This move is in response to changes in the insurance industry, in particular the blurring of the traditional boundaries between financial services, the development of new products, and the need to develop alternative distribution channels. The MAS hopes that there will be increased competition, which should foster greater innovation and increases in efficiency.

In addition, the MAS has adopted an open admission policy for new brokers. For reinsurers and captive insurers, the existing open admission policy remains unchanged. The MAS has also lifted the 49% foreign shareholding limit in locally owned direct insurers. It hopes that by forming alliances with foreign partners, local insurance firms will benefit from the transfer of technical know-how and increased financial strength, in order to enable them to modernise and expand. However, any increase in shareholdings above a certain limit will require the approved of the regulator. In a similar effort, the MAS has encouraged local insurers to merge or form alliances with players in other sectors of the financial market.

At the same time, the MAS has introduced regulations to enhance the protection of policyholders' interests. It is keen to strengthen corporate governance and management practices, and to improve disclosure amongst insurers. Locally-incorporated insurers will be required to have a majority of independent and non-executive directors of their boards, and a majority of the directors must be Singapore residents. The re-appointment of directors will require MAS approval, as the appointment of directors does currently. The MAS also plans to require actuarial certification of loss reserves within the next two years. Insurers will be required to disclose their expenses, and to show how those expenses affect yields. In order to pursue some of these reforms a Committee for the Efficient Distribution of Life Insurance has been set up, consisting of industry representatives and MAS officials.

Two new statutes concerning the insurance industry came into force on 31 December, 1999. The Insurance Intermediaries Act tightens up the regulation of insurance agents and brokers, and extends the regulatory power of the MAS. Among other things, the act prohibits an insurance agent from dealing with contracts of insurance as an agent for an insurer, without a written agreement between them authorising the agent to do so. The approval of the MAS is also required for the appointment of a broker's chief executive officer and directors. Brokers annually must lodge statements of accounts and an auditor's report with the supervisor.

The Insurance (Amendment) Act tightens up the control of takeovers of insurers to ensure that the approval of the regulator is sought in advance of the direct or indirect acquisition of insurers. The act also provides that any person must obtain the approval of the MAS before he becomes a “substantial shareholder” in a registered insurer incorporated in Singapore. A substantial shareholder is defined as a person who holds 5% or more of the voting power of an insurer.

The Singaporean authorities hope that these reforms will create a more vibrant and competitive industry. They also believe that the new regulatory powers of the MAS are vital to ensure a successful insurance industry in the long term. The reforms certainly open up new possibilities for foreign insurers to expand into the Singaporean market.

By Wong Kien Keong and Kelvin Poa, Baker & McKenzie, Singapore.