NATIONALISM AND INSURANCE

Nationalism, or love of country, can be used for good or ill. We should always be on the watch. Let us take a look at the history of the fire insurance industry.

For decades before World War II and until the early 1950’s, the fire insurance industry was a virtual colony of the British. An obscure outfit in London innocuously called the Fire Offices Committee (FOC) tightly controlled the price of fire insurance. The FOC was the implementing arm of the international fire insurance cartel. As in all cartels, FOC’s mission was to keep premiums on a high level.

The price list and the rules of the cartel were inscribed in an intricate manual called “the tariff”. It was the Holy Scriptures. Any deviation was called a “breach of tariff”, a mortal sin that confined the offender to eternal damnation.

Then, in 1960, with nationalistic fervor sweeping the country following our independence from American rule in 1946, the fire insurance companies cut the long-standing umbilical cord with FOC. Rightly so, for the fire insurance business to be under foreign domination was no longer acceptable. The nationalists in the companies association felt that the cartel had to be run by Filipinos who loved their country.

In the heyday of the postwar economic boom, insurance companies sprouted like mushrooms. By 1960, the cartel felt that the industry was overcrowded with some two hundred companies. For love of country, the industry could not be allowed to collapse. The cartel lobbied for, and President Macapagal issued an order banning the licensing of new companies, domestic or foreign. The ban, which lasted for some thirty years, tightened the grip of the cartel.

The insurance code had been enacted long before World War II. The cartel lobbied for, and, in 1964, Marcos decreed a new code. Under the new code, the cartel qualified for and was granted a government license to operate. In all our history, the insurance cartel is the only cartel with a government license.

The cartel’s powers were now total. It then flexed its muscles. It prescribed stiff fines, reaching hundreds of thousands of pesos per offense, for breaches of tariff. Inspection teams spread out to look into the policy files of insurance companies, general agents and brokers.

Incredibly, at the latter part of the martial law regime, the cartel even seriously discussed the need for calling on the armed forces and the police to enforce the tariff.

What started out as a noble call based on love of country, ended up in the creation of a virtual police state. The nationalist Filipino cartel was far harsher than the international cartel ever was.

Then, in 1994, the insurance commission made a momentous decision. In line with the free trade agreements in the ASEAN region, the entire insurance industry was liberalized. In the fire insurance business, the tariff was abolished and the cartel broken up by simply withdrawing its license.

The ban on new companies was lifted. Foreign companies were allowed to come in through three doors: as a wholly owned subsidiary, as a full-fledged branch or as in joint venture with a domestic company.

Nine years later, the industry is more vibrant than ever before. The greatest change has been this: if an insurance company wants to stay in business, it has to compete for the buyer’s premium, no longer in the stifling atmosphere of a cartel, but under the searing sunlight of a free and open market.

The consumer has benefited the most. For example, the premium for a fire insurance policy on a residential building has come down to about one-third what it was before trade liberalization.

And so, to the new crop of nationalists, please answer these questions: Whose side are you on?  The seller or the buyer? The supplier of the consumer?

The battle lines should be drawn, not in the classrooms or the streets, but in the marketplace.

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HOW TO CHOOSE YOUR INSURANCE COMPANY

18 November 1994

Choosing a good insurance company, one that will pay a valid claim fairly and quickly, is never easy, if only because there are so many companies to choose from.

There are 102 non-life companies and 24 life companies. They come in all shapes, sizes and colors. Some sell the whole range of policies, others specialize in just a few lines. Some hold office in several floors of high-rise buildings, others are one-room affairs on side streets. The largest non-life company writes P1.5 billions in premiums, the smallest less that a million. Most are Pilipinos, of course, but some are Americans, British, Swiss, Taiwanese, Japanese, a Canadian and a New Zealander.

Short of evaluating these companies by an actuary or a financial analyst, here are some guideposts.

Like some wines, insurance companies mellow with age. This is especially true with life companies. The rule of thumb used to be that the gestation period of a life company was seven years. Nowadays, because of stiff competition, the gestation period can be as long as twelve years. An insurance company is not a get-rich-quick scheme. Anybody who wants to make a quick buck had better put his venture capital somewhere else.

Since the late sixties, when insurance was seen to be an overcrowded industry, the Insurance Commission has licensed no more than five new companies. Reckoned from the date of the original license, Pilipino companies are at least twenty years old.

This is not to say that all the old companies must be good and the new ones are not. A few companies organized before World War II are creaky from old age as to be practically senile. On the other hand, some of the new companies are vibrant with youth.

When someone tells you that all companies are the same because all are licensed by the Insurance Commission, politely but firmly show him the door. In most cases, a license (it is actually called a Certificate of Authority) means nothing but that the company has met the minimum requirements of the Commission. If having a license is about the only thing the company can say about itself – well, who wants a company with minimum requirements?

When a company tells you not to worry because it carries enough reinsurance, alarm bells should start ringing in yours ears. It is true that, for a company to take upon itself all the potential liabilities under a policy is not only suicidal. It is against the law. So, the company passes on the excess liabilities to other companies. This is called reinsurance. Those who accept reinsurance are called reinsurers.

But the reinsurers are not accessible to you. They are not parties to your policy. If you have to sue the company on an unpaid claim, you cannot bring the reinsurers into the suit.

For the same reason that the reinsurers are not parties to the insurance contract, the company cannot use the failure of the reinsurers to pay their share of the claim as a defense for not paying a claim.  In short, when you buy a policy, you rely entirely on the company to have reliable reinsurers to back him up.

In the end, a financial statement is not much help. A company is people, and a lot depends on the people running it. But you cannot have a dossier on the owners and managers.

There is a short cut to all these. Find an agent or broker who comes highly recommended. The rule of thumb is: he should be making a good living at selling insurance on a fulltime basis. He is your bridge to a good insurance company. It is his professional duty to see to it that you buy the policy you need, at the best terms and conditions. And when you have a claim, he works on the company and its adjuster to have the payment made fairly and quickly. This is what he gets a commission for.

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HOW TO INSURE YOUR PERSONAL EFFECTS

13 July 1991

When you buy fire insurance on your home, it is fairly easy to cover the building. If your house is rather new, computing the amount of insurance is sometimes a simple problem of adjusting for inflation the original figure at which you built, or paid for, the house. If your house is quite old, you may have to ask help from an architect friend or hire a professional appraiser.

Insuring your personal effects, whether you own your home or you are renting, takes a little bit more effort.

The standard terms and conditions of a fire insurance policy cover you at depreciated values (current brand-new prices less depreciation). So, you compute the sum insured on your personal effects at depreciated value.

But you can also insure at replacement value or brand-new cost (no deduction for depreciation).  The rate (the unit price of your policy) remains the same, but the premium (total price) goes up because you are covered at the higher replacement value. If you have a claim, you will get paid as if all your things were brand-new. This method is called insuring old for new.

I always recommend replacement value insurance, whether on a building or its contents.

With the help of your broker or agent, make an inventory of your personal effects. It is easier to do it room by room. You may have to call the stores you bought the major items from in order to bring you up-to-date on prices. Items like clothes and kitchen utensils will have to be appraised in lots.

You can insure all personal effects except goods held in trust or on commission, bullion or jewelry, any curiosity or work of art worth over P200, manuscripts, plans, drawings, designs, patterns, models, molds, securities, documents of any kind, stamps, money, checks, books of accounts or other business books and computer software. If you wish to insure these items, the policy should specifically say so, although it is hard to put figures on manuscripts, plans, and the like. It is also better to insure such items as jewelry and computer software under separate policies specially designed for them.

The value of your personal effects (the policy will refer to them as “household contents”) should be lumped and rounded off into one sum insured. There should be no listing in the policy. This renders the policy so flexible as to take in replacements and additions without having to make any changes in the policy.

To the basic perils of fire and lightning, you should add earthquake, typhoon, flood, explosion, falling aircraft, vehicle, collision and smoke. These extra perils cost so little it is almost foolish not to have them included in the policy.

You should insure portable items such as the TV set, VCR, microwave oven against robbery and theft. Do not insure everything. It costs too much.  Besides, nobody steals a dining room table.

There is a difference between robbery and theft. If someone walks through an open door and runs away with your stereo, that’s theft. If he has to kick in the door, or pulls a gun on you, that’s robbery.

Since you are insuring specific items, you need to give a list. Each item will carry a separate sum insured and a deductible (that bottom part of a claim that the company does not pay).

Insurance companies do not offer robbery coverage in certain areas in Metro Manila where the risk is considered too much to handle. In areas where they do, they have looked into the security arrangements in the neighborhood.

What I have outlined above is how to insure personal effects under the standard fire policy expanded to include other perils. Some companies offer policies labeled Homeowners and Tenants Comprehensive Policies or Home and Contents Policy. They are variations of the same theme.

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