To establish the required amounts of capital to be maintained by life insurance companies in relation to their investment and insurance risks, the Insurance Commission, after consultation with the life insurance industry hereby approves the adoption of the Risk-Based Capital (RBC) Framework and issues the following rules and regulations pursuant to the powers vested in me by the provisions of Section 414 of the Insurance Code.

I. RBC Ratio and Networth

The investments and insurance risks of the company shall be classified under four (4) major categories.


The RBC requirement is given by the formula:


The RBC ratio of a company shall be calculated as Networth divided by the RBC requirement as determined in accordance with RBC Exhibit Instructions and Disclosures (See Annex A^[*] ).

œNetworth  shall include the company ™s paid-up capital, contributed and contingency surplus and unassigned surplus. Revaluation and fluctuation reserve accounts shall form part of networth only to the extent authorized by the Insurance Commissioner.

Every life insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the Trend Test as stated in (II.A.2) below.

II. Levels of Regulatory Intervention

The following levels of regulatory intervention then follow based on this ratio:

RBC Ratio = Y

Event

Description

100% < Y < 125 %

Trend Test

Linear extrapolation if next year ™s ratio < 100%. If so, move to Company Action Event

75% < Y < 100%

Company Action

Submit RBC plan and financial projections. Company implements the plan.

50% < Y < 75%

Regulatory Action

IC authorized to examine company and issue Corrective Orders.

35% < Y < 50%

Authorized Control

IC authorized to take control of the company.

Y < 35%

Mandatory Control

IC required to take control of the company.

A.  Company Action Event shall refer to any of the following events:

1. The RBC ratio of the company is less than 100% but not below 75%, or
   
2. The Trend Test has failed, which shall occur in the event that:
   
   
   1. The RBC ratio is less than 125% but is not below 100%;
      
   2. The RBC ratio has decreased over the past year, and
      
   3. The difference between RBC ratio and the decrease in the RBC ratio over the past year is less than 100%

A.1    In the event of a Company Action Event, the company shall file to the Commissioner within forty-five (45) days of the event a RBC plan that shall:

1. Identify the conditions that contributed to the event;
   
2. Contain proposals of corrective action that the company intends to take and that would be expected to result in the elimination of the event;
   
3. Provide projections of the company ™s Annual Statements for at least two (2) years with and without the proposed corrective actions; including but not limited to projections on the balance sheets, analysis of operations (total), surplus accounts, RBC Exhibits and lines of business information relevant to the RBC plan;
   
4. Identify the key assumptions impacting the company ™s projections and the sensitivity of the projections to the assumptions; and
   
5. Identify the quality of, and problems associated with, the company ™s business, including but not limited to its assets, anticipated business growth, surplus strain, extraordinary exposure to risk, mix of business and use of reinsurance, if any, in each case.

The Commissioner shall notify the company within the sixty (60 days upon submission of the RBC plan whether it shall be implemented or is unsatisfactory. In the latter case the Commission shall include reasons for the determination and proposed revisions to the RBC plan, and the company shall resubmit the RBC plan within thirty (30) days of notice.

B.  Regulatory Action Event  shall refer to any of the following events:

1. The RBC ratio of the company is less than 75% but not below 50%; or
   
   
2. The company fails to submit a RBC plan satisfactory to the Commissioner, if any, within the filing deadline; or
   
   
3. The Commissioner notifies the company of its failure to adhere to its RBC plan, and wherein the failure shall adversely affect the company ™s ability to eliminate the Company Action Event in accordance to its RBC plan.
   

B.1    In the event of a Regulatory Action Event, the Commissioner is authorized to

1. Require the company to submit a RBC plan within forty-five (45) days of the event;
   
   
2. Perform such examination or analysis, as deemed necessary, of the company ™s    accounts, operations and RBC plan; and
   
   
3. Subsequent to the examination or analysis, issue a Corrective Order specifying corrective actions the company is required to undertake.

The Commissioner may retain actuaries and other consultants as necessary to review the company ™s accounts, operations and RBC plan and to formulate the necessary corrective orders, the fees and costs of which shall be borne by the affected company.

C. Authorized Control Event shall refer to any of the following events:

1. The RBC ratio of the company is less than 50% but not below 35%; or
   
   
2. The Commissioner notifies the company of its failure to satisfactorily respond to a Corrective Order as stated in (B.1.c).

In the event of an Authorized Control Event, the Commissioner is authorized to place the company under regulatory control under Sec. 247 of the Insurance Code, should the Commissioner deem it to be in the best interests of the company ™s policyholders and creditors and of the general public. The Authorized Control Event shall be deemed sufficient grounds for the Commissioner to take action under Sec. 247 of the Insurance Code.

D.  Mandatory Control Event shall occur if the RBC ratio of the company is less than 35%. Should this event occur, the Commissioner is required to place the company under regulatory control under Sec. 247 of the Insurance Code: The Mandatory Control Event shall be deemed sufficient grounds for the Commissioner to take action under Sec. 247 of the Insurance Code.

III. Transition Period

The company shall be given a maximum of twenty-four (24) months from date of effectivity of this Insurance Memorandum Circular to  improve the RBC ratio.

IV. Submission of RBC Exhibits and Items

Every life insurance company shall annually accomplish and file the relevant RBC Exhibits and Items that shall form part of the Annual Statements in accordance with the instructions provided.

V. Confidentiality

With the exception of the RBC Exhibits that shall form part of the Annual Statements, all other disclosures and RBC Plans filed with the Commissioner shall be kept confidential in the same manner as the Annual Statement Schedules and other confidential reports required by the Commission.

VI.  Compliance with Minimum Statutory Networth and Minimum Paid-Up Capital, Margin of Solvency and RBC Requirements

The company shall, in addition to the Minimum Statutory Networth and Minimum Paid-up Capital required under  Department Order No. 27-06 and Margin of Solvency required under Section 194 of the Insurance Code, comply with the RBC requirement.

VII. The RBC Framework shall be subject to review at least once every three (3) years

This Insurance Memorandum Circular shall take effect on immediately.

Adopted: 5 Oct. 2006

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^[*] Text Available at Office of the National Administrative Register, U.P. Law Complex, Diliman, Quezon City