1

FREQUENTLY ASKED QUESTIONS

INSURANCE CODE

What is the role of Insurance Commission?The Insurance Commission is a government agency under the Department of Finance. The Commission supervises and regulates the operations of life and non-life companies, mutual benefit associations, and trusts for charitable uses. It issues licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters and actuaries. It has also the authority to suspend or revoke such licenses.

Why does the Government supervise the operations of insurance companies and their representatives?Insurance business exists to serve the public. It is therefore charged with public interest

What is the address of the Insurance Commission?The Insurance Commission is located at 1071 United Nations Avenue, Ermita, Manila, with Tel. # 523-84-61 up to 70 (Trunk Line), 525-20-15 (Office of the Insurance Commissioner), 524-47-84 (Office of the Deputy Commissioner), Fax # 522-14-34, and E-mail ocom@insurance.gov.ph.

Who heads the Insurance Commission?Insurance Commissioner – Atty. Emmanuel F. Dooc

Does the Commission have the power to adjudicate insurance claims and complaints involving any loss, damage or liability?Yes. The Insurance Code, as amended, empowers the Commission to adjudicate insurance claims and complaints involving any loss, damage or liability where the amount involved does not exceed P100,000.00 for any single claim. Decisions or orders of the Insurance Commission may be appealed to the Appelate Courts.

What other complaints can be filed with the Commission?Informal and administrative complaints against malpractices of insurance companies or agents may also be filed with the Commission. The Commission is ready at all times to render assistance in settling any controversy between an insurance company and a policyholder relating to insurance.

Are pre-need companies offering memorial service plans, educational plans and pension plans fall under the jurisdiction of the Insurance Commission?Yes, pre-need companies offering products similar to insurance are now under the jurisdiction of the Insurance Commission by virtue of Republic Act No. 9829 known as the Pre-Need Code of the Philippines as approved on December 3, 2009.

What are the minimum qualifications required of applicants for insurance agents’ examination?They must be of good moral character and must not have been convicted of any crime involving moral turpitude and also have been trained in the kind of insurance presently contemplated in the license applied for.

Who may be exempted from taking the agents’ examination?+ One who holds a valid and subsisting certificate of authority issued by the Commissioner+ One who has successfully completed an academic course and/or training program satisfactory to the Insurance Commissioner, in the kind or kinds of insurance contemplated in the license applied for+ One who, because of his previous connection with any insurance company, or with any office or firm handling insurance matters is found by the Insurance Commissioner to be trustworthy and competent to transact the business contemplated in the license applied for. Who may be insured?Anyone except a public enemy may be insured

2

What may be an insurable interest in life insurance consist of?Every person has an insurable interest in the life and health:+ Of himself, of his spouse and his children;+ Of any person on whom he depends wholly or in part for education or support; or in whom he has a pecuniary interest;+ Of any person under legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent performance; and+ Of any person upon whose life any estate or interest vested in him depends.

What are the two (2) essential policy conditions which if violated will void the entire policy?a) Willful concealment or misrepresentation by the insured of any material fact or circumstance concerning the subject thereof or the interest of the insured therein; and b) Any fraud or false swearing by the insured relating thereto.

What is the difference between suretyship and insurance?In suretyship, three persons or entities are involved: the surety, the principal and the obligee. In insurance, there are only two: the insurer and the insured.In insurance, there is a theoretical distribution of losses over a group or classification of risks, the insurance company assuming the losses of the individual insured. In suretyship, no losses is anticipated as the surety guarantees the obligation of the principal.

In property insurance, is the insured entitled to a return of premium if he should decide to discontinue his policy?Yes, to a proportionate amount corresponding to the unexpired term of the policy; generally under the short period scale provided for in the policy.

May the insurance company cancel a policy? If so, how? May the insured cancel a policy?Yes, upon prior notice thereof to the insured. However, no notice of cancellation is effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following:+ Non-payment of premium;+ Conviction of a crime arising out of acts increasing the hazard insured against;+ discovery of fraud or material misrepresentation;+ discovery of willful or reckless act or omission increasing the hazard insured against;+ physical changes in the property insured which result in the property becoming uninsurable; or+ determination by the Commissioner that the continuation of the policy would place the insurer in violation of this Code.The insured may cancel a policy upon notice to the insurer under the terms of the policy.

How soon may the amount of any loss or damage for which an insurer may be liable under a non-life policy be paid? If the insurer refuses or fails to; pay the claim within the time prescribed by law, may the insured collect interest for the duration of the delay?The amount of any loss or damage shall be paid within 30 days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not paid or made within 60 days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within 90 days after such receipt. Refusal or failure to pay the loss or damage will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground the claim is fraudulent.

If the insured has any right of recovery against another party, may he be required to assign such right to the insurance company?Yes, the company may require from the insured an assignment of all rights of recovery against any party for loss to the extent that payment therefore is made by the company.

3

Once a property is insured, must the insured inform the company of any change of the description, occupation or construction of the property insured.The insured must inform the company of any change thereto, otherwise, the company would be relieved from liability unless the insured before the occurrence of any loss or damage obtained the sanction of the company signified by an endorsement upon the policy.

What is the basis of the value of the insured property at the time of loss?The actual cash value at the time of loss, that is, what it would cost to replace the property.

Is it the duty of an agent to determine the value of the property insured and the amount of insurance to be carried? Explain.No, the value of the property should be determined by the insured, rather than the agent. However, the agent should guard as far as possible against over insurance and should check the amount of insurance in relation to the actual value with the insured.

What are the effects of non-payment of premium?

Forfeiture of all rights under the policy.

What is Compulsory Motor Vehicle Liability Insurance?

The Insurance Code (as amended) requires this coverage for the registration of motor vehicles. This insurance covers passengers or third parties who may be killed or injured as a result of accidents arising from the use of operation of such vehicles. The maximum amount of benefit under this policy is P100,000.00

What is the meaning of “Authorized Driver” in a motor vehicle policy?

An authorized driver within the meaning of the policy is any of the following:+ The insured; or+ Any person driving on the Insured’s order or with his permission.

What is the purpose of the errors and omissions insurance policy (professional liability or professional indemnity policy) required of insurance or reinsurance broker before a license could be issued.

To indemnify the applicant against any claim for breach of duty as insurance broker or reinsurance broker, as the case may be, which may be available against such applicant by reason of any negligent act, error or omission.

What do you understand by the “no fault claim”?An insurance company issuing the cover shall pay any claim for death or bodily injuries sustained by a passenger or third party without the necessity of proving fault or negligence of any kind. Immediate payment shall be made provided that the total indemnity shall not exceed P10,000.00 upon presentation of the following proofs of loss, namely:1. police report of accident, and2. death certificate and evidence sufficient to establish the proper payee, or medical report and evidence of medical or hospital disbursement in respect of which refund is being claimed.

Does the “no fault claim” apply to claims on property wherein the insurance company is under obligation to make payment immediately?No, because the “no fault claim” applies only to death or bodily injuries and does not respond to claims for third party property damage.

4

BANGKO CENTRAL NG PILIPINAS

FREQUENTLY ASKED QUESTIONS ON MEMORANDUM NO. M-2012-034

To facilitate implementation of Memorandum No. M-2012-034 dated 13 July 2012 on the prohibition against non-residents from investing in the Special Deposit Account (SDA) facility of the Bangko Sentral ng Pilipinas (BSP), the following clarifications are hereby issued:

1. As a branch of a foreign bank, capital is comprisedof assigned capital plus “net due to head office” where “net due to head office” is capped at 3 or 4 times of assigned capital. Is the “net due to head office” component of capital considered funds obtained directly or indirectly from non-residents for purposes of compliance with the Memorandum? Net Due to Head Office (NDTHO), even if within the allowable limits that may be considered regulatory capital, is considered non-compliant with the Memorandum if they are at such a level more than the expected to support the ordinary business of the bank given its risk profile. However, the unremitted profits component of NDTHO is not considered as funds obtained from nonresidents, hence, can be invested in SDA.

2. Are overseas Filipino workers (OFWs) considered non-residents? Land-based OFWs with work contracts of 1 year or more are considered nonresidents, while those with work contracts of less than 1 year are considered residents. Sea-based OFWs are considered residents.

3. For joint accounts where one of the accountholders is a non-resident, will the account be considered non-resident? Generally, for joint accounts where 1 of the accountholders is a non-resident, the account will be considered as non-resident. However, joint accounts involving a non-resident OFW and a resident beneficiary may invest in SDA.

4. Will a Filipino individual temporarily residing abroad (e.g. a student studying overseas for 1-2 years) be considered a non-resident? A Filipino individual who goes abroad for full-time study generally continues to be resident in the Philippines. This treatment is adopted even if his/her degree/course may exceed one year. However, a Filipino student may change to being a resident of the territory in which he/she is studying when he/she develops an intention to continue his/her presence abroad.

5. If the non-resident invests in a Peso unit investment trust fund (UITF), and the Peso UITF has SDA investments, are we supposed to terminate the UITF placement of the non-resident? Non-residents may invest in UITF products with SDA placements so long as such SDA placements are for prudential liquidity requirements of the fund or are in the nature of interim/temporary investments.

6. Will “Dual Citizenship” be considered for this purpose? The issue is residency, not citizenship. Hence, please be guided by the definition of non-residents under Section 1 of the MORFXT.

7. Does an Alien Certificate of Registration give permanent residence to foreigner? The requirement is for a non-Filipino citizen to reside for a year or more in the Philippines. If he/she is residing in the Philippines for a year or more, he is considered a resident.

8. Does period of residence have to be uninterrupted? Under Section 1 of the Manual of Regulations on Foreign Exchange Transactions, the individual should be permanently residing in the Philippines for a year or more to be considered a resident.

9. Shall we consider the retirees and ambassadors as "non-residents", if the source of funds is the retirement pay and salaries, respectively, which are paid by either GSIS, SSS or Filipino employers?

5

National diplomats, peacekeeping and other military personnel, and other civil servants employed abroad in government enclaves, aswell as members of their households are considered to be residents of the economic territory of the employing government. Ambassadors and retirees who are employed or were formerly employed by the Philippine government, arethus considered residents. In the case of retirees of private entities, they may be considered non-residents if they stayed abroad for a year or more. However, ifit is clearly established by the Bank that the funds are sourced domestically (e.g. retirement pay), then, these funds may be invested in SDA.

10. What does indirect sourcing mean? It refers to funds ultimately obtained from non-residents which through layering or other schemes are represented to be from a resident source.

11. The memorandum says that we shall report to the SES all existing placements prohibited by said memorandum. When we report the outstanding SDA by non- residents which will be terminated as they mature, what format do we use? Banks and their trust departments are required to report all existing SDA transactions prohibited by the Memorandum as of cut-off date of 18 July 2012. The Banks’ Compliance Officers have been provided by the BSP with the reporting template. The inventory of such prohibited transactions shall be submitted to the Central Point of Contact Department I or II not later than 31 July 2012. The notarized Letter of Undertaking (LOU) shall be submitted to the BSP’s Treasury Department not later than 24 July 2012 as a basic requirement for continued access to the SDA facility.

12. Are deposit placements of non-residents prohibited to be invested in SDA considering that funds are fungible? In general, deposits generated by a bank from any source may be invested in SDA as part of normal banking activity. However, management activities of a bank are not covered by the prohibition, provided, the bank does not enter into arrangements or schemes that effectively allow a bank to act as conduit of nonresidents to the SDA facility (e.g. offering preferential yields to non-residents higher than the Bank’s regular deposit rates).

13. Aside from the submission of notarized Letter of Undertaking and inventory of all existing SDA transactions not consistent with the Memorandum, what are other expectations from a bank or trust department/entity? Banks and trust departments/entities are expected to develop internal policies consistent with the Memorandum which shall be effectively communicated across the organization. The Bank’s compliance system should be able to monitor compliance with said policies and internal audit shall conduct independent review to ensure effective implementation of said policy. The action/operational plan including policy institutionalization, compliance mechanism and audit controls of the bank and its trust department to comply with the terms and conditions for the access to the SDA facility shall be implemented not later than 31 August 2012. The implementation thereof shall be subject to verification by the BSP.

TRUTH IN LENDING ACT

FAQs on Circular No. 730 Version 2 Page 1 of 4

FREQUENTLY ASKED QUESTIONS CIRCULAR NO. 730 – TRUTH AND TRANSPARENT LOAN PRICING AND DISCLOSURE Introduction The BSP amended rules to implement the Truth in Lending Act under Circular No. 730, dated 17 July 2012, aims to enhance loan price transparency and improve creditor disclosure practices. The objective of the new rules is to make lending rates more understandable, comparable and known to the client to enable better informed decision making. For

6

the credit providers, they will also better communicate the cost of providing credit from their perspective (i.e. cost of funds, reserves, credit risk, deposit insurance, etc.) and be able to compete in a level playing field with other providers. Greater transparency across all credit providers also allows better comparison of prices and fosters competition that may eventually lead to a sustained lowering of rates. Upon due consultation with major stakeholders, the new rules are set to be uniformly implemented by 1 July 2012. Aside from banks and non-bank financial institutions under BSP supervision, the parallel transparency regulations will apply to other credit-granting institutions under the Securities and Exchange Commission, Insurance Commission and Cooperative Development Authority. In order to address various concerns related to the new rules, the BSP is posting the following frequently asked questions (FAQs) to guide the public/consumers and financial institutions. 1. What are the main enhancements of the new rules? a) Emphasizes the importance of fair pricing by requiring interest computation based on the outstanding balance of the loan at the beginning of an interest period or each installment period; b) Provides a comparable basis for disclosing loan interest rate via the Effective Interest Rate (EIR). EIR may be quoted annually if the term is for more than a year, or monthly if the loan is amortized on a monthly basis or more frequently for a term of not more than a year; c) Shows the full cost of credit by using EIR which includes all charges incident to the extension of credit; d) Requires the consistent use of EIR in all loan documents including the marketing materials; and e) Provides a simpler disclosure statement which includes the key information useful for the borrowers. 2. What are the minimum required information to be disclosed to the borrower? Based on research and focus group discussions, the following are the required information to be included in the disclosure form that are most relevant and useful to the borrower for purposes of informed decision making: a) Loan amount; b) Upfront charges/deductions collected; c) Net proceeds of the loan; d) Schedule of payments; e) EIR; and f) Conditional charges, if any. The credit provider may also expand the document to improve client’s information. 3. Are the revised rules applicable to all types of loans? Yes. The rules and sample format of Loan Disclosure Statement are applicable for all types of loans. However the implementation will focus on retail loans, small business, agricultural and consumer loans.

7

4. What is the importance of the EIR? EIR is the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds. It is the rate that best measures the true cost of credit. The derived EIR formula includes all charges incident to the extension of credit. 5. What is the formula used for the EIR calculation models? The BSP adopts the universally accepted EIR formula of: Annual Effective Interest Rate (EIR) = (1 + i)ⁿ - 1 Where: i = periodic interest rate n = number of periods in a year

The term “periodic” in “periodic interest rate” refers to the time between installments (daily, weekly, semi-monthly, monthly, etc.), while the “number of periods in a year” will depend on the mode of payment or payment term of the loan (daily, weekly, semi-monthly, monthly, etc.). Upfront charges and grace period have a material impact in the computation of the EIR. As such, Internal Rate of Return (IRR) of future estimated cash flows over the term of the loan should be determined to get the periodic interest rate. The nominal rate, which is the contractual rate, shall be the main basis for the EIR calculation. However, the EIR will appear higher than the nominal rate because it will include interest, fees and charges incident to the extension of credit. It provides the borrower a complete and comparable total cost of credit. 6. What are the charges included in the EIR computation? a) Interest; b) Service charge/processing fees; and c) Other charges/fees incidental to the extension of credit (e.g. documentary stamps, notarial fees, appraiser’s fee, etc.) Imposable charges/fees should be identified and clearly explained by the entities to their clients. Fees incidental to the extension of credit are those that are collected exclusively because of the loan. As a general rule, taxes should be borne by the credit providing entity and should not be passed on to consumers. In case any of these are paid by the borrower, these should be indicated in the Disclosure Statement and included in the computation of EIR. Further, owing to the independent benefits an insurance coverage brings to the client and his/her heirs, even if offered side by side with a loan, premiums should not be considered in the EIR computation. The terms and conditions of the insurance coverage should, however, be clearly explained to the borrower. More so, savings is a separate product/service with its own benefit and value to the clients that is independent of the loan. Compulsory savings component forms part of client’s savings account which can be withdrawn upon demand or once the loan is paid in full, therefore, this is not a charge and should be excluded from the computation of EIR. Finally, conditional charges also do not form part of EIR computation as these depend only on contingent events and are not expected in the ordinary course of the loan. FAQs on Circular No. 730 Version 2

8

7. Are entities allowed to charge add-on interest to the principal? Can this be amortized on a straight-line method? No. Add-on interest and straight-line methods are prohibited. Interest and service charge directly attributable to the granting of credit shall be amortized using the effective interest method. 8. Is the entity allowed to deduct advanced interest on the date of the loan grant? Yes, advanced interest may be collected. 9. Are there templates that financial institutions can use that will automatically reflect the schedule of amortization? The EIR calculation models as illustrated in Memo No. M-2011-040, are mere guides for financial institutions to demonstrate the underlying principles of discounted cash flow analysis which is the basis of EIR calculation. The entity would have a unique calculation depending on its specific loan terms. It is encouraged to develop a program to automatically calculate EIR for a given loan. 10. What are the sanctions in case of non-compliance with the required disclosure statement? Non-compliance by BSP regulated entities of the required disclosures shall be covered by sanctions provided under Section 6 of R.A. No. 3765 (Truth in Lending Act). Additionally, non-compliance with the MORB provisions shall be covered by Sections 36 and 37 of R.A. No. 7653 (New Central Bank Act). Similar sanctions are likewise provided by other regulators on their regulated entities. 11. In case of violations by credit-granting institutions, can you enumerate the appropriate venue for consumer complaints? For institutions supervised by the BSP, consumers are urged to file a formal complaint to the institution with which they are transacting. Should their complaint be unresolved, consumers may forward their complaint to the BSP Financial Consumer Affairs Group (FCAG). Complaints regarding other credit granting institutions, consumers may forward their complaint to the respective regulatory agencies. (i.e. SEC, IC and CDA). Coordination regarding the enforcement of the rules is also being undertaken with the Department of Trade and Industry and the Department of Interior and Local Government.