AS I was writing this column, there had been mounting opposition from the financial sectors against the one-year debt moratorium for borrowers earlier proposed in the Bayanihan to Recover as One (Bayanihan II) bill currently under consideration. Even the Bangko Sentral ng Pilipinas and the Insurance Commission had joined hands to assail the proposal.
BSP Governor Benjamin E. Diokno had issued a warning that such a moratorium “will significantly strain the liquidity of the banks” which may impact their ability to service withdrawals. Diokno is concerned that a one-year moratorium could result in “unintended consequences that will severely affect the banking industry, the financial system and the economy.” Thus, while the intention of the bill to provide relief to the sector devastated by the pandemic is salutary, a serious liquidity problem may trigger a bank run, which is the last thing we may want at present.
For his part, Insurance Commissioner Dennis Funa has strongly pointed out that a one-year moratorium would be detrimental to the insurance and pre-need industries and our economy. He stated that if passed into law, the 12-month moratorium could spell financial risk to the life and pre-need industries that are already reeling from low premium production brought about by the reduced economic activity. He worried that such a measure “will exacerbate the adverse effects of the pandemic to said industries’ financial and capital positions, such that said industries may be permanently unable to recoup the consequent losses during this period, even if we were to consider future premiums.”
Atty. Francis Lim, President of the Management Association of the Philippines, suggested that “the moratorium should exclude insurance and pre-need companies as they may find it difficult to service claims, especially Covid-19 related deaths.”
The Bicameral Conference Committee approved the recommendation of both BSP and the IC, which is supported by the business sector to provide for a 60-day payment moratorium for insurance premiums and debt payments. This move was welcomed by the banking and insurance communities, but this will not sit well with the borrowers and insurance policy owners. It will be up to the President to decide.
If I may add to this discussion and I hope it’s not yet late, the payment of insurance premium is not a debt obligation per se. It’s entirely different from a loan. A premium is a contractual obligation on the part of the insured in consideration of which the insurer commits to keep its promise under the policy of insurance. The premium is the consideration for the continuation of the insurance protection or services an insured is getting from the insurance company. By the nature of its contract, there is a strict necessity for prompt payment of premiums to keep the policy in force, and this has been judicially recognized in most jurisdictions. “Promptness of payment is essential in the business of life insurance. All the calculations of the insurance company are based on the hypothesis of prompt payments. They not only calculate on the receipt of the premiums when due, but on compounding interest upon them.” (New York Life Ins. Co. V. Statham, 93 US 24) Stretching the period for premium payment will upset the actuarial soundness of the policy. Unlike a loan that earns interest and penalties, which are also enforceable for as long as the principal loan remains unpaid, non-payment of premiums will only result in policy lapsation. Premiums paid had already served their purpose of obtaining insurance protection against the risk or contingency, which had run during the period that the policy had been in force.
The Insurance Code requires a Grace Period Provision in every individual and group life policy of at least one month while the Pre-Need Code provides for a Grace Period of at least 60 days. In non-life, it is usual to have a 90-day credit extension under the brokers and agency agreements within which to deliver the premiums. The Grace Period is a fixture in the policy with or without a pandemic, which allows an extra number of days to pay the premium after it has become due. In fact, in the event of a calamity, it has become de rigueur for these industries to extend the statutory grace period, if not ordered by the regulator itself. It is common for the industry to declare motu propio premium payment moratorium in places declared a calamity area by the authorities. The contract remains in force during the Grace Period. If a loss occurs during the Grace Period, any unpaid premium is automatically deducted from the benefit paid.
Premiums due are not loans and the two differ materially in many respects. Unlike loans, premium payments cannot be enforced by the insurer. The consequence of non-payment of premium will be termination of the policy unless the policy has earned a cash surrender value, which entitles it to a nonforfeiture benefit. In most cases, a loan is secured by a collateral, which provides the lender another recourse against a borrower in default which is not available to an insurer. Therefore, premium payments should not be treated as loans and should not be bundled with payment of debts for the purpose of giving relief to their customers. It’s only prudent not to include premium payments under the debt moratorium contemplated in Bayanihan II bill. The Grace Period Provision and the liberal implementation accorded to it already provide ample protection to the insuring public. To further stretch it to an unreasonable period will upset their sound actuarial valuation, which will work hardship on the insurance and pre-need industries already suffering from the ill-effects of the coronavirus.