Technology issues involving the Insurance industry
by Dominique Alexander Cabangon
Introduction - Purpose of the Research Paper
The purpose of this paper is to suggest a solution of ways and means to prevent, if not, eradicate the rampant graft and corrupt practices in the insurance industry, specifically in the life insurance industry involving the official in the Local Government Units or LGU’s. This paper would discuss the schemes, method and the money of how such LGU’s circumvent the law, and of how they manipulate transactions and provide funds for such insurance coverage. This will also proposed the application of technology in the system for the purpose of eradication of the graft corrupt practices and the admissibility of evidence of such in cases, where an officer of the local government may be held accountable and may be found guilty to be involved in laundering the taxpayers money in procuring insurance business or industry.
In addition, I would like to address the problems of online application of life insurance product.
I
Brief history of Insurance
The main concept of insurance - that of spreading risk - has been around as long as human existence. Whether it was hunting giant elk in a group to spread the risk of being the one gored to death or shipping cargo in several different caravans to avoid losing the whole shipment to a marauding tribe, people have always been wary of risk.
The first written insurance policy appeared in ancient times on a Babylonian obelisk monument with the code of King Hammurabi carved into it. The “Hammurabi Code” was one of the first forms of written laws. These ancient laws were extreme in most respects, but it offered basic insurance in that a debtor didn’t have to pay back his loans if some personal catastrophe made it impossible (disability, death, flooding, etc.).
History of the Insurance Commission and Insurance in the Philippine Setting
By the enactment of Republic Act No. 275, formerly referred to as Office of the Insurance Commissioner, which took effect upon the formal opening of the Central Bank of the Philippines on January 3, 1949 and which, in effect superseded the provisions of Exective order No. 54, dated April 21, 1947 and Section 169 of Act No. 2427, otherwise known as the Insurance Act.
At that time the government agency which supervised the insurance industry in the Philippines was called the Insurance Division of the Bureau of Treasury. This lasted for a period of 26 years .
On November 20, 1972, then president Ferdinand Marcos decreed, Presidential Decree No. 63 amending certain sections of Insurance Act. Among other things, it provided that the Office of the Insurance Commissioner be known as the Insurance Commission.
By the enactment of the Insurance Act, the insurance industry of the Philippines was paved it’s way spearheaded by, of course, by the multinational corporations of different foreign entity which garnered almost three fourths, if not, all the market share both in life and non-life insurance business. In that era insurance corporations who deals with both life and non-life business, until the Insurance Commission ordered that life and non-life business be separated by the very nature of the insured.
All insurance company whether life or non-life, including Mutual Benefit Associations and Savings and Loans Associations are under the supervision and directions of the Insurance Commission.
In a recent statistical report, stated by, Phil-am Life Insurance, President, Mr. Joey Cuisia, he stated that “if we are to look at the percentage of the Filipino who are insured, there are about 20% of the population in the Philippines that are insured. Removed the mandatory requirement of the government, such as the GSIS, the percentage of Filipinos insured are on five percentum”. Therefore, there is a need to educate Filipinos on the value of insurance in our lives as well as it’s value to the economic development society.
It has been a custom of the insurance business to recruit it’s agent, it’s own sales force to pursue what ever the target quota may be impose by the respective insurance companies for the year. This relation may be referred to as Principal-Agent relationship, whereby the insurance company gives authority to agents to sell it’s products, in return a percent based commission or compensation shall be awarded to them, plus, if they are to reach the required quota, a pleasure trip and/or cash prize awaits it’s authorized/agents etc.
Moreover, other than licensed agents there are the Insurance Brokers. However, although insurance brokers sells a product of a certain insurance industry, their loyalty may however be found tilted on the side of the insured. These brokers are only middlemen of the insurance companies. And that no principal-agent relationship is established only that of the strict compliance of the provisions of the policy or such insurance brokers are sometimes treated also as a client by insurance companies.
Dilemma
Other than the problem of educating the purchasing public about the value of insurance in our lives and the immature acceptance of principle of insurance. It’s been a culture and custom to us Filipinos specially in the government of the “lagay system” its been existing, if not, part of the system dating back since this the Philippine government was established. From the top post of the institution from the lowest ranking official is directly and indirectly tolerating and involved to such graft and corruption. As the researcher of this paper and has been working in an insurance company for less than a decade is not excused or absolved from this kind of malpractice, as it is admitted that such accustomed way is necessary in order to close a sale, specially if it involves a branch of the Government.
As we all know, by contract of insurance, the insurer pays a certain premium to the insurance company in return pays an amount of the insurance coverage in the event of any unforeseen or contingent event. But that premium made has imputed on it, a commission reserved for the licensed agent, as his compensation for the sales closed. That in order to seal the deal, this may be done through certain short and speedy way of closing such deals. One of which is to compromise a certain percent of the commissions of the agent and/or broker, promising that if the project pushed thru, a substantial amount of cash shall directly go to the pocket of such government official or office without even a trace. It is justified by the reason that such percent is already computed in the premium therefore and such is already in the practice in all the industry selling and supplying any contract with the government, and that no law is violated and that no man is prejudiced.
Government Acts
One of the acts of the government to lessen the graft and corruption practices in the insurance industry other than those indicated in the Revised Penal Code and R.A. 7641 or otherwise known as the “Local Government Code”, and Law on Public Officers. The Government enacted REPUBLIC ACT NO. 9160, OTHERWISE KNOWN AS THE “ANTI-MONEY LAUNDERING ACT OF 2001.”
The basic principle of this law is to report to the Anti-Money Laundering Council any questionable, unusual bank transactions involving an amount exceeding 500,000.00. Section 10 and 11 states that:
Sec 10. Freezing of Monetary Instrument or Property. — The Court of Appeals, upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period of twenty (20) days unless extended by the court.
Sec. 11. Authority to Inquire into Bank Deposits. — Notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this Act, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activities as defined in Section 3(I) hereof or a money laundering offense under Section 4 hereof, except that no court order shall be required in cases involving unlawful activities defined in Sections 3(I)1, (2) and (12).
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into or examine any deposit of investment with any banking institution or non-bank financial institution when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP.
However, this has flawed by dividing the amount into separate check lesser than the amount mentioned in order that said bank transaction may not be reported in the Anti-money laundering council.
The government has never considered the transparencies of the transaction of the insurance industry because such can be easily manipulated and circumvented by big shot businessmen, their lawyers and accountants.
Present Technology
Technology is reshaping the way we do business. Particularly in areas of distribution, customer and supplier services, marketing, communications, administration, and human resource management. From the time cellphone was introduced and accepted it has been part of our daily lives.
Technology such as electronic transfers of information via the internet, extranet, and intranet means that customers, suppliers and intermediaries are now close to the insurance company’s business and are becoming more active participants in the whole process. Newer technologies are also being enhanced to create a more intimate relationship between clients and the company, allowing to treat each other as a valued individual rather than a policy or agency type of number. Administration processes also changes as system is introduced to provide more efficient service. In many cases, this doesn’t affect staff members, but it does take away tedious repetition of jobs and allows staff to undertake more productive work.
In an insurance company there is a very slow change in the development of technology because for example, such judgment may sometimes calls for a discretion upon the person handling the problem. Unlike computer to which is very efficient do not refer to discretion but computes a precise margin of whether such can be accepted to be insured.
Technology in the insurance industry in the Philippines is not as dynamic as the changes in the technology made and developed in the first world countries. Most of the premium payment facility of insurance premiums are still those of conventional type of payment such as payments in cash or check. None of the members legislation proposed the transparencies of premium payment through the use of technology to avoid graft and corrupt practices.
As Bob Mendelshn, CEO of SunAlliance stated “ Technology truly has been an enabler and we are just starting to see now how it changes the way we work. Because of technology, people in the industry are working very differently than they did five years ago. The underwriting process is different, the customer service is different, the claims process is different and all these are more efficient.
Scenario
In a sale of an insurance product to a Local Government Unit, the first thing you have to consider is, if there is a fund available or such Province, city, municipality, or the barangay, whether such LGU’s is capable of purchasing Insurance products to a private insurance companies. That under the general welfare clause of the Local Government Code of 1991, Section 16 it provides that:
Section 16 – General Welfare – Every Local Government Unit shall exercise the powers expressly granted, those necessarily implied there from, as well as power necessary, appropriate, or incidental of its efficient and effective governance, and those which are essential to the promotion of the general welfare.
The Code provided further provides, that under the following sections, to wit
Section 447 and 458, Subpa (a) (i) (xiii) state that “Provide for group insurance or additional insurance coverage for Barangay officials, including members of the Barangay Tanod, and their Service Units with PUBLIC or PRIVATE INSURANCE COMPANIES when the finances of the City/Municipality allow said coverage…”
By these provision of the Local Government Code, this is one of the funds available for disposable of the Local Government Unit and it allows such local unit to contract or purchase insurance products to any private insurance companies.
Furthermore, it is been opined by the Commission on Audit under COA Opinion 2000-001, it states that:
Payment by the government for such insurance coverage shall only be for the duration of the Barangay officers term of office. Should said Barangay officials or members would still want to continue availment of the benefit even after their terms of office, premium payments therefore should already come from their personal funds. Permanent insurance coverage where the Barangay will shoulder payment of the premiums after term of office will not be feasible.
Therefore, until such local government official sits in office such expenses for insurance premiums shall be therefore shouldered by the Province, City, Municipality, or Barangay.
In negotiating a business with a local government, you must consider who is the decision maker such Province, City, Municipality, or Barangay for the reason that it is the person to whom you should talk to, failure to contact such would render your actions futile and would produce nothing in the end.
Another thing that you have to consider is the political relationship of the LGU you are trying to target, because it is immaterial to sell to the chief executive of the LGU if the members of council is an oppositor to local chief. Because, according to the DILG OPINION No. 83, SERIES OF 1998, DATED MAY 27, 1998:
Dept. of Interior and Local Government clearly stated that:
“It is their considered opinion that other than the GSIS, Barangay officials could be insured with PRIVATE Insurance Companies, provided, however, that the same is duly covered by an appropriate Sanggunian Ordinance/Resolution and subject, further, to the availability of funds and the budgetary limitations prescribed for under Section 325 (a) of the Code.
This was signed by Hon. CELSO D. GAÑGAN, Chairman. Copy furnished the Office of the Director, Local Government Audit Office.
Therefore, all funds coming out of the “kabang bayan” shall done through a valid ordinance or resolution by the “sanggunian” or council in order that such procurement is valid. Provided, that such Local Government Unit has funds available and within their budget limitations. However, in cases where the local chief executive have a surplus budget under his office at his disposal or such local chief is so notorious that he has an “iron fist” or “kamay na bakal” within his jurisdiction.
In the course of the negotiation, the local chief rarely speaks to insurance company representatives. Afraid of being identified, these officials sends proxy/representative and is directed to negotiate business with us. It is there, where the asking of the “lagay” would be asked and determined the percentage involved based on the gross premiums paid. You would be dismayed of how these representative handle such negotiations, it is more like they are spending their own cash without any regard or even without care of the benefit and features of the insurance packages. It is the least these people shall looked for and consider. The only thing that these public officers would ask is how much would be the amount to be remitted back to their boss. With respect to the biddings and awards committee, such biddings are just in the form of formality, when such insurance provider gives the largest percentage of the premiums paid, other insurance companies will be ask for a higher premium. Therefore, giving an impression that the offer of the highest percentage cut has the lowest premium rates. In the actual cases, at least forty 40% is being normally asked and sixty percent 60% is the highest based on the authors personal experience.
By this kind of scenario, it is clearly a violation of the Anti-Money Laundering Act; which states that:
“SEC. 4. Money Laundering Offense. — Money laundering is a crime whereby the proceeds of an unlawful activity as herein defined are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following:
- Any person knowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transacts said monetary instrument or property.
- Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he falicitates the offense of money laundering referred to in paragraph (a) above.
- Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so.”
Other than the violation of the Anti-Money Laundering Act ther are other violations are commited, such as tax evasion of income received of the LGU officials, please take note, that all the transaction entered by the local government are paid in check, but the service fee or the rebate are given in the form of cash and on cash only, because if the insurance companies issues a check on behalf of such local official, there will be a paper trail of the money involved and other questions would be raised on why such public officials receives a check from an insurance company. So therefore, this was never been practiced.
On the day of the payment the local government unit shall issue a check In behalf of the insurance company but this shall be cashed to a government bank, to which they can cash the check even such negotiable instrument is under the name of the insurance company. After encashment of the check the agreed percent shall deducted to the total amount whereby the representative of the local chief shall collect and immediately leave the bank, please also take note, that this is taking place inside the bank and the cash being divided are in millions of pesos. After the division of the cash the representative of the insurance company shall directly remit the premiums and shall issue an Official Receipt based on the gross value or the check cashed. Therefore, no trail can be found nor evidence can be adduced against the local chief executive and his cronies even the chargeable withholding tax is being shouldered by the seller. Whether from the direct office, broker or agent. .
Remedies/Solution/Etc.
The remedy lies with the Insurance Commission, well as far as, Insurance companies are concerned. It is vested the power of supervision over all insurance companies in the nation. The Commission must be innovative enough to create a program that would facilitate the transparencies of the insurance transactions of every company. a program that would record all the innovative plans of the respective insurance company every agreement an insurance entered, as well as, as the percent of the commission imputed to such insurance packages. This will be in correlation to the different government bodies, such as the Bureau of Internal Revenue for the purpose of the taxes due of the insurance corporation and as well as the taxes due of the respective agents/brokers and the like. The Anti-Money Laundering Council in cases of questionable transaction, it may easily detected and questioned, and of course the Philippine National Police, National Bureau of Investigation in cases investigations and charges.
This program must be synchronized via a web-based program, that enables the different government entities concerned to access the facility to whatever the purpose it may serve. This type of program is being used by the insurance industry. A good example of is the Medical Inquiry Bureau or the MIB, whereby al insurance companies agreed that in the event that a person, who applies for an insurance coverage or has been confined in a hospital shall be recorder in the MIB to which, if the person applying for an insurance coverage was discovered with an adverse health condition, such fact shall be imputed to the system. Hence, he cannot anymore apply to other insurance companies without complying to certain underwriting parameters and it would be easily determined whether or not he is insurable due to hi/her status. This MIB system is an agreement between and among life insurance companies to be used for their respective underwriting procedures and such program connected to the different medical institution in the nation. However, this is not a web-based program, it is being updated from time to time and is not simultaneously accurate.
Another, one is the automation of all the insurance companies, although it is still a technology lag because of the reason that every insurance company differs in the automation efficiency and procedure.
Now, what is being proposed here, is a web-based program to be used by the Insurance Commission to facilitate it’s supervision powers over insurance companies. This may lessen the graft & corrupt practices in the industry because of the transparency of the transaction. Technology may play a vital role in the cleansing of the accustomed malpractices of the insurance companies. This program shall record all transaction entered into by any insurance companies to which shall be available to the respective government authorities such as, the BIR, NBI, PNP etc. and the premiums of the sold insurance products shall be closely monitored including the commission or compensation received by the respective licensed agents or brokers. This would promote the transparency of the insurance procurement and the plans of insurance purchases and the Commission shall know all the insurance benefits of such respective LGU’s.
Consequences / Prosecution
In the advent of this kind of synchronized system of the insurance commission, it can be said that there would be a down fall on the sales of the insurance procurement by the LGU’s, because based on the trend. These Officials who procures such insurance products shall never purchase an insurance product for the reason that, other than the lack of education pertaining to insurance. These official shall never procure anything without any profit rebated to them, only those LGU’s who is an honest purchaser for value shall be the purchasing such insurance products.
By virtue of the enactment of Law on Electronic Evidence such transaction may be admissible in courts because the very essence of such is the admissibility of such electronic devices. In cases this are still be commited by the insurance companies because they want to reach the quota or by some other reason they shall be held liable together with the conspiring public officials.
Conclusion
Technology is just a tool which is a very effective tool to be used to enforce what is right and may guide us to the right path. Therefore, it behoves to say that even though such computer program is made available it is the people behind such tools are the ones that has to changed the ways and customs of the “lagay system” in the country. In the Philippines, even there is a substantial evidence has been found against you, such may be reverted and be contrary to what has been seen and proven. Specially a law which is new and young that needs to be interpreted in future cases or controversies.
II
The problem with online applications for life insurance
Today, almost all life insurance companies has already established a website as a form of advertisement and to make known to the public that such insurance company is a strong and economically stable one, whereby a person may find out of how much is the premium of the desired plan of insurance coverage. Most of these websites includes an online application for life insurance. Where a person may fill up an application form and an e-mail shall be received if such application is approved based on the respective underwriting parameters of each company.
The problem lies if the person who applies online does the ff:
- filled up completely the application form online not declaring true medical history which is adverse.
- filled up completely the application online not remembering past illness in good faith.
After such person has completely filled up the forms, such forms shall be subject to the underwriting procedure of the respective insurance companies. The Medical Inquiry Bureau or MIB shall be used for such procedure. If in the MIB shows that such applicant do not have any record in the MIB it is presumed that he has no adverse illness. Therefore, an approve e-mail letter shall be sent to the client, informing him of the positive acceptance of the insurance company attaching in the e-mail the amount to be paid representing insurance coverage.
After the premiums are paid, Insurance policy shall be issued and insurance coverage shall commence. Under the insurance code, the insurance company has a contestability of a period of two years, meaning that the insurance shall have a period of two years to contest the any claim of the insured by reason of misrepresentation and concealment, otherwise the insurance company shall be forever be barred from contesting such claim.
Supposed that the person insured died after the 4 years, and the insurance company finds that the person has been suffering for an illness for more than 6 years now. Because of the online application the person applied on the internet without personally appearing before an underwriter to examine him physically by means of the senses. Can the insurance company deny the claim by reason of misrepresentation? Did the contestable period prescribed giving the insured the better right?
On the second case, unknowingly in good faith the applicant filled up an online forms, the same procedure was done, an e-mail of confirmation was sent, premiums are therefore are paid. The insured died after 22 months. During the claim it was discovered that he has cancer 3 months after the confirmation has been received. Does the insurance company liable to pay on such circumstances?
These are only of the problems encountered by life insurance by reason of online application, because normally agents and brokers shall personally visit such client checking physically the nature of the status of the person, whether such has the capacity to pay, or such person may be insured. This kind of primitive procedure is most effective because it calls for a human decision or discretion which is based on experience and training.
Just like in an airplane, the autopilot can never replace the judgment call of the human pilot, although efficient and effective, human experience and feeling shall never be replaced by computer programs.
