Bitter medicine for sick pre-need industry

It has been almost a decade after many of the country’s pre-need companies went into crisis. Yet even now, industry survivors continue to struggle under changing realities that include surmounting financial problems and an unfavorable public perception.

At the height of pre-need firms’ popularity in the early 2000s, there were over a hundred companies operating, with thousands of agents selling the popular education plans that guaranteed potential plan holders sufficient funds to ensure that beneficiaries would have enough money to go through college and graduate.

Today, the number of companies has been pruned down to about 20. More significantly though, the number of licensed dealers has been reduced to a trickle as the potential market of buyers of plans – pension, life (or memorial), and education – had drastically shrunk.

The once-mighty College Assurance Plan is under corporate rehabilitation, and so are many of the big names of a decade ago, the latest being Prudential Life Plans Inc. which had been granted permission recently by the Insurance Commission to suspend payment on any claims made by plan holders.

Change of guard

The Insurance Commission (IC), after taking over the industry in 2009 from the Securities and Exchange Commission after the passage of the Pre-need Code, has been busy restructuring the operating environment of existing pre-need companies, including those under corporate rehabilitation, as well as new entrants.

Recently, the industry’s new regulator proposed to hike the minimum capital requirement for new companies by P200 million, a substantial jump from the existing levels.

Formerly, pre-need companies that offered a single product, either pension, memorial or education plans, were required a minimum capitalization of only P50 million. Those with two products were asked to put up a minimum requirement of P75 million; and those with three products, P100 million.

These amounts pale in comparison to the financial responsibilities that pre-need companies like CAP during the height of its crisis faced when they were besieged by education plan holders who were hunkering for money to pay the promised tuition fees of beneficiaries.

In 2005, for example, shortly before CAP went into rehabilitation, the company had accumulated a deficit of P17 billion. Prudential Life, on the other hand, asked for IC intervention when its deficit reached P9.23 billion recently.

These deficits were caused by the pre-need companies’ inability to service claims and promised returns on plans, and were often exacerbated when their license and permit to sell plans was revoked, thereby cutting a source of potential funds to service claims.

A matter of trust

Aside from increasing capitalization levels, the IC is also looking into hiking the required trust funds of pre-need firms that serve as guarantee and reserves for future claims or plan maturities. Currently, the trust fund level is pegged at 40 percent of plans sold.

Pre-need companies, after operating in haywire mode during the years when it was still under SEC regulation, have now sobered up to the realities of observing prudent actuarial valuations and using better risk analysis tools to protect its financial health.

For many of the defunct or beleaguered pre-need companies that offered education plans in the past, their downfall had been the deregulation of tuition fees that cause claims to balloon by triple digits.

The unregulated hike in tuition fees charged by schools cause pre-need firms’ exposures then to balloon to levels that even government regulators could not manage.

This in turn left many plan holders with an empty bag, or more succinctly, the shattered promise of having available funds to pay for tuition fees of their children upon entering college.

Bitter but necessary

Raising the capital requirements for pre-need companies, as well as adjusting their trust fund levels are steps that will definitely restrict the growth of the industry in the next few years, even if such additional amounts will be done in staggered basis.

Expect more measures from the IC as the pre-need industry suits up to better business practices. But like most medicines, taking these remedies may be bitter – but they will definitely make the patient better.

Expectedly, the remaining pre-need firms will vigorously oppose the required hike in capital requirements and the increase in level of trust funds to back up maturities of sold plans. If the stockholders of these companies are not willing to put in more money and comply, then they should not be allowed by the regulators to remain in the pre-need business.

The track record of the IC and the Banko Sentral ng Pilipinas specific to how they have overseen the insurance industry speaks well of their oversight ability. The public is looking at these regulators to remain steadfast in their drive to resuscitate the “sick” pre-need industry.

Prologue

Of course, we will never see the day when a pre-need company will offer an education plan that promises a blank check to cover the future education of a child. But neither will we see such massive-scaled suffering of parents who were being turned away at the cashier windows of colleges and universities because their plans had turned worthless.

There is little comfort for thousands of these spurned plan holders. Even if some of those distressed pre-need firms are now starting to “reimburse” claims even on a restricted basis, the tumult of a decade ago is something that is difficult to forget.

Hopefully, order is now slowly being restored, and the pain of miscarried dreams will fade away to a dull throb. We can look forward to a new breed of companies that we can trust, firms we can hand over money that we had judiciously earned, and fear not that they will just disappear in a black hole.

Hopefully too, we will see a healthier industry that can provide what it had intended to do: give hard-working individuals the security of providing for their pension, memorial or education spending in the future.

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