PHL pre-need insurance industry: Reconciling past for brighter future

In Photo: This file photo shows students at a flag-raising ceremony. Two decades ago the College Assurance Plan Inc. became unable to pay for the tuition of beneficiaries of holders of a pre-need education product. The firm’s ills deeply affected the pre-need insurance industry.

Part One

THE president’s ink barely dried on the Education Act of 1994 when the College Assurance Plan Inc. (CAP-Education) fiasco exploded.

Early into the new millennium, CAP-Education took a turn for the worst when its investments in real estate nose-dived.

According to reports, CAP-Education had been investing its funds heavily on real estate—mostly owned by its board members. The investments even exceeded the cap set by the pre-need industry’s regulator that time: the Securities and Exchange Commission (SEC).

The questionable real-estate investments resulted to the fall of CAP-Education, which was considered a pioneer in the pre-need insurance industry in the country and was prominently known for providing educational insurance plans to clients.

The company ultimately had to stop its operations: Its license to sell educational plans was revoked. This has resulted to delays in the payment of claims to its estimated 800,000 plan holders.

CAP-Education has committed to pay tuition obligations until 2012, despite an estimated P4.1 billion in liabilities, including its obligations to plan holders estimated at P1.2 billion for the first semester of school year 2005-2006.

“The CAP traditional pre-need plan was conceived in 1980 to provide parents with an inflation-free savings vehicle that guarantees payment to the school of tuition fees due when the beneficiary of the plan enters college,” CAP-Education said on its web site.

By 2008 the power to regulate the pre-need industry was transferred to the Insurance Commission (IC), which led to the creation of the operational framework for the industry known as the
Pre-need code.

Court roles

IN 2013 the Regional Trial Court (RTC) in Makati City approved a revised rehabilitation process under the supervision of a Rehabilitation Court for CAP-Education.

The decision led CAP-Education to resume payments for the benefits of its plan holders nationwide within 10 years,  starting from the early part of  the first quarter of 2014. Mamerto Marcelo Jr. is the RTC-appointed rehabilitation
receiver for the company.

In 2014 the Supreme Court (SC) issued a Temporary Restraining Order (TRO) putting on hold the implementation of the Extended and Modified Rehabilitation Plan approved by the RTC in Makati City . This resulted to the temporary suspension of the payment of claims by the company.

According to the IC, the SC issued the TRO to afford itself time to evaluate and decide on certain issues raised by the SEC concerning the rehabilitation plan approved by the RTC in Makati City and upheld by the Court of Appeals (CA).

“Thus, at this juncture, we have no recourse but to await the SC’s orders relative to the lifting of the TRO and payment of CAP-Education claims,” the IC said in a statement.

TRO effects

ACCORDING to Elmer M. Lorica, president of the Philippine Federation of Pre-Need Plan Cos.  Inc. (Pre-Need Federation), CAP-Education had stopped paying planholders’ claims due to the TRO.

“But policy holders can still claim once the TRO is lifted. CAP is under the Court supervision. Unless the court decides on their case, it cannot proceed with its payment of claims,” Lorica told the BusinessMirror.

He added that policyholders who have further inquiries can contact the CAP office in Makati City.

The IC also pointed out that CAP-Education policyholders can contact the commission’s conservatorship, receivership and liquidation division for further inquiries.

The issues and challenges that were faced by CAP-Education had led to a number of pre-need companies to close shop. From 200 companies, the total number went down to 40 as of 2013, data from the IC showed.

“From as high as more than a hundred companies, now there are only 14 companies issued with a license,” Lorica said. “But only five to six companies are selling the pre-need products.”

CAP’s path

ACCORDING to Lorica, several other preneed companies, most of them pioneering in the industry, followed CAP-Education’s path due to the insufficiency of their trust fund to answer the liabilities.

“The earning rate of the products has not been earned, therefore the deficiency in their trust fund,” Lorica said. “The rate was too high to be earned—as high as 18 percent—while the earning was only a single digit—as high as 5 percent to 6 percent only.”

But the challenges proved to be a learning experience, as the challenges paved the way for the creation of the Pre-Need Code, which is considered to be a stronger framework to better guide the industry.

“The crisis of the industry is a blessing in disguise,” Lorica said. “Not only did it lead to the enactment of the Pre-Need Code, the weaknesses or errors of the industry were remedied by the remaining players of the industry.” According to Lorica, the Pre-Need Code covers the operation of all models: industry management, industry sales, organizational and industry product.

“Now, the industry is more stable as it corrected the errors and weakness of the past,” he added.

RA 9829

THE Pre-Need Code, or Republic Act 9829, instructs all preneed insurance companies to fall under the supervision of the IC. The IC was placed as regulator for the industry.

“All pre-need companies, as defined under this Act, shall be under the primary and exclusive supervision and regulation of the IC,” the Pre-Need Code said. “The commission is hereby authorized to provide for its reorganization, to streamline its structure and operations, upgrade its human-resource component to enable it to effectively and efficiently perform its functions and exercise its powers under this code.”

The code has emphasized that “it is the policy of the state to regulate the establishment of preneed companies and to place their operation on sound, efficient and stable basis to derive the optimum advantage from them in the mobilization of savings and to prevent and mitigate, as far as practicable, practices prejudicial to public interest and the protection of planholders.”

After the issues that plagued the pre-need industry in the past, Lorica believes the industry is trying to stabilize its structure and operations once again.

Image credits: Nonie Reyes


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