(Last of three-part series)
Prudentialife Plans Inc. (PPI) is the latest of the many preneed companies that have failed.
Before the Asian financial crisis of the late 1990s, there were more than 200 preneed firms operating in the country. Now, there are only 20 licensed preneed companies based on latest data from the Insurance Commission’s website.
Immediately after the Asian financial crisis, preneed firms started collapsing. The problem peaked in mid-2000s when big industry players, including College Assurance Plan (CAP) and Pacific Plans Inc., could no longer service their obligations to plan holders.
Gerard Lukban, commission secretary at the Securities and Exchange Commission (SEC), said the financial product was created in the Philippines because of the importance that Filipinos gave to education.
Lukban said the problem with preneed firms was that it had no international model to follow. So, there were no operational and regulatory benchmarks that could help guide the preneed sector.
Disastrous open-ended plans
He said the business model involving “open-ended” education plans proved to be disastrous for the industry. An open-ended preneed policy is one that promises to fully cover the cost of tuition whatever the amount may be.
With the enactment of the law deregulating the education sector in 1992, preneed firms were confronted with increases in tuition that exceeded their projections.
Like other preneed firms, PPI sold open-ended education plans.
The Asian financial crisis also caused serious problems in the industry, Lukban said. Many preneed firms, given their heavy investments in real estate, suffered losses due to drastic declines in property prices.
“Many smaller industry players had failed following the Asian crisis, but the problem of the industry got media attention only when bigger players collapsed in the mid-2000s,” Lukban said.
In the case of PPI, he said, the company started showing signs of financial difficulties a few years before 2010.
It was in 2010 when regulation of the preneed industry was transferred from the SEC to the Insurance Commission (IC).
Investment in subsidiaries
One reason cited for PPI’s collapse was an old regulation issued by the SEC prohibiting preneed firms from investing in stocks that were not publicly listed.
The regulation was said to have forced PPI to divest itself of some of its investments even at a loss.
John Apatan, deputy commissioner at the IC overseeing the liquidation of PPI, said the firm’s investments in nonpublicly listed stocks were composed of investments in its subsidiaries.
The company’s subsidiaries include Prudentialife Landholdings, Prudentialife Realty Holdings, Prudentialife Memorial Park and Prudentialife Memorial Chapels.
“That was their [PPI’s] claim—that they suffered losses because of that regulation and that they could have generated more income if they were allowed to continue investing in those,” Apatan said.
Insurance Commissioner Emmanuel Dooc said PPI’s financial condition was already problematic upon the IC’s assumption of the regulatory role.
Dooc said PPI blamed the latest global financial crisis, which started in 2008 and dragged the economic growth of many countries in 2009, for its failure.
The record-low interest rates resulting from the crisis were said to have prevented PPI from generating yields sufficient to meet its liabilities.
Despite the industry’s problems, regulators said there was still a good chance that the existing players could operate viably over the coming years.
They said the industry remained sustainable, but they stressed the need for a strict implementation of reforms.
A key reform was the enactment of the Preneed Code in 2010. Before this, there was no specific law governing the regulation of the industry.
One of the basic features of the law was the transfer of the regulation of the preneed industry from the SEC to the IC. The law recognizes that preneed products are more like insurance rather than investment products, thus the need for a change in regulator.
With a “more appropriate” regulator, lawmakers believed the preneed sector would be better supervised.
PPI, however, collapsed when the preneed regulation was transferred to the IC. Dooc noted that PPI was already troubled before 2010 and that the IC just inherited the firm’s problems.
Another feature of the law was the institutionalization of capital requirements.
Under the Preneed Code, a company selling three types of plans—education, pension and memorial—is required to have a minimum paid-up capital of P100 million.
A company selling two types must have P75 million, while a company selling one type must have P50 million.
The capitalization requirements are aimed at helping ensure that preneed firms have the means to service their liabilities.
Dooc said the IC would push for further enhancement of the Preneed Code. While regulation of the industry was transferred to the IC, the agency was not asked for inputs when legislators drafted and passed the Code.
Further capital hike
A key IC proposal, he said, was the additional increase in the capitalization requirements. In the IC’s view, the existing capital requirements remained small. Dooc said raising the capital requirements would better ensure the viability of the industry and protect consumers.
The IC is finalizing the numbers on its proposed increase in capitalization requirement and will soon submit this to Congress, Dooc said.
Another proposal, he said, was the transfer of authority over the liquidation of a failed preneed firm’s “corporate assets” from a court to the Commission.
Currently, the IC has authority over the liquidation of a failed preneed firm’s “financial assets,” which include cash and securities. But the liquidation of “corporate assets,” mainly real and other physical properties, is assigned to a designated court.
Dooc said that because the IC has more expertise in financial matters than the courts, transferring the oversight of liquidation of corporate assets to the agency would better serve the interest of policyholders.
End open-ended policies
Learning from the past, the IC will no longer grant a license for selling open-ended policies even if the Preneed Code does not explicitly prohibit the sale of these policies.
“It does not have to be stated in the law. We will no longer issue a license for open-ended policies,” Dooc said.
The IC commissioner said both the regulator and preneed firms should have learned by now that the sale of open-ended policies—a key culprit in the collapse of preneed firms selling education plans—was highly risky and imprudent.
Dooc said the business of selling education plans could still be viable as long as the model involving the sale of open-ended policies was dropped.
Like Dooc, Victor Abola, an economist and a consultant to First Metro Investments Corp., said the education plan business could hardly be viable in the future if the sale of open-ended policies would persist.
“To assure a policyholder of a prepaid tuition, no matter the amount, is no longer a viable option,” Abola said.
Hard to project
With the deregulated education sector, Abola said, how much tuition would increase in the future was hard to project given that price movement was dictated by market forces. An increase in demand for college education could already cause an increase in tuition, he said.
Abola said predictability of future expenses, in this case tuition of beneficiaries of education plans, was crucial in avoiding collapse of another preneed firm in the future.
“The business model should be one where expenses are predictable and fully funded,” he said.
Partner with school
Dooc said the IC favored the business model in which a preneed firm had a college or a university as a sister company and sells education policies that would cover tuition if the beneficiaries go to the school.
Under this model, he said, a preneed firm is exposed to less risk.
One preneed company that observes this model is Philplans First Inc., a unit of STI Holdings Education Systems.
Dooc said the preneed industry might find this approach beneficial if more players would follow it.
Demand for preneed products remains significant despite the collapse of many firms, according to Chris Rafal, head of the IC public assistance department.
Rafal said there was reason to believe that the preneed business was still sustainable as long as firms left standing learned the lessons of the past.
The latest IC data showed there were 190,242 preneed policies sold in the third quarter of 2012, up 80 percent from 105,677 in the same period of 2011.
Rafal said education, pension and memorial plans were financial products that continue to be beneficial to policyholders.
“There is still a significant demand for preneed plans. Preneed remains attractive and can still be viable as long as the safeguards are there,” he said.
However, for the 245,000 plan holders of PPI and hundreds of thousands more plan holders of other preneed firms that have shut down, the reforms being pursued are just way too late.
For the PPI plan holders, what they want from authorities are aboveboard distribution of payments and filing of appropriate cases if fraud was involved in the firm’s collapse.