After near collapse, pre-need industry is alive and well

Emerging from a near collapse in the past decade or so, the pre-need industry is alive and well, with 15 licensed companies racking up sales of nearly 184 billion plans worth P7.359 billion as of the first quarter of the year.

The 15 need companies make for a lean industry, reflecting a net worth of P18.792 billion, data from the Insurance Commission (IC) showed.

"Buhay na buhay pa ang pre-need industry," IC Commissioner Emmanuel Dooc said.

With education plans among the industry staple, most of the existing companies were able to survive the onslaught of higher tuition and miscellaneous fees in the early 1990s by anticipating higher tuition and miscellaneous fees and offered plans with limited benefits.

All told, more than 70 companies collapsed in the aftermath of the Education Act of 1992, which deregulated the financial cost of education. At that time there were 92 pre-need firms in the country.

"Other companies were able to continue operating by selling other products aside from education plans, such as memorial and pension plans," Dooc noted. 

As of June 8, the companies with certificates of authority or license to operate from the commission were:

• AMA Plans Inc.

• Ayala Plans Inc.

• Caritas Financial Plans Inc.

• CityPlans Inc.

• CocoPlans Inc.

• Eternal Plans Inc.

• First Union Plans Inc.

• Himlayang Pilipino Plans Inc.

• Manulife Financial Plans Inc.

• Mercantile Care Plans Inc.

• PhilPlans First Inc.

• St. Peter Life Plan Inc.

• Sunlife Financial Plans Inc.

• Transnational Plans Inc.

• Trusteeship Plans Inc.

Tweaks and management tools

Alberto Albano, president of Philippine Federation of Pre-need Plan Companies, the firms that continue to operate needed to tweak and fine-tune, calibrate and manipulate the available management tools and resources available to them in order to survive.

"Unprofitable plans were phased out or outrightly discontinued and new, more promising plans were introduced," noted Albano, who is also the president of Himlayang Pilipino Plans.

"Networks were downsized and unprofitable branch offices were closed."

Sales commissions and overrides were adjusted and redundant officers and employees of head offices and the remaining branches were laid off, Albano said. "Benefits and even salaries of remaining officers and employees were reduced."

In retrospect, Dooc noted the education plan was the industry's best selling product, noting family has a strong desire to have their children graduate from college.

"But then the government deregulated tuition fees. Tumaas nang husto ang tuition fees ... So 'yung kinikita ng mga pre-need companies ay hindi sapat para matutusan 'yung mga pangangailangan ng mga bata na ibinili ng kanilang mga magulang ng educational plans," he said.

Parents picked the expensive schools, because their policies had no restrictions on which educational institution to enroll their children.

"So ang deregulation ng tuition ang naging unang problema. Sapagkat ang laki ng gastusin, hindi nakayanan ng mga pre-need companies na nag-offer ng 'open-ended product'," Dooc said.

"Ibig sabihin ng open-ended ay walang limitasyon kung magkano ang benefits. Nakatakda lang sa plano na pagpasok ng bata sa kolehiyo ay sasagutin na ng pre-need plan nila 'yung gastusin sa pag-aaral," he added.

From the perspective of the federation, Albano noted it was a case of "generous commitments of the plans and rapid decline of earnings to investments.

"In simple terms, the cost of the plans' commitments was increasing while the earnings of the investment funds of the pre-need companies were declining."

CAP and Legacy Group

Some of the biggest pre-need firms that collapsed were the College Assurance Plan Philippines Inc. (CAP), Professional Financial Plans, Platinum Plans Philippines Inc., and APEC Plans. These companies were placed under court rehabilitation, along with PET Plans Inc., Permanent Plans Inc., and TPG Corp.

In 2005, the College Assurance Plan – then the largest pre-need company – incurred a trust fund deficit involving more than 700,000 plan holders. The situation compelled the company to seek rehabilitation.

The Legacy Group – Legacy Consolidated Plans Inc., Scholarship Plan Phil. Inc., All Asia Plans Corporation – ceased operating in 2009, with 52,990 plan holders on the losing end with estimated losses placed at P5 billion, according to Senate records.

In aid of legislation, the Senate committee on trade and commerce conducted an investigation and held hearings on the matter. As a result, the Pre-Need Code of the Philippines was enacted into law.

Interest rates and mismanagement

Dooc noted another factor which contributed to the demise of the pre-need companies was the poor investment returns.

"Halimbawa ang interest regime dati ay kumikita from 12 percent ... up to 25 percent per annum.  pero bumagsak ... Ngayon even sa term deposit sa bangko mabuti nang kumita nang 1.5 percent. Coming from a high of 25 percent ... humina nang husto ang kita ng mga pre-need companies."

He said the drop in interest rates was "a function of the economy. Tinamaan din tayo ng financial crisis noon which affected the economy."

Also, pre-need companies made unsound investment decisions. "Masasabi rin natin isa sa mga factors diyan is the mismanagement ng kumpanya," the commissioner said.

"Maari 'yung kinikita nila o 'yung hinuhulog na pera ng mga plan holders ay inilagay nila sa negosyo o investments na hindi naman nagbigay ng return na inaakala nila ay ma-i-dedeliver sa kanila," he said.

Stricter regulation

The enactment of RA 9829 or the Pre-need Code in 2010 was a watershed for the industry. "So, nung nagkaroon tayo ng Pre-need Code ... nabalangkas ng maayos ang regulation ng industry dahil sa lesson na natutunan natin," Dooc noted.

"Hinigpitan natin ang investment practices ng mga pre-need companies." Under the Pre-need Code, a company selling the three types of plans – education, pension, and memorial – must have a minimum capital of P100 million.

A company which sells two types was required at least P75 million in capitalization, while a company which offers a single plan must have P50 million.

The code transferred the regulation of pre-need companies from the Securities and Exchange Commission to the IC.

Dooc said the commission holds period audits and examines companies to ensure that their finances are sufficient to meet their obligations to their clients.

As of March 31, 2016, the industry registered total assets of P119.065 billion against liabilities of P100.273 billion. — VDS, GMA News