For pre-need plan holders, a bitter pill to swallow
Daxim L. Lucas and Elizabeth L. Sanchez
Inquirer News Service
THE SNOWBALLING troubles of the pre-need industry have plan holders worried about their hard-earned investments.
Many are concerned if the cure being prescribed for the ailing 30-year-old industry can still save it. More importantly, they worry if they can still get their money back.
This year alone, three major pre-need firms have taken the route towards regulator-assisted rehabilitation -- Pacific Plans Inc., Platinum Plans Philippines, and recently, College Assurance Plans Philippines Inc. (CAP).
Pacific Plans asked the Regional Trial Court in Makati City to allow it to suspend payment and go through rehabilitation after running out of cash to service future claims. Platinum also asked the court to be allowed to keep its business running since it has plans to branch out into related fields like marketing.
Both firms face stiff opposition from plan holders who believe that company officials are trying to dodge their commitments to clients -- a charge the companies deny.
For the pre-need firms, survival comes at a high price and it is becoming even doubly difficult to convince the Securities and Exchange Commission (SEC) about the viability of their plans to stay afloat.
Clutching at straws
What will make a rehabilitation plan work?
SEC commission secretary Gerard Lukban said the biggest consideration is the infusion of new capital into a pre-need company.
"When a company goes to court and asks for this relief, the court will have to decide whether this company is entitled to it," Lukban said. "What they will consider is solvency. Is this company worth salvaging?"
Lukban stressed that the SEC was not out to kill the pre-need industry, contrary to claims of the troubled firms that regulators keep shooting down rehabilitation proposals in court.
"The big factor there is the infusion of new capital or they could study venturing into something more profitable," Lukban said. "The SEC also has to be convinced that the money is coming in. Every company in trouble deserves to be rehabilitated but their efforts to seriously implement that rehabilitation is the key."
And convincing skeptical regulators and an increasingly incredulous public about their viability seems to be the biggest liability of some pre-need firms like CAP, at present.
No less than Senator Manuel Roxas II, chairman of the Senate trade and commerce committee, opposes CAP's bid for rehabilitation.
"Obviously, CAP has been engaged in a litany of lies and had been fooling the regulators and the people all along," said the lawmaker, who is spearheading moves to impose tighter regulations on the industry. "SEC was correct in suspending CAP's license to sell. If CAP was allowed to continue selling plans, then more families could have been fooled."
Roxas pointed out that CAP had in the past paraded several names of supposed prospective investors, among them Green Circle Properties & Resources Inc., Green Square Properties Corp., First American Investment LLC, and International Global Capital Holdings AG.
"Up to now, not a single centavo was infused in CAP," Roxas said in a statement. "Their trust fund is down to P4.71 billion from P8.5 billion in 2003."
No matter what road to recovery the pre-need industry and their clients decide to take, the solution will definitely hurt everyone concerned.
Holders of open-ended educational plans are faced with a dilemma: Should they continue paying their premiums in the hope that the company will honor its commitments, or should they stop paying altogether and stand to recover only a portion of their policy value, or even risk losing everything they've paid through the years?
SEC assistant director Nonilonia Ambat, who oversees the pre-need industry, said that on the average, plan holders can recover 50 percent of what they paid when they choose to terminate their plan benefits -- but only if the policies have been fully paid.
Clients whose policies are only being paid for the first or second year are not entitled to recover any portion of their investments, Ambat said, explaining that terminating the policy at such an early stage will be a desperate move.
More realistically, she said, plan holders must be ready to swallow the bitter pill.
"Pre-need companies should convince plan holders to agree to convert to fixed value benefits," Ambat said. "If they need to beg the plan holder to agree, they should. The public will surely take the hit."
The SEC official's advice assumes that a pre-need company still has enough assets to cover the termination values of policyholders' plans. This may not always be the case as some firms may not only be illiquid, but bankrupt.
For actuaries like Isagani de Castro Sr., however, clients of some troubled pre-need firms are better off cutting their losses and starting from scratch.
"For clients of some firms, I would advise them to just stop paying," he said, adding that paying premium payments to a bankrupt pre-need firm is like throwing good money away.
"For some companies that are not that deep in trouble, like Pacific Plans, there is still hope that clients can recover their principal investment plus a small interest, if they accept the proposed rehabilitation plan," De Castro said. "But they should already forget about receiving the full benefits."
Wanted: Strong regulator
The Philippine Federation of Pre-Need Plan Companies believes, meanwhile, that open-ended plans should have a benefits ceiling.
But more than putting a cap on the amount to be paid to plan holders, the pre-need business model can still work and stay alive under a fixed-value setup, said federation president Juan Miguel Madrigal Vazquez.
"The pre-need industry remains viable because they serve a need," Vazquez said in an e-mailed note to the Inquirer. "The challenge is for the companies to serve those needs properly. People mistake the open-ended plan for the whole industry when it is not."
Vasquez also said that the problems faced by some of the industry's biggest players, like CAP and Pacific Plans, happened before 1994 -- way before the SEC was given resources to regulate the industry, as it has done since the Securities Regulation Code was passed in 2000.
"The law should create a strong regulator, empowered and accountable, with resources to implement this vision prior to, and after, any problem that would arise," he said. "The law should provide proactive protection and post protection or penalties to protect plan holders."
Roxas is hopeful that the pre-need bill pending in Congress will address these concerns, and more.
He explained that the law will specify a uniform accounting system which all players must adhere to, set prudent measures to protect trust funds from abuse and misuse, and require pre-need policies to be insured through a similar system used in the insurance industry.
As such, the pre-need industry will also be transferred under the ambit of the Insurance Commission, which will likely have more success in regulating quasi-insurance products.
Roxas admits, however, that his proposed solution is prospective, rather than retroactive.
While future buyers of pre-need policies will enjoy greater protection, existing clients will likely be left holding the bag, unless they can convince the courts to liquidate the assets of troubled firms in their favor.
On this point, both Roxas and De Castro agree that clients should pool their resources and file a class action suit against erring firms.
"The legal route is the only route," De Castro said, given the state of the industry, where several pre-need firms are on the verge of bankruptcy.
Having been a consultant for several insurance and pre-need firms in the past, De Castro predicts more pain in the coming months and years for all players in the industry—from the clients to the companies, even the regulators.
"It will be very difficult," De Castro warns.