‘Win-win’ plan for pre-need industry
Jan. 15, 2009
by Dennis Fetalino
The Securities and Exchange Commission has agreed in principle to assess the proposals submitted by the Philippine Federation of Pre-Need Plan Companies, Inc. for a review of the regulatory framework for the industry to enable it to weather the shocks of the global financial crisis and ensure its stability and growth over the long term.
In a letter to the federation, the SEC responded positively to the request of the pre-need industry umbrella group.
“Please be informed that we truly commiserate with your predicament, and we appreciate your sincere acknowledgement and recognition of obligation to your planholders. Rest assured that the Commission, as your regulator, shall assist you in evaluating the options available by balancing the growth and survival of pre-need companies and the interest of the planholders,” Jose P. Aquino, director of the SEC’s Non-Traditional Securities and Instruments Department, told the federation in a letter.
The SEC has received the position paper prepared by the federation containing an industry situationer, the current problems it is facing, and proposed solutions.
PJ learned that the SEC has drafted its counter-proposal and has agreed to sit down with federation officials to reconcile the documents to craft a mutually agreed framework.
Earlier, the federation wrote SEC Chairman Fe Barin to bring to her attention the concerns of the industry in the face of the ongoing global economic slowdown which has resulted in corporate downturns and financial losses for companies all around the globe.
It stressed that the pre-need industry “is not sheltered from this difficult situation,, more so with the burden of our old plans.”
“The root cause of the problem in the pre-need industry stems from plans that were approved and underwritten in the past based on assumptions which, while prudent at that time, have not been sustained by subsequent events beyond our control,” the pre-need umbrella group said.
“Specifically, our problem is the-growing obligations on plans sold in the past, which were priced per actuarial feasibility studies that were then viable. These plans assumed interest yields of up to 16 percent per annum when key interest rates and T-Bil rates were 20 percent per annum. Tremendous volumes of business were underwritten under these past assumptions,” the group stressed.
“The last few months, the trust funds of our plans registered huge ‘unrealized’ erosion of value because of the mark-to-market accounting standards. This has driven home the realization and acceptance that unless and until the onerous required yields on our old business are resolved and properly addressed, there can be no certain future for the industry,” it warned.
The federation noted that the SEC has put in place many critical and important measures both to protect the public and ensure the continuity and growth of the industry.
Accordingly, the organization complemented the SEC’s initiatives with its own remedial measures.
“We made adjustments on our current products, redesigned our plans, and cut our distribution cost to assure the sustainability of our new plans. They are profitable and more flexible, which will help us avoid the same problem repeating itself,” it said.
However, the pre-need business wasn’t able to shake off past burdens despite an industry-wide recapitalization.
“Year after year, we have infused millions of pesos in additional capital to ‘top-up’ what the trust finds could not earn. We have faithfully honored our commitments on the old contracts that we issued even when the foundations of these transactions no longer hold true. From these old plans, we have been suffering heavy losses borne out of subsequent unforeseen events beyond our control,” the federation said.
It blamed “regulatory rigidity” for the industry’s inability to cope with the financial pressures.
“We could only wish we have the same flexibility that the American Law and the English Law provide their industries, allowing for solutions that depart from an ‘all-or-nothing remedy’ to a ‘loss-sharing doctrine’ when contracts are rendered commercially impracticable because their original economic basis has become radically different from what was contemplated at the time said contracts were conceived. However, in the absence of this flexibility,, we believe that given the continuing economic uncertainty, our industry fairly deserves the light to definite measures of relief from the heavy burden of the old plans,’ the federation said.
It said a well-thought plan crafted by both state regulator and the pre-need industry could guarantee long term stability and growth of the industry.
“With your favorable consideration, our sustainable new plans, all the cost- saving measures, and other pre-emptive action plans of the individual companies, we are confident that our industry will be able to continue and thrive,” the industry group told Barin in its letter..
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