In the midst of this worldwide financial turmoil, some pre-need companies have suddenly shut down, without prior public notice. Pre-need plan-holders are mad. The Securities and Exchange Commission was caught flatfooted.
Right off, let me make one thing clear: A pre-need company is NOT an insurance company; it is a securities seller.
Pre-need plans are very attractive investments. The most popular product was, and still is, the educational plan. You bought it when your child entered grade school, and paid the contract price under a five-year installment scheme. When the child entered college, the company paid the tuition directly to the school.
Another attractive feature of a pre-need plan is transferability. Under a group life insurance policy issued by the mother company, the plan can be transferred to a specified person if the original buyer dies before the plan is utilized.
The first educational plans offered were generously open-ended. The company paid whatever the tuition was. Sky was the limit. My son Jim bought a plan when Cayo, his eldest, was in grade school. Over five years, Jim paid a total of P18,000. Cayo went on to take up management engineering at Ateneo de Manila University. The tuition ran up to a cool P340,000. It was the best investment Jim ever made.
How did the pre-need company manage to shell out so much for so little money? If you missed a payment, the contract lapsed. If you did not resume your payments within the stipulated time (the company did not even remind you of your arrears), the contract was completely canceled and you forfeited forever all your payments.
These orphaned payments were booked in suspense. In a House committee hearing I attended, the suspense account of one company amounted to a whopping P300 million.
The pre-need plans were sold as securities, not as insurance policies. In fact, those who originally drafted the contracts took great pains to avoid using insurance terms.
As securities sellers, the pre-need companies fell under the benevolent care of the SEC and evaded the eagle-eyed auditors of the Insurance Commission. Most important, the pre-need companies went around the severe statutory capital and reserve requirement of insurance companies.
Later on, to avoid the sad experience with open-ended plans, the pre-need companies put ceilings to their promises.
But the pre-need industry has been in deep trouble for some time. The days of high earnings are gone. The value of their inventory of stocks and bonds has plummeted. Pacific Plans rendered itself illiquid by diverting a large portion of assets into 10-year bonds of National Power Corp. The pioneer in the industry, College Assurance Plans, got embroiled in long-term investments in Metro Rail Transit and real estate development.
What now? With hardly any assets left, a bailout with taxpayers’ money is simply out of the question. Congress should look into any wrongdoing. The guilty cannot be allowed to get away scot-free. Too much money of the buying public has been lost.
The SEC should strengthen its supervisory and inspection staff. To be caught flatfooted by the closure of pre-need companies means somebody was asleep at the switch. The SEC should have known that the companies were floundering, and should have right away appointed conservators and receivers to preserve whatever assets were still left.
Finally, the SEC should take lessons from the Insurance Commission on how to regulate and supervise companies which collect from, and hold money in trust for, the public.