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TO make the industry responsive to present realities like rising
cost of goods and services, the Securities and Exchange Commission
(SEC) is studying the possibility of applying a risk-based capital
adequacy requirement on pre-need companies.
Commissioner Jesus Enrique Marti-nez said the
regulator is conducting a study on the adoption of this risk-based
capitalization requirement for these firms in light of the scheduled
review of the present minimum requirements.
The government currently requires a single-plan
preneed company to have at least P50 million in capital to support
its business. The SEC also requires a minimum capital of P75 million
for a two-plan company and P100 million for a three-plan firm.
The minimum capitalization aims to address the
quantity of capital required by preneed companies to support the
premiums of their products. A risk-based framework addresses the
quality side since it establishes the required amount of capital to
be maintained in relation to investment and the risk a pre-need firm
takes.
Under its medium term development plan of, the
SEC is mandated to introduce the risk-based framework for providers
of financial services and products under its supervision. So far it
has adopted this system for security brokerage firms and other
companies that take on financial risks as part of their business.
Similar system has been adopted by the insurance industry, which is
under the supervision of the Department of Finance.
“If we are in fact to consider the [risk-based
framework], we don’t want to have a knee-jerk reaction to happen
to the more prominent pre-need companies. That’s not the reason at
all. We want it to be more adaptable to [the] movement in the price
of the services they actually offer and the reserves that they have
to have in order to assure the viability of those services with
regard to the price of the services they offer,” Martinez said.
However, the capital to service the needs of the
plan holders do not come from the company alone since it has a trust
fund that provides the yield to fund the benefits. It is only when
the trust fund becomes deficient that the company has to fill that
funding gap.
The commissioner said oftentimes the
deficiencies in the trust fund is caused by the pre-need company’s
failure to deposit in the trust fund that portion required of sales.
Another reason is the inadequate returns on its investments.
If the latter happens, the trust fund, not the
preneed company, is liable to the plan holders. “If the trustee is
performing properly, it knows what kind of yields the [company] must
realize. [The management] has to hit that yield. Otherwise, the
trust fund will fall short of the liabilities it will face,”
Martinez said.
Some of the companies that cannot support the
benefits of the plan blame the trust fund for falling short. But
this could have happened because some of them have illiquid assets
like real estate, the commissioner said.
Martinez said there lies the problem of having
an impaired capital for pre-need companies, which is one of the main
reasons why their licenses to sell are suspended.
“That is one of the considerations when we
talk of risk-based. You talk of a moving target; you’re talking
about amount of sales. Because the more sales you make, the greater
the risk. And so now you’re capital adequacy becomes questionable.
The larger you get, the more difficult your capital adequacy will
be,” he said.
-- Likha C. Cuevas-Miel
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