WITH interest rates continuing its downward path, the chances for reviving the pre-need industry, a popular investment tool in the 1980s, now seem remote, even impossible.
This was the assessment of Sun Life Financial President and Chief Executive Officer Rizalina Mantaring, who said that only a few like her company’s Sunlife Financial, continue to service existing clients, whose plans are retiring at variable dates for the next 20 years or more.
But unlike the other pre-need firms that gave “open-ended” policy and guaranteed returns to customers in the past, prudent ones like Sunlife Financial, “give up net income and set aside the money to be sure we provide for the future claims,” Mantaring explained to The Manila Times.
“Some of our clients are asking us why we do not declare net income, and we explain to them that we set this aside as reserves for their future claims or benefits and this sounds okay with them. At least they have something to look forward to for their children’s college education,” she added.
The industry is highly dependent on the interest rate regime. At its height, the industry grew in both numbers and portfolios when the interest rate regime was somewhere between 15 percent and 20 percent.
But the Asian financial crisis crept on 1997 and 1998 and the pre-need industry was among the biggest losers, to the point that many smaller ones closed up immediately from the impact of the crisis while the rest managed to maintain operations for a few months more.
The greatest debacle was felt when giants—College Assurance Plan (CAP) and the Pacific Plans folded up in the mid-2000s, and since then people lost trust altogether on the pre-need industry.
Its collapse in fact momentarily affected adversely the operations of life and non-life insurance companies, which answered the setback by launching massive and aggressive financial literacy campaigns that was initiated by Sunlife with celebrity actor Piolo Pascual as its endorser of “It’s Time” campaign.
Who would have imagined a CAP and Pacific Plans with billions worth of assets and liabilities running aground, and unable to bounce back? Many of their clients in fact have tried in vain to resort to court action but dropped them after the two companies filed for bankruptcy.
Sun Life Financial Plans has an inactive pre-need company since interest rates are so low that it offers almost no value to customers. “We don’t want to sell unless we can give good value to clients,” Mantaring said.
Mechanics of preneed
Pre-need is based on a guaranteed return for the premiums paid by policyholders, and the guaranty is more often a level that is not sustainable for the operations of the company.
And since the pre-need business is sensitive to fluctuations in interest rates, then the guaranteed high levels of returns for the clients end up not being supported by the current resources and projected low, if any, income of the pre-need companies under a very low interest rate regime.
The abrupt end to the pre-need industry was a combination of factors like very unhealthily low interest rates plus the lifting of the cap on educational plans by the Department of Education. Thus no investor in his right mind would venture into pre-need.
The last pre-need company that failed in recent years was Prudential Plans Inc.
Before the Asian financial crisis, there were 200 but now this is down to only 20 licensed
companies, according to data on the Insurance Commission’s website.
The pre-need industry became hot because of the desire of Filipinos to insure the college education of their children. The industry’s collapse highlighted the absence of regulators to oversee its operations. In 2010, the regulation of pre-need was transferred from the Securities and Exchange Commission (SEC) to the Insurance Commission (IC).
Since most, if not all, the pre-need companies of the past offered open-ended policies vowing to cover tuition fee whatever the amount may be, they ended up sourcing their funds for current tuition demands from fresh contributions without setting aside funds for future requirements.
While the industry was under SEC’s supervision, a regulation prohibiting them from investing in stocks that were not publicly listed forced them to invest heavily in real estate.
Such that when the Asian financial crisis brought with the property burst, many pre-need companies fell literally flat on their faces.
For the remaining companies in the pre-need industry, the enactment of the Pre-need Code of 2010 provides a ray of hope. For one, the law recognizes that pre-need products are more like insurance rather than investment products, thus the need for a change in regulator. Under the IC, the sector will be better supervised. Also it institutionalizes a minimum capital requirement for education, pension and memorial of P100 million paid up.
A company selling two types must have P75 million, while a company selling one type must have P50 million. The capitalization requirements are aimed at helping ensure that pre-need firms have the means to service their liabilities. But the open-ended policy must stop.