SEC to monitor closely pre-need companies

With the economic environment not expected to improve significantly in the near term, the Securities and Exchange Commission (SEC) is further tightening the monitoring of the financial and operational condition of pre-need companies.

The SEC is looking at increasing the frequency of its on-site inspections to ensure the solvency of pre-need companies and the protection of planholders. It intends to conduct thorough on-site unscheduled inspections of pre-need companies at least twice a year.

It is also looking at reviewing the sales and advertising practices of pre-need companies and plans to issue guidelines on pre-need advertisements.

The pre-need industry has faced difficult challenges in meeting investment objectives based on the assumptions of expected returns under more favorable economic and market conditions.

Some pre-need companies have been affected by the continued slowdown in the property sector and the decline of the stock market. With few investment alternatives, the pre-need investment portfolio has been invested mainly in real estate, listed stocks, Treasury bills and government bonds, and bank deposits.

The real estate sector, which has sharply declined since the Asian financial crisis in 1997, has yet to show signs of recovery.

Pre-need firms are required to keep assets equal to their actuarial reserve liabilities (ARL) representing the present value of future planholder benefits in a separate trust fund. When trust fund assets fall below the ARL, a trust fund deficiency results.

The SEC said that over the past four years, more than half of all pre-need companies experienced trust fund deficiencies which deteriorated to P5 billion in 2001.

The SEC requires pre-need plan firms to submit a trust fund valuation report not later than April 30 each year. The valuation is first done by the pre-need plan company actuary. Should there be any trust fund asset shortfall, the SEC will require the pre-need plan company to present its program of trust fund buildup.

This valuation exercise, required of all pre-need plan companies by the SEC is part of the safeguards placed on the trust fund to ensure immediate servicing of obligations.

The trust fund annual valuation is done in order to determine the total trust fund’s present value – which should be sufficient to settle all the obligations of the entire fund in the event these simultaneously become payable today because of catastrophies or cash withdrawal runs.

The SEC is also pushing for the immediate passage of the Pre-need Code to strengthen public confidence and minimize losses to planholders in the event of the insolvency of a pre-need firm.