Insurance from Insurance

Like every parent, I explored the wisdom of insurance. After all, it is everyone’s dream to improve the lot of his or her children. Fortunately I had a good friend in the business that gave the real lowdown of pre-need insurance. In a nutshell, the only way you can win in the game is if you die first, preferably way ahead of the last installment of the most affordable term-life insurance.

Now there are packages that combine investment/financial tools and insurance and hospitalization plans to entice browbeaten buyers who have wised-up. That’s good isn’t it? Well…if you compute the interest from a fully-paid plan with the same amount invested for the same length of time in another financial instrument, the latter would probably be at par or a few percentage points ahead. And one doesn’t have to be dead to enjoy the returns. This alternative assumes that the investor would have the discipline to religiously put away his money as he would for a pre-need plan that is voidable with non-payment.

Surely, educational plans are more productive for parents? Set aside money now for the children’s college tuition. For forty years this was the top-selling product. More than 100 companies profited from peddling memorial, pension and education plans with combined sales of over P10 billion.

The bubble burst when tuition fees were deregulated in 1992, surprisingly unforeseen by pre-need firms. School fees increased and traditional, open-ended plans could no longer predict how much was needed at maturity. A huge number had been sold and the pre-need firms couldn’t pay their obligations.

Like ducks in a row, the companies fell: PET (Philippine Educational Trust Plans) in 2002, CAP (College Assurance Plan) followed in 2004 and Pacific Plans [2005] blighting the hopes of about 4 million planholders, mostly from middle income families.

ImPRUDENT

Seemingly clueless about the industry’s experience, Prudentialife now joins the falling dominos needing rehabilitation. Recent IC data showed liabilities of P19.25 billion against a trust fund of P8.62 billion. Like the others — apparently, Prudentialife had more liability than trust.

In a TV interview, an official defended their situation by complaining that they were stopped from selling more plans. Like a Ponzi scheme, new gullible investors were needed to infuse fresh, hard-earned money to pay-off current planholders. And while owners of these failed companies came out unscathed and still profitable from other affiliate ventures, history shows that the poor planholders are left holding an empty bag.

CAPsized

CAP was incorporated on February 14, 1980 with Atty. Enrique A. Sobrepeña Jr., James Marsh Thompson, Rafael E. Evangelista, Dr. Ernesto M. Espaldon and Amb. Romulo M. Espaldon. It was the first Philippine pre-need educational plan company. From an initial paid-up capital of P570,000 and an authorized capital stock of P10 million, it now has an authorized capital stock of P300 million with a subscribed portion of P157 million and a paid-up capital of P127 million.

Since its incorporation, the company registered P40 billion worth of plans. 125,000 are active beneficiaries while 290,000 are fully paid but not yet availing. There are 164,000 actively paying planholders. CAP paid P8.8 billion in tuition fees in May 2003 and over P11.3 billion as of late 2004.

Recently, CAP stated that its education plans remain valid and serviceable under the court-approved rehabilitation plan. As of February, it reported that claims filed for school years 2004-07 had been processed, with approximately P80 million released for claims.

But those who expected CAP to pay the full tuition were disappointed. It declared that under the circumstances the amounts are the most equitable. It promised that the actual cost of the plan would be returned 100% under the return-of-installment provision.

PETrified

PET Plans Inc. took another tact. While it had the cash to pay its obligations, it opted to bolt-out of pre-need. Noting that the business was no longer viable due to changes and stricter SEC rules, they had the Court approve its rehabilitation program to convert the education trust fund into a unit investment trust fund. Depending on their plan’s value, a portion of units in the BPI-managed investment fund can be owned by the planholder.

Management mounted a roadshow to convince customers to keep their money invested and ride on potential growth. While there was no guaranteed amount, there may be higher returns since the fund was no longer restricted by pre-need conditions.

Reactions to the conversion plan ranged from rage to acceptance to forbearance. Less than 10% immediately cashed in their investment, hoping for better future returns.

Un-PACified

In 2005, livid planholders of Pacific Plan’s unremitted education fund formed PEP (Parents Enabling Parents) Coalition to demand payment for their children’s tuition. Seventy thousand parents said they had to put their children through school themselves. They asserted that there is a moral obligation from the pre-need sector.

The Court of Appeals declared that Pacific was liquid enough to pay the contracts. But the case is still pending before the Supreme Court, 3 years later. 

Meanwhile, according to sources the Yuchengcos have sold their troubled unit for P250 million to investment banker and Asian Spirit Airlines founder Noel Oñate. The acquiring company, APIC (Abundance Providers Investments Corp.) pledged additional capital and growth by selling and servicing education, pension and memorial plans.

Finance Department Order 27-2006 now requires all insurers to have a minimum paid-up capital of P175 million by end 2011, to be deposited in banks by March 2012 and finalized on paper by June. The capitalization level increases to P250 million by end-year. Smaller non-life insurers were encouraged to merge so they could pool resources. This is a jump from the required minimum paid-up capital of only P100 million under the 2009 Pre-Need Code.

The Philippine Insurers and Reinsurers Association (PIRA) contested the “discriminatory and unreasonable” directive, saying it will force companies to close shop. It argued that mergers were unlikely in a fiercely-competitive industry where most firms are family-owned.

But who protects the distraught planholder? The crash has justifiably dimmed the prospects of the pre-need industry. SEC estimated that collections dropped by 20% below previous year in 2007 with education plans hardest hit at 15.44% decline. It will surely take time for real reform to happen in the insurance game. Much-longer, to regain lost trust.

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