Press Release
February 20, 2008


Senator Edgardo J. Angara today called for the immediate passage of the comprehensive Pre-Need Code, saying it is a key to ensure the protection of the interests of planholders.

"The pre-need plan is a savings mechanism designed to realize a Filipino parent's deepest aspirations - education for their children, health care in times of illness, pension upon retirement, memorial service upon one's demise. It has become a family's popular option for ensuring the education of their children, especially after the enactment of the Education Act in 1982 which pried the doors open for sharp tuition increases," said Senator Angara who also chairs Senate Committee on Banks and Financial Institutions.

The unexpected collapse of the first pre-need firm in the country - Pacific Plans Incorporated (PPI) - following the same fate of industry leader College Assurance Plan (CAP) had shaken the industry. Pre-need companies failed to meet obligations, which is primarily composed of tuition fee payments. In 2005, as a result of the industry shakedown, the number of pre-need companies licensed to operate went down to 32.

The main reason cited for the business failure is the so-called traditional educational plans. Under a traditional educational plan, the pre-need company agrees to pay the tuition charged by the school at the time the claim is made. It amounted to an open commitment, so when the deregulation of tuition fees occurred in 1992, there was a tremendous increase in the tuition obligations of pre-need companies.

Poor management and unsound investment decisions made by some pre-need companies exacerbated the problem. In the absence of a clear regulatory framework, these mismanagement acts escaped monitoring and prevention.

"With the vital role the pre-need industry plays - and the imperative to protect the investing public -- it has become necessary to enact a law that would govern the operation of pre-need companies, regulate their activities, and assure their liquidity and solvency for the protection of their planholders," said Angara.

Senator Angara's bill seeks to achieve are two-fold: protect the planholders and at the same time keep the pre-need industry viable.

Under his bill, pre-need companies to have a minimum paid-up capital of P100 million to provide a solid capital base and lessen the risk of instability in the future.

For planholders who become hard up to pay their installments, a pre-need company shall provide a grace period of at least 60 days to pay unpaid dues. If he/she is still unable to pay within this period, and the plan is rendered ineffectual, the plan holder is given two years to reinstate the plan.

Pre-need plans are prohibited from refusing to pay or settle claims and benefits to their planholders without just cause. The proceeds of the plan shall be paid immediately upon maturity of the contract, except in the case of installments or annuity, in which case they will be paid when they become due. Failure to pay the claim within 15 days from maturity will entitle the beneficiary to collect interest on the proceeds at twice the interest.

The bill adopts the Trust Fund Model currently employed by the SEC. Under this model, a portion of the installment payment collected shall be deposited by the pre-need company in the appropriate trust fund. This would help guarantee the delivery of benefits to the plan holder in the future, and minimize the risk of insolvency as the trust fund will remain untouched until the plan matures.

The minimum contribution of a pre-need company to the trust fund is 45% of the amount collected for life plans, and 51% for all other types. The trust fund may be invested in (1) fixed income instruments such as government securities, savings or time deposits, commercial papers or direct loans; (2) mutual funds; (3) equity investments in stocks; and (4) real estate.

For transparency, the bill requires that the contributions to the trust fund be properly disclosed to the planholders. Under the Pre-need Code, companies are required to make their financial condition regularly examined, and an annual statement published.

"The best protection we can extend to planholders is by creating a solid framework which places the operation of pre-need companies on sound, stable and sustainable ground. What we are trying to change is the unregulated anything-goes regime that has created the problems in the first place

More importantly, pre-need companies exist to provide insurance for the education, health and other vital needs of its 3.8 million planholders, and thus fills the void that government cannot fill. Hence, there is great economic value in fostering the pre-need industry and ensuring that they flourish for years to come," said Angara.

Today, pre-need has become a multi-billion peso industry, posting P157 billion in total assets. Over the last 25 years, the industry has had over 92 firms actively engaged in the sale of pre-need plan securities.

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