Risk is the possibility of a loss due to an uncertain event that may occur in the future. It includes the probability of the event as well as the severity of the impact. One cannot predict with precision how events will turn out despite all due diligence. This calls for active preparation. A major risk management tool is insurance as a protection for the unknown.
Technically, insurance is the transfer of the risk of a loss from one party (the insured) to another party (the insurer) in exchange for a premium payment. The transaction assures the insured a smaller loss as the insurer compensates or indemnify the insured for the financial loss. Operating based on probabilities and the law of large numbers, the insurer assumes that the premium payments and earnings therefrom will more than cover the operating expenses as well as claims by those insured.
A pre-need plan is one form of insurance. A funeral plan assures that you do not burden your loved ones the details as you pre-arrange everything in case the inevitable happens. Health plans help pay for the covered medical treatments. Education plans help in the matriculation of your children’s school needs. A pension plan is built up during one’s productive years so that one can draw periodic payments upon retirement from work.
On paper, pre-need plans serve a very useful function for the plan holder as it relieves him of the burden when the need arises. For the ordinary citizen, it is putting aside savings and postponing consumption today as a contingency measure so that future needs are adequately addressed.
The Philippines, however, have not been fortunate in the pre-need industry. One big failure in the past was CAP or College Assurance Plan which left millions of Filipino pension and educational plan holders holding an empty bag. People’s hard-earned money were set aside to address a future need but instead even the principal payments were gone after CAP was declared bankrupt. To this day, many plan holders have not even retrieved their principal premium investments in CAP.
This column does not intend to discuss why and how CAP failed. The irreversible truth is that it faltered, and the beneficiaries were paralyzed. The nagging question today is whether history will repeat itself. Please note that when a big player in the industry fails, it is reasonable to suggest that there must be a role that regulators played in the debacle, whether by omission or commission. Economic crises not just here but worldwide always report that both the governed and the governing contribute to the downfall.
I write this in light of an early June 2020 report from no less than the Insurance Commission (IC) that the pre-need industry suffered a net loss of P718.6M in 2019 as companies posted higher liabilities despite an increase in sales. Based on unaudited financial statements, 14 pre-need firms’ combined 2019 bottom line was a reversal of the P2.16B net income posted in 2018. Total liabilities grew 3.81% to P112.78B and reserve liabilities rose 4.7% to P108.65B. Sales, however, increased 11.51% to P22B, 778,033 plans in 2018 vs. 923,370 plus in 2019.
The disturbing element of this report is the performance was prior to COVID-19. With the pandemic, the country was placed in lockdown and in varying degrees of community quarantine. The Philippine GDP is expected to drop drastically in 2020. And surely, the pre-need companies are expected to be affected economically and financially.
There are signs of pending problems. A friend purchased a pre-need pension plan worth P300,000 fully paid over 5 years with the promise of yearly drawdown of P30,000 for X years and return of the principal upon maturity. The company offered a COVID assistance plan through a pre-termination package that will pay lumpsum immediately. Initially, it looked like a generous offer. The catch is the immediate payment is only around P240,000 or 80% of the principal/premium paid. For those with liquidity concerns, the program may be most welcome. But from a rational finance perspective, our plan holder is being literally offered an unwarranted margin discount which pays less than the principal shelled out. He would have been better off not getting the plan from the start.
Another educational plan holder is now entitled to graduation gift per his policy. But the company says because of the pandemic, he will get a 15% margin discount this year, unless he waits for another year to receive the full sum.
What was supposed to be a life vest for emergencies or for an unplanned future is backfiring on our plan holders. Some people will have no choice given the dire situation they are in. But at the end of the day, are our consumers being given a fair deal? Who protects our plan holders? And what lies in the near future once the pandemic economic whammy sets in?
Pre-need plans and insurance are almost real necessities in these days. But if the insured will be at the full mercy of the insurers, how can we help our people who literally have little choice in their hands? Authorities should look into these issues if we are to have a robust and deep financial system which protects the needs of the small and less privileged. Finally, let us not allow the CAP experience to happen again.
Benel Dela Paz Lagua was previously Executive Vice President and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and a longtime advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.