SEC okays use of insurance bond for pre-need trust fund

The Securities and Exchange Commission (SEC) said it is open to the proposal of the Philippine Federation of Pre-need Plan Companies Inc. to issue an insurance bond that can be tapped by its members to cover any trust fund deficiencies.

An SEC official said the Commission has no objections to the Federation’s proposal since this would address the problems being encountered by several pre-need plan firms in meeting their capital and trust fund requirements.

The same official said the Federation and the surety companies would still need to thresh out some minor details to get full clearance from the SEC.

To complement the bonds to be issued, the Federation will establish a liquidity pool funded by its members and multilateral agencies to further ensure the protection of planholders.

The bonds shall be issued to a special trust, supervised by a collegial body formed by the Federation, which in turn is regulated by the SEC and the Insurance Commission.

However, only companies which can demonstrate liquid resources and those with sound financial conidtion and profitable operating results can avail of the bonds.

To enhance eligibility for suretyship and reduce bonding cost, the Federation said other pre-need companies or principal affiliates may guarantee performance of the principal’s obligation to sureties. Pre-need firms of like size may enter into alliances whereby co-guarantee arrangements for suretyships would be available.

If eligible for suretyship, the entire industry deficit of approximately P5 billion as of 2001 would cost P14.4 million in premiums.

The bond will be governed by three contracts – the principal contract which provides for the benefits plans; the surety bond which states the terms of the principal contract plus the amount of guarantee and pledged collateral; and the indemnity contract.

The Federation has been actively seeking ways to improve the industry’s liquidity and to provide an alternative cost-efficient means of complying with the SEC’s requirements for the maintenance of trust fund balances.

Trust fund deficits are required by the SEC to be remedied through additional trust fund contributions.

Trust fund contributions, however, can only be withdrawn for benefits and to finance operating requirements. If a deficit reverses, contributions made for it can only be applied to future mandatory contributions, unnecessarily tying up the company for cost of borrowed funds.

A trust fund is a critical component mechanism designed to guarantee the capacity of preneed plan companies to meet their future obligations to planholders.

Pre-need companies are required to deposit in a trust fund a minimum of 51 percent of their collection or such higher amount as may be determined by the actuary. Trust fund deficiencies may be attributed to low investment yields and decline of the stockmarket.

The SEC said there should be a regular review and public disclosure of pre-need plan firms’ trust fund assets and their liability fund to make sure that they can fulfill their promises to planholders.