Summary

A preneed plan was conceptualized as a savings instrument for different needs:

pension for retirement, education cost and memorial services. It became a huge
success in the early 90s when College Assurance Plan (CAP) offered the first openended education plan to the public. It was very well received by the public
prompting other preneed companies to follow the business model of CAP. However it
started to collapse because of the following factors;
1. Deregulation in tuition fees
The main reason being cited for the collapse of pre-need companies and
industry is the Education Act of 1992 which saw the deregulation of tuition
fees. The cost of education immediately went up. According to the Philippines
Federation of Pre-need Plan Companies, Incorporated (PFPPCI), tuition fees
grew at an average of 17 percent annual after the deregulation. The gap
between the tuition fees and the ROI began to narrow and equalize by 1997
and widened after that, The ROI and the sales just couldnt keep with the rise
of tuition fees.
2. Asian Financial Crisis
Government securities and equities are the two largest components of the
trust funds of preneed companies. Yields on the securities began to come
down following the Asian Financial Crisis and never recovered from thereon.
Furthermore, the stock market crashed at the height of the crisis. The all-time
high for the stock market would only be broken after 10 years.
Moreover, so much investment was placed in real property in most parts of
Asia, yet only a few manages to actually acquire such investments. In the
case of CAP, its real estate properties which were included in the trust fund
dropped to more than a half in value.
3. Actuarial Liability Reserve (ARL)
CAP suffered much from the rule laid down by the Securities and Exchange
Commission (SEC) in 2002 that it had to stop selling education plans. The
enforcement of the so called Actuarial Liability Reserve (ARL) valuation
method by the Sec contributed to the collapse of CAP. ARL is used by life
insurance companies in evaluating the sufficiency of their insurance reserve
to immediately pay clients.
CAP opposed the ARL implementation, saying that the method only made it
appear that an education plan- which would be acquired by a one-year-old

planholder and would be used after 17 years when he or she would enter
college- would appear to be and actual trust fund liability in the companys
annual financial report.

Conclusion
Of all the pre-need companies, College Assurance Plan Philippines, Incorporated is
the biggest company to suffer after the collapse of the industry several years ago.
Aside from being the pioneer of the industry, it has the largest number of
subscribers. As expected, a lot of planholders were furious and began demanding
their investments back, cancelling their subscriptions. This in effect had further
affected the reputation of the company losing a great percentage of subscribers in
just one moment that it cant anymore sustain its income.
Contributory to the downfall of College Assurance Plan includes; the Asian Financial
Crisis which caused the stock market went down dramatically together with real
estate values; enforcement of the Education Act of 1992 allowing tuition fees be
deregulated among universities and colleges in the country having tuition fees shot
up drastically; and the most controversial adaptation of Actuarial Reserve Liability
valuation method by all pre-need companies as required by the Securities and
Exchange Commission (SEC).
Subsequently, CAP is facing its worst financial problem, incurring a deficit amount to
around P17 billion in 2005. CAP maintains an outstanding debt of P20 million per
day in unpaid claims to its planholders alone.
After the companys liquidity problem leaked to the public, the CAP management
started to lay-off regular employees and has since utilized early retirement and
voluntary separation programs. In 2003, CAP employed more than 700 employees
nationwide. Now the number of the employees was cut down to 315.
CAPs dilemma is not isolated. The other pre-need firms had also faced same
problems like Prudential Life and Platinum Plans from which they opted to costcutting measures.

Currently the focus of CAP right now is to resume paying its planholders. While we
admit that some other pre-need companies were nothing more than scams, its a
fact that CAP is still open and is trying to pay back its planholders which makes
them not one scam-artist, even if it is still difficult for the company in coming up
with the money to pay people back.
Maybe its already time to realize that CAP is also a victim in this case, which was
caused by the carelessness of some of our government officials specifically with the
Securities and Exchange Commission (SEC) especially regarding the Actuarial
Reserve Liability valuation method.
Above all, its important to consider that CAP could have just declared bankruptcy,
leaving nothing to its subscribers. Its actually the best option for them businesswise yet theyre still open standing their ground fighting in court what we believe is
the truth against certain individuals in the government.
Recommendation
1. Redevelopment of its real estate properties through partnerships.
A proposal for redeveloping CAPs properties would be better than liquidating all the
companys assets. When assets are liquidated, CAP would never be able to continue
paying its planholders.
A possibility is building of high-rise structures to replace the buildings that served as
the local offices of Cap nationwide. Through this, the company would be able to
recover the lost portions of the trust fund from the lease and sale of both the
redeveloped and small real properties.
2. Stringent enforcement of the Pre-need plan code of 2009
This code was created to serve as a legal framework that regulates and governs
pre-need industry. This code includes code of ethics for pre-need companies
directors and officers; prohibiting engagement of affiliate banks as trustee to avoid
collusion; and most importantly stricter licensure and registration to ensure that
only qualified pre-need companies will engage in the business.
3. Pre-need industry to be supervised by the Insurance Commission

The Insurance Commission has the capabilities and expertise in regulating the preneed industry. With the Pre-need Uniform Chart of Accounts (PNUCA) in place, the
very nature of the said industry is defined as an insurance and not as an investment
instrument. For these reasons, it would be better that supervision be handed to
Insurance Commission instead of the Securities and Exchange Commission (SEC).
4. Rigorous Independent Audit
To determine which companies still have the financial capabilities to remain in the
business, a rigorous independent audit must be conducted. Licenses of those that
fail in the audit should be revoked by the SEC and be placed under administrator or
receivership.
5. Fixed Value Education Plan
What was adapted was the open ended education plan which requires the pre-need
companies to pay or shoulder the tuition fees and other educational expenses
regardless of inflation and effects of the Education Act of 1992. It is much better
though to have fixed value education plan be implemented. With it, fixed-value plan
lets the holder decide how much will be needed for the childs expenses in college.
Moreover, there is an annual benefit that increases by 12% yearly to guard against
inflation. It can also be included in the program the cash award for academic
excellence and college scholars may receive a graduation gift equal to the total
contributions.

Pre-Need Company or issuer means any corporation registered with the Commission and authorized/licensed to
sell or offer for sale Pre-Need Plans. A Pre-Need Company may be a single plan (selling one type of Pre-Need Plan)
or multi-plan (selling more than one (1) type of Pre-Need Plan).