(Conclusion)

Today we conclude the response to reports that Juan Miguel Vasquez, the president of the Philippine Federation of Pre-need Companies of the Philippines, was blaming on his industry?s actuaries for the mess it?s in.

What the [pre-need] companies could have done at that point was invoke a legal right to change the terms of the contract as a result of the change in circumstances. The other thing they should have done was to stop selling those types of contracts as the open-ended nature of the contract left them exposed to an incredibly high risk.

In any case, what they definitely should have done was re-asses their obligations, develop a plan for meeting those obligations and, failing that, begin to engage their plan holders.

The life insurance industry does not have this sort of open-ended promise. In fact, in early pre-need contracts, there was a small print caveat that said that the promise to pay tuition had a certain limitation?they were not truly completely open-ended contracts.

Also, many companies priced their plans at investment rate of return assumptions that were in the double digits. When interest rates fell precipitously, this meant that they needed to make up what they lost in investment income. For new business, they could make this up by increasing the pricing. For existing business, they could make this up only through increasing trust fund contributions and strengthening the trust fund.

Let me show that to you in easy numbers. Say you promised Pedro P1,000 by the end of the year and you originally expected to earn about 10 percent. This would mean your actuarial liability would be about P909. This means that you need to have about P909 in your trust fund. Your P909 will earn 10 percent, which is about P91 and that P91, together with the original P909 would total 1000. If interest rates have dropped to 5 percent in the meantime, you would need to have about P952. The P952 will earn 5 percent, which is about P48 and you will have P1,000 at the end of the year.

What this really means is that a lower interest rate environment means you must increase the amount in your trust fund, both currently as well as in the future by increasing your schedule of trust fund contributions.

Here is the kicker. If your trust funds were, in addition, exposed to high risk investments?e.g. equities?you would be in a double bind because the value of your investments may have now decreased.

Now, please understand. The problem of decreasing interest rates is not new. This is a long-term trend and did not happen overnight. Second, the pre-need industry is not the only industry that is exposed to this phenomenon of low interest rates.

Here is another part of the explanation. In the insurance industry, by law, the interest rate used to value reserve liabilities can be no higher than 6 percent per annum. And, in fact, many companies use lower rates for some or all of their in-force portfolio.

Also, in the insurance industry, only certain sorts of assets are acceptable as reserve investments. Finally, these assets, again by regulation, are valued using a conservative approach.

By contrast, pre-need companies can use rates higher than 6 percent. In fact, under the SEC memorandum of April 2007, for some of their portfolio, they are instructed to use the rate used at pricing ?even if those rates are now unrealistic and unattainable. When this circular came out, the Actuarial Society of the Philippines instructed its members to always disclose whether the assumption is realistic or not and to disclose that liabilities calculated using an inappropriate assumption would result in a possible significant misrepresentation of liabilities.

I can?t speak for all our professionals or the actuaries. I obviously do not know the specifics. I suspect that there is enough blame to go around.

The really important question is where do we go from here and how do we prevent this from happening again.

* * *

While the Senate is investigating the scandal involving World Bank-assisted public works projects, perhaps it should look into what?s happening in faraway (and literally almost unreachable) Eastern Samar. According to reports, the public works officials in the province would rather help the local congressmen spend money for signs instead of repairing the nearly impassable roads themselves.

It may sound like small potatos to Metro Manilans used to billion-peso projects, but the P350.62 million worth of road projects for Eastern Samar funded by Public Works Department allocations for 2007 and 2008, plus P32.724 million from the pork barrel funds of the local congressman, Teodulo Coquilla, should have been more than enough to keep the province?s roads in excellent shape. Instead, what they have over there are jokingly ?the safest roads in the Philippines??the highways are so bad that even the largest vehicles have to travel at an accident-proof snail?s pace.

But if the roads of Eastern Samar are bone-rattlingly bad, at least they have the proper signs. Reports say that the DPWH in the province, through the efforts of Congressman Coquilla, has already spent P90 million for road signs, traffic control posts and guardrails?these last pieces of equipment probably coming in handy when motorists and their passengers need something to hold on to after using the moonscaped highways.

The provincial government has twice written the DPWH to allow the local unit to take over maintenance of the roads. But the department?s regional office has not acted upon the requests, which include an allocation of P10 million from local funds, because the congressman doesn?t want Gov. Ben Evardone to take any credit for fixing the highways that are in the DPWH?s care.

Meanwhile, the people of Eastern Samar have to contend with bad roads every day, which is bad news for the local economy, all because of the misuse of scarce government funds and a congressman?s refusal to allow a political rival to get any credit for good work.

And this is just one province. Who knows how many times this sort of wasteful use of taxpayer?s money and bureaucratic gridlock is repeated all over the country today?