The Insurance Commission (IC) has issued a circular mandating a 2-percent increase in the investment threshold for preneed companies under the Pre-Need Code.
The IC said Circular Letter 2017-28, which was issued last week, imposes a 2-percent increase in the investment threshold under the Pre-Need Code, thus making it reach 17 percent of the total amount of the trust fund for allowable investments in long-term commercial paper.
Direct loans that preneed companies can make also increased by 2 percent, or from 5 percent to 7 percent of the total amount of the trust fund.
As for equities, the new threshold is 32 percent, from the current 30 percent of the total amount of trust fund. And in real estate, from 10 percent to 12 percent of the total amount of the trust fund.
“The adjustments are in pursuant to the authority of the IC to adjust the percentage allocation per category set forth under the Pre-Need Code, which must not be in excess of two percentage points upward or downward and such adjustment must not be more often once every five years,” Insurance Commissioner Dennis B. Funa said.
As provided under the Pre-Need Code, the exposure limit in any particular issue shall not exceed 10 percent of the allocated amount.
Funa said the increment in the threshold on investment allocations of preneed companies was brought about by the recent trend of flat and declining investment yields.
Considering this situation and the current limit under the Pre-Need Code that prevents the trustee banks of preneed companies from taking full advantage of instruments with higher returns, the IC decided to increase the current threshold.
“This 2-percent across-the-board increase is significant and will give the much-needed flexibility to the trustee banks of preneed companies so they can maximize their gains on higher-yield channels without compromising the stability of the fund,” Funa said.
Under the Pre-Need Code, companies engaged in preneed business are required to establish a trust fund to pay for the cost of benefits and services, termination values payable to planholders, and other costs necessary to ensure the delivery of benefits or services to planholders as provided for in the contracts.
All investments of preneed companies are limited to fixed income instruments, equities, and real estate to ensure the liquidity of the trust fund guaranteeing the delivery of the benefits provided under the contract. And also to obtain sufficient capital growth to meet the growing actuarial reserve liabilities of a preneed company.
Failure of a preneed company to cover any deficiency in the trust fund may result in the imposition of a penalty, in addition to other remedies determined by the IC, such as suspending or revoking the license of a preneed company or placing such company under
conservatorship.