By Paul John Caña, esquiremag.ph
Many parents of kids who grew up in the ‘80s and ‘90s were able to send their kids to school with the help of College Assurance Plan or CAP. The founders of the company—Enrique A. Sobrepeña Jr., James Marsh Thomson, Rafael E. Evangelista, Ernesto M. Espaldon, and Romulo M. Espaldon—hit upon (what was then) a brilliant idea: ask for small, regular payments from clients (mostly parents preparing for their children’s education) in exchange for a guarantee of full payment of tertiary-level tuition. Parents were assured of the money for their kids’ education, and CAP had a steady source of revenues. It was a win-win for both sides.
“The CAP traditional pre-need plan was conceived in 1980 to provide parents with an inflation-free savings vehicle that guarantees payment to the school of tuition fees due when the beneficiary of the plan enters college,” CAP said on its website, which is now defunct.
For a time, the scheme worked. CAP became the pre-need company of its day, inspiring other companies to replicate its business model and offer their own plans to clients. But today, CAP is a shell of its former self. In a now infamous case that has become a cautionary tale for the insurance industry, the company crashed and burned in the 2000s, unable to pay its obligations to its clients, many of whom, in turn, lost their hard-earned life savings.
But how could a once-thriving company with what was thought to be a foolproof business model suddenly crumble? What exactly happened to CAP?
What happened to CAP
The collapse of CAP was the result of a combination of factors, foremost of which were the deregulation of fees for private colleges and universities in 1992, the Asian financial crisis of 1997, and enforcement of new rules that measured the value of CAP’s finances and found it severely lacking, which eventually hastened its demise.
We’ll go over each one and try to explain it without getting caught up in extraneous details.
First, tuition deregulation. Prior to 1992, the average annual increase in college fees was only around 10 to 15 percent. But that year the Department of Education (then called the Department of Education Culture and Sports) issued DO 16 that essentially allowed schools to set their own guidelines covering tuition subject to consultations. Between 1990 and 1995, average tuition surged by as much as 275 percent. And between 1996 to 2000, tuition increased by another 26 percent, according to this paper submitted by undergraduate business administration students of Xavier University-Ateneo de Cagayan in 2015.
That proved to be a major hurdle for CAP. With skyrocketing school fees, what the company was earning from the premiums paid by its clients was no longer enough to cover the claims.
“For instance, CAP said that fees at the Ateneo de Manila stood at P9,200 in 1990, but swelled to P37,000 per semester in 2000,” the paper said.
Other educational pre-need companies adjusted their offerings because of this development; instead of promising to cover the entirety of the fees—however much it was—the firms would instead only offer fixed value plans, or those with a pre-determined amount at the time of the plan’s maturity.
But CAP went another route; it continued to offer its traditional educational plans, ostensibly as a strategy to maintain its position as the company that had the best plans in the market. While the company did manage to attract more business in the beginning, it may have proven to be a costly mistake in the long run.
Financial crisis and Actuarial Reserve Liability
The Asian financial crisis, which decimated many other companies and industries at the time, also had a hand in pummeling CAP’s business.
During its heyday, CAP invested its revenues in things like real estate, which helped grow that money. Some of that money went into a trust fund that acted as sort of guarantee that the company had enough funds to cover its obligations to its clients, as well as have plenty left over as income. This, in itself, wasn’t bad; it’s common practice for companies to invest the money it receives from clients. The problem was that CAP allegedly invested much more of its funds than what was allowed by regulators, which at the time was the Securities and Exchange Commission (SEC).
Additionally, it was reported that CAP invested in real estate businesses owned by some of its board members, including Nasugbu Properties and Camp John Hay Development, which constituted clear conflict of interest.
By the time the crisis hit in 1997, CAP’s real estate properties dropped in value to almost half. Bobby Café, who was executive vice president of CAP, told The Manila Times in 2014 that the company was still able to operate during and after the crisis because it was able to replenish the trust fund with new capital from other sources.
In many accounts, it was the enforcement of a new rule by the SEC in 2002 that proved to be the beginning of the end of CAP. This new rule involved using what’s called the Actuarial Reserve Liability, or funds or assets set aside by insurance companies in case of future liabilities, to measure just how much reserve funds the company has in case they needed to pay clients immediately. But applying this valuation method on CAP meant that the company “did not have enough funds to cover the future requirements of its existing planholders.”
“In 2002, the deficiency in the trust fund was only P2.5 billion,” the Ateneo de Cagayan paper says. “By 2003, the deficiency had leapfrogged to P17.2 billion. Independent actuarians, however, calculate the deficiency then to have stood at P25.7 billion.”
In 2004, there were reports that CAP was finding it difficult to pay the tuition of its planholders, leading some schools like Ateneo De Manila University and the University of Santo Tomas to eventually terminate its arrangement with the company. This, in part, eventually led the SEC to revoke CAP’s license to sell its educational plans.
Grasping at straws
Faced with mounting problems—unable to pay its obligations to its clients and disallowed to sell new plans to generate revenues—CAP’s parent company College Assurance Plan Philippines Inc., filed a Petition for Rehabilitation with the Makati Regional Trial Court a year later, in August 2005. But the SEC opposed CAPPI’s rehabilitation and said so in a comment filed with the Makati RTC. This began a protracted legal battle between CAP and the SEC. Eventually, regulatory functions over the insurance industry was transferred from the SEC to the new Insurance Commission, which, along with the Pre-Need Code of the Philippines, was created through RA 9829 in 2009.
Needless to say, while all this was going on, thousands of confused and angry policyholders found themselves grasping at straws, wondering if they would ever see their money again. Many of them stormed the CAP offices in different parts of the country, demanding that they get their money back. According to the Ateneo de Cagayan’s research, from 1980 to 2003, CAP had a total of 780,603 (planholders), apart from 37,421 planholders that were fully served. Many of them have banded together in online communities such as Facebook groups for updates and to offer support to each other.
Meanwhile, CAP was placed under court receivership in December 2005, where it has been ever since. The Makati RTC approved a rehabilitation plan in 2013, which paved the way for the company to start paying the claims of its planholders. But the Supreme Court issued a TRO on the claims in order to “evaluate and decide on issues raised by the SEC.” As far as we could tell, payments to claimants have not resumed since.
Case Study on College Assurance Plan by Rogerlyn Jaminal, Michelle Florence Ondong, Katrina Tan, Nikka Ugsod, Jude Cyril Viernes; Xavier University – Ateneo De Cagayan (February 23, 2015)
Supreme Court of the Philippines