New solvency standards for insurance companies MICHELLE LINDO,
senior insurance analyst, Financial Sector Adjustment Company Limited
(FINSAC), told members of the Institute of Chartered Accountants of
Jamaica that the new Insurance Act will prescribe minimum continuing
capital and surplus requirements (MCCSR) for life insurance companies in
order to reduce the risk of insolvency and capital deficiency.
She explained that new capital and solvency standards are intended to
establish a minimum requirement for life and general insurance companies
"in order to ensure their existence as healthy going concerns."
She was speaking at a seminar organised on Thursday by the ICAJ to
discuss issues on insurance accounting in respect of the new proposed
standards at the Hilton Kingston hotel.
Accountants were told that the Government plans to pass the Insurance
Act 2000 and related regulations into law. The new regulations are
expected to be enacted by January 2001 or some period shortly thereafter
and new rules will apply which will have significant implications for the
insurance industry.
Mrs. Lindo acknowledged that the new act is a creature of financial
difficulties that the insurance industry experienced in the mid-1990s. In
providing a historical scan, she explained that during the early 1990s the
industry experienced a boom, especially life businesses. Between 1990 and
1991 the number of policies increased by 35 per cent and by a further 25
per cent the following year.
She argued that growth in UL and equity-linked products were fuelled by
the high interest rate and stock market boom while major players shifted
from core business and increased investments in hotels, office buildings
and other long-dated assets.
In 1993 the stock market crashed and there was a severe liquidity
strain on some companies as policyholders flocked to encash their
policies. Some $3.3 billion of encashment were made in 1993, US $550
million in 1992 and US $150 million in 1991.
In order to meet liquidity needs a number of insurance companies
attempted to sell their long-term assets but, "by then there were no
takers and FINSAC intervened and offered assistance in addition to
creating an early warning ratio and consolidating the entire
industry."
The current Insurance Act of 1972 is similar to one developed in the
United Kingdom jurisdiction but it has not been updated to handle new
types of insurance policies, investment vehicles and changing risk
patterns in the industry. Further, no actuarial guidelines were
established and solvency requirements were insufficient to protect
policyholders.
The current draft of the new Insurance Act provides more details and is
flexible enough to accommodate modification "easily and
frequently." The powers of the office of the Superintendent of
Insurance (OSI) are to be expanded to identify and control companies
operating under hazardous financial conditions.
The new act also provides for the use of early warning ratios and
systems, regular examinations of insurance companies, an increased role
and responsibility of the actuary, auditors and board of directors, rules
on types and quality investments, specified techniques for actuarial
valuation and the establishment of risk-based capital requirement.
The MCCSR for life insurance companies is premised on a risk-based
formula that is intended to reduce the risk of insolvency and capital
deficiency. The computation of the required capital is based on the
company's composition of assets and liabilities along several risk
components, while the MCCSR percentage is determined by the ratio of
available to required capital.
The available capital is defined as the existing capital of the life
insurance company that can be counted for solvency requirements less
specific deductions, limits and restrictions and may be divided into two
categories.
After both the required capital and available capital are computed and
the MCCSR is deemed to be less than 100 per cent, the OSI is obliged to
take action to ensure that a company in this position must take action to
increase the capital base in order to continue in operation.
Leon Anderson, former FINSAC consultant, who presented a paper on
accounting standards for life insurance companies, added that in respect
of actuarial liabilities accountants are going to be required to provide
provisions for adverse deviations and to recognise acquisition costs in
computations and to account for expected surrenders and lapses.
Mrs. Lindo concluded that the Insurance Act 2000 will foster
"increased discipline and vigilance in monitoring investment
portfolios and capital requirements, adherence to industry accounting
standards and ensure an increased role for actuaries, auditors,
accountants, and the board of directors of insurance companies." We value your feedback
and comments.
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