The Interest-Sensitive Policy Story

The Supreme Court on Thursday (April 29, 1999) ruled that the FINSAC-pioneered scheme to pay out lump-sum, interest sensitive policies of Crown Eagle, Mutual Life and Dyoll Life is the best deal possible for policyholders, and congratulated Judicial Manager, Glenford McLeish and the FINSAC team on the fine quality of the report submitted to the Courts for approval.

In painting a picture of insolvency, the report said that if the three insurance companies were wound up policyholders would receive far less than the sums to which they would be entitled to under their policies, and outlined the route Mutual, Eagle and Dyoll had taken to arrive at the Government's door for help.

The early 1990's ushered in the advent of lump-sum interest sensitive policies - policies which were in effect, a means for investors to receive tax-free interest on deposits and for insurance companies to take in deposits under the guise of insurance products. Not being licensed as deposit-taking institutions, they were therefore able to escape regulation by the Bank of Jamaica.

There were two types of interest-sensitive policies. One was a. savings-type policy in which the policyholder made periodic payments and on which he earned interest. For these 40,000 such policies, interest payable was not linked to any specific investment. In fact, it could be said that interest paid was 'insensitive' to the performance of the companies' investments.

The second type was the lump-sum, interest-sensitive policies which were primarily investment vehicles, funded usually by a single lump-sum deposit. Again, the interest paid on these policies were unrelated to the performance of any investment.

The link to insurance came through a small amount of the deposit going into insurance coverage. In many cases the actuarial valuation of the insurance component was worth less that 1% of the investment component. For example, in the case of Mutual Life, of a total lump-sum portfolio valued at $2,145,015,107 only $1,486,431 or .07% went to insurance coverage for its 6,513 lump-sum policyholders.

In more than 90% of lump-sum interest-sensitive policies, the policyholder’s life was insured for $60,000 or less compared to average coverage of approximately $250,000 in the savings-type interest sensitive policies.

"It appears that the companies all invested the funds received from holders of lump-sum, interest-sensitive policies in long term investments which yielded no income or income which was substantially less than the interest payable to the

policy-holders.

"These included office buildings, hotels and other real estate developments. In addition, these funds were not segregated, and the policyholders were guaranteed risk-free returns," the report states.

Soon, the companies had to face the reality that none of them – Mutual, Dyoll or Crown Eagle – had sufficient cash to meet their obligations to lump-sum policyholders. Further, the deposit-like nature of the business meant that policyholders could withdraw their funds at will.

In order to meet the claims of policyholders, the three companies issued new lump-sum policies and in taking in new deposits, began compounding their problems.

Under the weight of the design and provisions of the lump-sum interest sensitive policies, the viability of the companies came under increasing pressure until all three companies went to the Government for help.

Following a diagnostic review of the insurance companies, it was clear that the lump-sum business would have to be removed from the traditional insurance business as a first step in safeguarding policyholders. And so, FINSAC crafted an agreement with the Bank of Nova Scotia which would pay out all such policyholders.

Under the deal policyholders with $200,000 or less would be paid out almost immediately while larger investors would get the first $200,000 of their funds now with the balance becoming due in 7 years. Of the 9,200 lump-sum policyholders, only 2,200 policyholders fall in the category of large investors.

Shortly, and subject to the approval of the courts, the insurance component of these policies will be reissued.

In approving the scheme of arrangements proposed, the Supreme Court also agreed that lump-sum interest-sensitive policies whose owners do not accept the terms of the FINSAC/BNS scheme, will be transferred to Larnaka Ltd. FINSAC will issue bonds or other long term instruments to Larnaka to enable it to settle the claims of policyholders under the same terms and conditions as the FINSAC/BNS initiative.

May 3, 1999