Address to the Insurance Institute of Jamaica
Speaker: Patrick Hylton, Managing Director
18/11/98

Intervention in the Insurance Industry was also necessary at the time of the collapse of the banking sector due to the level of inter-company transactions between the two sectors. The main objectives of the intervention were to provide solvency and liquidity support to the Life Insurance Sector as well as to evaluate the most cost effective way of dealing with Insurance assets under Finsac control which included providing ongoing management of these assets.

The amounts invested in the sector to date are as follows:

• Crown Eagle Life $14.5 billion in loans
• Dyoll Life $200 million equity investment
• Island Life $300 million equity Investment
• Jamaica Mutual $10.8 billion in loans
• Life of Jamaica $1.2 billion in equity

FINSAC staff, assisted by external consultants, have evaluated the future structure of the life insurance industry. Some of the issues under consideration include:

• The amalgamation of all real estate assets into one organization similar to that of an entity like a REIT (Real Estate Investment Trust)
• The merger of some or all of these insurance companies into one large insurance company in order to achieve economies of scale and to create an institution of value which would attract local or foreign investors meeting the necessary fit and proper criteria to purchase the company
• The additional costs associated with further rehabilitation of the sector and
• The current value of FINSAC’s investments in the sector.

It is likely there will be a merger of the institutions. We are seeking to establish an insurance holding company (similar to the banks) with the relevant management expertise to continue to guide the rehabilitation of these institutions. An insurance holding company is somewhat more problematic than a bank holding company since insurance assets can only be transferred to an existing insurance company.

Mention must be given to the efforts of a special project established under the joint auspices of, and jointly funded, by FINSAC and the Inter-American Development Bank. The focus of that project is on managing FINSAC’s investment in the insurance sector, the strengthening of insurance regulation and an overview of private pension funds in Jamaica.

The project team is working closely with staff from the Office of the Superintendent of Insurance to ensure that the OSI is trained in the new methodology as it is being prepared and to ensure their suggestions are included in the new procedures and processes.

The team has interviewed and established lines of communication with all stakeholders in the insurance sector, including insurance sector umbrella organizations, the Institute of Chartered Accountants, chief executives and other regulatory authorities.

To date the team has successfully completed the following:

• Performance benchmarks have been established for all FINSAC insurance companies and all the companies are being measured against these benchmarks
• These standards form the basis for the early warning ratios which will be used by the OSI
• Monthly reporting forms for both life and general insurance companies have been completed; all FINSAC life insurance are now required to report using this format which can be completed electronically
• SWOT analyses have been performed on all the FINSAC companies as well as a review of the past 9 years financial data on all the life and general insurance companies
• The computerization of the reporting and the annual filing forms for the OSI
• An initial review of insurance law and pension law requirements have been completed
• New investment guidelines have been completed and a meeting with the advisory committee, formed from representatives of the industry and government, working on the revision of the insurance act has taken place.

The new Insurance Act will be completed in draft form by the end of this year. All of the interested parties will have time to review it before a series of meetings in early January to finalize the Act and Regulations. I do not yet have a time for the Act to be put into effect but it is hoped that it will be considered by Cabinet and the Parliament on a fast track basis.

The Insurance Law consultant is working closely with the Insurance Accounting expert to ensure the new accounting standards will be reflected in the new legislation. The deadline for the new accounting standards is June 30^th, 1999. The Insurance Accounting expert will be working closely with the life and general insurance companies and the accounting profession to develop the new standards.

In addition, there will be a reorganization of the OSI to create a self funding unit structured in a manner that will best serve the industry and the public while protecting policyholders’ interests. The recommendation is for the OSI to have a Board of Directors composed of representatives from all the stakeholders, i.e. the life and general industries, the brokers, the public at large and the government.

Some of the components that will likely be in the new legislation are as follows, (note that there will be a transitionally phase to implement the new legislation to give insurance companies the needed time to meet the requirements and that there will be consultation with all interested parties prior to implementation of the new legislation):

• Prohibitions against related party transactions, except for nominal amounts, which is the usual practice in strongly regulated jurisdictions;
• Prohibitions against unfair forms of contracts;
• Mandatory board committees such as an Audit Committee, Investment Committee and a Conduct Review Committee (which reviews conflicts of interest, related party situations etc.)
• Administrative penalties as well as a right to appeal to a separate body such as an Appeals Commission;
• New solvency requirements for Life and General companies. The Life ratio will be a Minimum Continuing Capital and Surplus Requirement (MCCSR) which is patterned after the Canadian standard. The solvency test for the General insurers will be some type of Minimum Asset Test;
• Requirement for all new products to be reviewed by the OSI. This will likely be a negative assurance type of approval, i.e. If no response from the OSI within 30 working days, the company can begin to market the product;
• Explicit statement that company directors and senior manager have responsibility to policyholders and not just shareholders;
• Requirements for new entrants into the market place which include a suitability test for senior management and directors;
• Rules governing the activities of agents, salespeople and brokers and clear definitions of their respective roles;
• Maximum time for the settlement of claims;
• Definitions of the appropriate methods for valuing liabilities of life companies; and,
• Requirements for the actuary and accountant to report directly to the Superintendent of Insurance if there are any concerns that have arisen through their company analysis.

A committee has also been established to look at the overall regulatory framework in Jamaica. It is looking at institutional arrangements and issues that incent people to behave in specific ways. As part of the process the stamp duty on policies which make US dollar policies sold by Jamaican life insurance companies uncompetitive with those sold by "suitcase" salespeople is being looked at. Of interest to the general insurance companies is whether the capital reserve could be transferred to the equity capital of the company without attracting tax. This issue is also under review. What we are trying to ensure is that a product is treated in the same manner whether it is sold by a bank, an insurance company or any other financial intermediary. In other words, the thought is to discourage regulatory arbitrage.

I know concern has been expressed that this process to revise the regulatory arrangements governing the insurance sector is just another project that will not be implemented. Let me tell you that there certainly is a will on the part of FINSAC, the OSI and the Ministry of Finance to improve insurance regulation in Jamaica and to implement the recommended changes. But it will only work if the industries themselves recognize that they have to make a concerted effort to change their methods of operating as well. That is my challenge to you. Will you work with us to make the necessary changes?

One final point, the insurance sector faces a serious challenge to return to profitability and all participants will have to play their part and not just look to FINSAC to continue to provide financial assistance. It is time for the directors and senior management of the company to adopt and implement principles of strong corporate governance and for the shareholders to recognize they have a duty to the policyholders of the company and not just to their interest to protect their investment.