Should Barbados take further steps to protect customers from insurance risk?
The debacle involving CLICO and its sister company British American Insurance (BAICO) is still fresh in the minds of many Barbadians.
This is so especially for those who either have insurance policies or invested in these twin insurers whose parent, Trinidad and Tobago’s C.L. Financial, collapsed in early 2009.
As Barbadians and others in the Eastern Caribbean wait for the CLICO and BAICO problems to be resolved nearly eight years after they became known, insurance industry regulators have been keen to ensure that there is not a repeat of such challenges.
Numbered among them is the Financial Services Commission (FSC), the successor to the Supervisor of Insurance, which was responsible for regulating CLICO and BAICO when they ran into difficulty.
The focus has not been only on more, but better, regulations. In this regard, the FSC has signalled its intention to introduce risk-based capital for the insurance sector, a mechanism that has been used increasingly in other markets.
Speaking in September last year at the Domestic Financial Institutions Conference at Hilton Barbados Resort, now outgoing FSC chief executive officer Randy Graham, signalled that a risk-based capital regime was coming.
“As it relates to insurance, in 2016 we also expect to begin consultation to introduce risk-based capital to the insurance sector which many believe our sector is now ripe to receive,” he said.
Risk based capital is a means through which regulators measure the least amount of capital that is required to support the total business operations of financial entities, including insurers.
Factors considered include the size of the company and its risk characteristics.
Using this information, the regulator has a mechanism that allows it to limit the amount of risk a company is allowed to take.
Earlier this year, Graham highlighted several challenges the insurance industry was facing and said the FSC intended to remedy these issues.
“The key vulnerabilities identified surrounded the depressed net income position recorded, particularly in the general insurance sector, the reduced levels of investment income, and the relatively low capital levels, leading to the heavy use of reinsurance as risk diversification,” he said.
Beacon Insurance Company is one regulated insurance company that is welcoming the FSC’s move.
Speaking recently at a media conference, Beacon’s chief operations officer Christopher Woodhams said: “It ensures that what you are doing in your business is properly managed and properly regulated. So, essentially what happened with CLICO shouldn’t happen again.”
“[Risk-Based capital] is very different to what the regulations have right now. It is a very onerous but important requirement and it is a distinct change to how an insurance company manages its business.
“We, at Beacon, 100 per cent support it.”
Recent data shows that there are 21 domestic insurance companies maintaining more than $3.2 billion in assets and paying out over $175 million in claims annually.
This alone suggests that there is a lot at stake and regulators need to ensure they have measures to prevent another calamity.
The FSC is a member of the International Association of Insurance Supervisors (IAIS). On July 29, this year, IAIS said a new insurance capital standard (ICS) would be introduced and “will constitute the minimum standard to be achieved and one which the supervisors represented in the IAIS will implement or propose to implement taking into account specific market circumstances in their respective jurisdictions”.
“The IAIS’ ultimate goal, by a date yet to be determined, is a single ICS that includes a common methodology by which one ICS achieves comparable, that is substantially the same, outcomes across jurisdictions.
“Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal.
“Not prejudging the substance, the key elements include valuation, capital resources and capital requirements.”
In a 2016 report on the top regulatory trends in insurance, international advisory firm Deloitte said this year was expected to “see many insurers continuing to enhance their enterprise risk management frameworks and build out their quantitative assessment of risks and capital”.
It also pointed out that “for many insurers, one of today’s biggest challenges is trying to comply with new capital regulations that were originally designed for banks and do not necessarily fit the insurance business model”.
“Many of these rules strive to help the global financial system survive a crisis by requiring institutions to hold more capital in reserve. This makes sense for banks. But it may limit the ability of insurance companies to spread risk and build resiliency,” Deloitte added.