FOR THE RECORD: CLICO lessons
The CLICO matter has now reached the stage where reasoned comment may be attempted on one of the region’s most troublesome business problems.
The judicial manager’s Press conference on Thursday last should help to calm the frayed nerves of policyholders and investors; but no matter what results from this exercise, it is patently clear that Barbadians can successfully manage financial companies.
Clico was one such entity, but problems at the level of the parent company fuelled the local problems.
The enquiry in Trinidad and Tobago and the upcoming forensic audit of Clico Life here in Barbados may give clues to what may have gone wrong. I draw on my involvement in Trade Confirmers and the Bank of Commerce and Credit International (BCCI) matters and my exposure to company law to ground this first comment.
Now, the local company placed under judicial management is the CLICO International Life Insurance Co Ltd. Two related entities here have been sold, but the sale of the life insurance company proved problematic, and the question is why?
While we may not now have the answers, let us consider some realities.
Unlike motor vehicle and property insurance companies, which sell what the Insurance Act calls “short-term” insurance products, life insurance companies sell “long-term” insurance products, like life policies and other instruments which may mature in the future.
Both types of insurance companies are regulated by the Office of the Supervisor of Insurance or, more recently, the Financial Services Commission.
Life insurance companies can only invest the premiums collected in certain types of investments, because the statutory emphasis is on the security of the investment and not on risky investments which may return high profits in one year but suffer heavy irretrievable losses thereafter. The idea is to make sure that the company can meet its future contractual obligations when the long-term policies mature.
But when Mr Oliver Jordan, a joint judicial manager, spoke to the Press conference last Thursday, he remarked that a lot of the cash raised in the life company was advanced to the holding company, in many cases without clear documentation, and as he said, a forensic audit would be undertaken to identify assets of which the judicial manager is not yet aware, which were acquired with funds from the life insurance company.
Two points arise. Best practice suggests that transactions entered into by any life insurance company should have clear documentation, since that cash collected should be earning monies to satisfy future obligations of the company.
The second and very much related point concerns the holding company to which “a lot of the cash” was advanced. What was the nature of these advances? Were they investments in the holding company?
If they were “investments”, one has to ask if the holding company had the kind of track record set out in the act, since life insurance companies can invest only in certain companies whose distinguishing feature must be a consistent recent track record of dividend payments on its shares. The forensic audit is obviously necessary to delve into those areas.
A more wide-ranging consideration is that this problem involves a regional group of companies operating across the borders of several Caribbean countries and sometimes engaging in inter-company transactions.
While there is nothing inherently wrong with such activity, the effective regulation of a group of financial service companies at a regional level may now be a necessity.
Thus, the regulators of a subsidiary, in say Barbados, could be made aware of the financial health of the parent company, when for example the parent may wish or demand to borrow from a subsidiary on the strength of a promise to repay with or without documentation.
As this region becomes more of an integrated economic community, it is a matter which has to be faced, so that problems of this sort can be avoided.
The freedom of business entrepreneurs must be constrained in some cases, by proper regulation, and such proper regulation can only be based on knowledge and expertise.
The disclosures on Thursday will provide a level of reassurance to policyholders and investors, but beyond that, there are some deeper legal and regulatory issues which ought to quickly attract the attention of regional authorities.