Williams: The CLICO/CIB crisis is a major setback for the financial sector in the region.
Trinidad and Tobago's central bank Governor Ewart Williams has called for a strengthening of the region's financial system following the collapse of Lawrence Duprey's CLICO and its clico International Bank (CIB) (CLICO/CIB) which he said represents a case of "systemic failure".
"The CLICO/CIB crisis is a major setback for the financial sector in the region. We have been able to contain the contagion but the challenge of strengthening market confidence and ensuring that the cost to taxpayers remains minimal in the medium term is ongoing," Williams told business leaders in Port-of-Spain last week.
In mid-February, Williams disclosed that the insurance premiums of CLICO, now facing a financial deficit of more than US$1 billion, were used as capital to invest in projects by parent company, CL Financial.
Premium income collected in 2008, which should have been directed to the Statutory Fund, was channelled into investing in other companies.
Deficit ballooned
Based on the unaudited accounts for 2008, the Statutory Fund deficit ballooned to close to US$1 billion.
Excluding these from the Statutory Fund calculation of 2008, the notional deficit rises to US$1.6 billion on a policyholder liability base of US$2.5 billion.
At the end of January, CLICO policy surrender requests on maturing obligations totalled US$106 million. The monthly payment for pensions and annuities was calculated at US$6.5 million while the 73-year-old insurance company's bank balance was put at US$2.5 million, in addition to a sizable bank overdraft.
Since the January 30 disclosure of the financial problems of CLICO, CIB and the British American Insurance Company, a number of countries including Barbados, the Bahamas, Guyana, the Cayman Islands and Belize have taken action to protect policy holders.
Many have gone to the courts to place CLICO's operations under judicial orders in the management of its assets and funds.
Calling for the urgent upgrade of legislation, Williams told the business seminar that he hoped the recent international financial crisis as well as the recent stresses in both the credit union and the insurance industry would convince industry participants of the need for modern legislation to cope with a modern financial sector.
Directors and management also need to take seriously their fiduciary obligation to protect depositors'/policyholders' funds. Independent directors, he said, have a special obligation to provide checks and balances and play a "whistle-blowing role", if necessary.
External auditors also need to recognise their fiduciary responsibilities and must be held accountable.
Upgrade skills
The regulator need to continue to upgrade their skills and quickly achieve the level of competence in the insurance regulation as was achieved in bank regulation.
Admitting that new insurance legislation has taken far too long to come into being because of a fairly crowded legislative agenda and the shortage of legal drafting skills, Williams added that the consultation process has also dragged on for much longer than expected because of reluctance of the industry to accept changes that have become standard in other jurisdictions.
Mandatory
Williams said as the central bank and the industry proceeded to work on a new Insurance Act, it tried to achieve, by moral suasion, what would have been mandatory under appropriate legislation.
For instance, the central bank insisted on on-site inspections of CLICO.
"In the face of concerns about risk management and inadequate controls, we insisted on the appointment of independent directors and other measures to improve corporate governance. Concerned about the excessive reliance on short-term funding, the bank required CLICO to cease sale and the renewal of a particular deposit product," he said.
After facing resistance for many years, in early 2008, the bank sought to enforce compliance with "the admissible asset regulations" that put restrictions on related party transactions on the balance sheet and in the Statutory Fund.
He said while most companies had been adhering to the regulation, CLICO was one of the few that did not fully comply.
Responding to queries why the bank did not intervene in CLICO before, Williams said CLICO met its Statutory Fund requirements in 2004, 2005 and 2006. The central bank's calculation showed a Statutory fund deficit in 2007 but up to the time the crisis broke, CLICO was challenging their conclusion.
"CLICO had been given a clean bill of health by its auditors each year since 2004, when it came under central bank's regulatory control in 2004. You may have read that Madoff used a small obscure firm to audit its books. CLICO's auditors was a highly recognised international firm.
"AM Best, the renowned international rating agency for insurance companies, downgraded CLICO in 2007 from A- to B+++. B+++ is still a solid rating for an insurance company. CLICO posted healthy 'bank' profits in each year since 2004," the central bank governor said.
Difficult to justify
With these credentials, intervening in CLICO would have been difficult to justify, Williams added.
"It would certainly have prompted a long dragged out legal battle which could have had serious knock-on effects both for CLICO and for the rest of the financial system. With slow progress being made via moral suasion and with new legislation on the way the case for intervention was even less defensible," he told the business leaders.
Williams said it was clear that regulation of the insurance industry, which was accustomed to being unregulated, was always going to be a major challenge and that CLICO, being the biggest company, would be in the forefront of this process.
Describing the country's insurance legislation dating back to 1980 as very archaic, he said for example, CLICO, with assets in excess of over US$4 billion, only requires capital of US$479,000.
This compares with banks which must have capital equivalent to a minimum of eight per cent of its assets.
While the legislation did not restrict related party transactions, there were significant deficiencies or loopholes. It was also silent on the issue of actuarial methodology, which allowed companies to use their own standards which could result in a lower Statutory Fund requirement.