The Central Bank of Trinidad &Tobago (CBTT) became the main regulator of the insurance industry in 2004 and was aware of the inadequacies in both the Central Bank Act and the Insurance Act surrounding related third-party transactions, which prevented the regulator from taking corrective action to protect policyholders.
One week and five years late, the Government of the Republic of Trinidad & Tobago (GORTT), through the parliament (both the House of Representatives and the Senate) and assented to by the President, quickly amended the Central Bank Act and the act governing financial institutions (including all banks and insurance companies) to allow the CBTT, as the main regulator of the sector, to examine the finance status of related holding, subsidiary and associate companies and to exchange information with other regulatory agencies across borders and jurisdictions.
The insurance industry has been described as a “cash cow” and as such its high levels of liquidity drive the need for growing returns. Unlike banks, whose depositors call frequently upon their deposits, insurance companies have relatively fewer claims from policyholders, leaving an enormous cash position which must be invested and put to work. Herein lies the problem. Traditionally, investments in infrastructure, such as commercial buildings with healthy rental income, within the same jurisdiction were adequate. Then, in the pursuit of a high return on investments the strategy changed and a more high risk, high reward investment philosophy with policyholders’ funds, was practised. Holding companies were formed to receive the profits, rightfully due to policyholders, from subsidiaries and associate companies as well as to escape burdensome regulations and reporting.
In good times, cash-strong insurance companies paid their obligations to the regulator on time, calculated on the policies in force but not taking into consideration the groups’ assets as discovered in the holding company’s financials. A strong case can be made that all groups’ assets are policyholders’ funds and hence, the regulator’s calculations of statutory funds may well be based on groups’ assets. For in lean times, when profits become losses and these losses hinder policyholders’ claims, it will be asked, where was the regulator? CLICO negotiations with the CBTT, by all public utterance, seem to be surrounding the type of assets (cash only) that the regulator is willing to hold as statutory funds. CL Financial Holdings Limited has assets to meet and treat with all its obligations, for example, 55% of Republic Bank Limited whose market share price is approximately TT$86.00 per share with 160,407,000 shares issued, equivalent to TT$7,587,251,100; and 23% of One Caribbean Media Limited whose market share price is approximately TT$17.50 per share with 66,215,000 shares issued, equivalent to TT$266,515,375. Certainly now the more powerful regulator can, with an appropriately acceptable evaluation, hold any or all shares and end the uncertainty. The damage is already done!