A failure of the regulation or the regulator?

Mar 02, 2009 Features / Columnists, Peeping Tom

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The Commissioner of Insurance is coming under a great deal of criticism, and is likely to come under more of the same, over the handling of the CLICO (Guyana) matter.  Two political parties have come out calling for both her resignation, as well as that of the Minister of Finance.
Should the regulator however be blamed for what took place? Or are we dealing here with the inadequacy of regulation?
One of the major criticisms against the regulator was the fact that CLICO (Guyana) held investments outside of Guyana to a limit which was prohibited by the Insurance Act of 1998, and action should have been taken in this regard, since it was the high consolidation of risks within CLICO (Bahamas) which has led to the problems now being experienced by the local company.
In short the regulator, in this instance the Commissioner of Insurance, is being blamed for this alleged breach of the Insurance Act. In fairness to the Commissioner of Insurance, she can only act after the fact. The regulations within the Insurance Act which creates the position of Commissioner of Insurance does not require the consent of the Commissioner of Insurance before external investments are made, and perhaps this was a grave oversight which those of us now with the benefit of hindsight can rail against.
Once such a breach was detected, however, the Commissioner of Insurance was compelled to act. But we must be careful in how we judge her because, while there was the compulsion to act, the means at her disposal were obviously constrained.
She has in a statement issued to the press explained that, having ascertained the extent of CLICO (Guyana)’s exposure, she immediately instructed the company to correct the deficiency. Based on statements made by the President, we can presume that this instruction was one year ago.
She further stated that the company undertook to correct the problem in a manner that would be orderly and which would avoid undue dislocation to its operations, which she observed would have been harmful to the interests of its policyholders.
The company of course had already invested overseas and would clearly have found difficulty in reversing its investment.  The investment may have been on terms which would have precluded the company simply withdrawing the investment. And so it is doubtful whether, if CLICO (Guyana) wanted to pull back a significant portion of its US$40M in CLICO (Bahamas), it would have been able to do so since it would have been impossible for CLICO (Bahamas) to have done so without itself experiencing serious problems, financial crisis or no financial crisis.
The Commissioner’s assessment is that it would have been inappropriate to opt for judicial proceedings at that stage. Such a move would have resulted in a loss of investor confidence in CLICO (Guyana), and there would have been a run on investments and the surrendering of policies which would have precipitated “the demise of the company”.
All of those considerations however had to be weighed against the long-term consequences to policyholders, given the intense concentration of the assets invested in a single company overseas. It is not like they had 20 per cent of these assets invested in the sister company in the Bahamas; it was over 50 per cent.
If close to one year ago it was recognised that there was a problem with the concentration of CLICO (Guyana)’s investment overseas, then there was sufficient time for serious manners to have been brought on the company to act, as promised, to reverse the situation. What was done within this one year? Was this matter brought to the attention of the Minister of Finance? If so, what was his reaction?
One year is a long time to be engaging the company, and therefore serious questions are going to be asked as to why stronger action was not taken. I hope that, now that the Commissioner has explained her side in a general way, she would follow this up by explaining to the obviously distraught policyholders just what were the specific forms of engagement which took place with the company over a one-year period, what steps the company took to reduce its exposure, and what steps she took to force them to correct the problem.
While the options that were open to the Commissioner of Insurance would have caused a loss of public confidence in the institution, consider what has now resulted. Hundreds of policyholders are facing an uncertain future in so far as their investments are concerned, and the ripple effect of this can cause serious problems to our economy.
Let us however not forget that the cause of the present problems is not so much the global financial crisis, but rather the concentration of assets which CLICO (Guyana) invested in CLICO (Bahamas). Whether or not there was a global financial crisis, having 50 percent of your assets in one company is reckless, and therefore those responsible for this investment decision should be asked to explain themselves.

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