Wednesday, 11 June 2014

Sir Frank shares views on insurance sector going forward

There is a need to ensure continuous co-operation and co-ordination among insurance regulators, and Chairman of the Financial Services Commission (FSC), Sir Frank Alleyne, says the circumstances surrounding distressed insurance companies in recent times have underscored the need for cross-border regulation and crisis management.

Sir Frank told those attending the opening ceremony of the Caribbean Association of Insurance Regulators (CAIR) Conference at the Hilton Hotel last week Wednesday morning, that the failure of financial conglomerates in the region has also pointed out the extent of the interconnectedness and linkages in the region’s financial system and has by extension highlighted the need to regularise insurance legislation across the Caribbean.

(From left) Courtney Christie-Veitch, Financial Sector Advisor
with the Caribbean Regional Technical Assistance Centre;
Chairman of the Financial Services Commission of Barbados,
Sir Frank Alleyne; and John Benjamin, President of Caribbean
Association of Insurance Regulators, during the opening ceremony
of the CAIR conference at the Hilton Barbados on Wednesday morning.
“Contagion risk has therefore become a significant one as there are numerous insurance conglomerates which currently operate throughout the Caribbean and many with extensive investment portfolios in Caribbean government-issued debt. It is therefore imperative that we as a region work together to regulate and monitor these entities in a group supervisory manner. To this end, the harmonisation of insurance regulation across the region – a difficult, but not insurmountable, task – will certainly become a critical area and can possibly be a topic for future CAIR conferences and workshops,” he added.

With that in mind, he said the conference’s focus on Group-Wide Supervision and on Cross Border Supervision is a wise one, especially given that in this region the insurance industry is made up of large insurance companies that operate in several countries through a branch office or agency network distribution channel.

“This type of structure in our insurance industry creates a scenario where oftentimes there are home regulators – host regulator relationships created for an insurance company. This type of structure also creates a scenario where the risks inherent to the insurance company are housed across borders in different countries,” he noted.

Sir Frank explained that in addition to this characteristic of the industry, insurance companies are now seen expanding their operational structures to enter into or acquire companies operating in industries outside of insurance.

In this respect, the FSC chairman said there are a number of issues to be considered, including that the insurance companies convert their operational structures into conglomerates where the core business is insurance, but the group structure includes risks that are not inherent to the insurance industry. Additionally, he said that there are also instances where the industries into which the insurance companies have expanded may not be regulated.

Also of note, Sir Frank said, is that the International Monetary Fund, in completing its various Financial Sector Assessment Programmes across the Caribbean sub-region, pointed out that complex conglomerate structures could make it difficult to obtain an accurate picture on the chain of commands within the conglomerate structures. Moreover, he stated that it may also be difficult for regulators to assess the financial strength of the group, if the business structure of the insurance company and its subsidiaries differs from the legal structure of the entity.

“These scenarios add complexity to the job of the regulator and the on-site examiner as assessment of the net risk for an insurance company now has to consider cross-border economic factors, cross-border legislative factors and various industry risks which are not the core risks used to assess an insurance company.”

“In this regard, IAIS issued Insurance Core Principle (ICP) 23 on group wide supervision, ICP 24 on macro prudential surveillance and insurance supervision, as well as ICP 26 on cross-border co-operation and co-ordination on crisis management. These core principles require the insurance supervisor to co-operate and co-ordinate with other relevant supervisors and authorities so that cross-border companies are prudently regulated to safeguard the financial stability of the region,” Sir Frank stated.

He added that the supervisory materials of the International Association of Insurance Supervisors (IAIS) indicate that insurance supervisors are expected to co-operate with other supervisors, including those from other sectors, on legal entities and on a group-wide basis. Also, he said, the IAIS stresses the importance of respecting jurisdictional confidentiality requirements and encourages the use of Multilateral Memoranda of Understanding to facilitate such information exchange as a practice to supporting and strengthening the cross-border supervision of insurance companies. (JRT)

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