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'Clico effect' overshadows insurance sector gains
Developments in the insurance sector in 2009-2010 were overshadowed by the Government’s on-going efforts to restructure Clico and British American (BA), following intervention by the Central Bank in early 2009. In 2008, these two companies accounted for 49 per cent of the total assets of the insurance sector. Based on the statutory returns for all insurance companies for the year-ended December 31, 2009, there was a significant fall in gross premiums and a small decline in total assets from the previous year. Most of this reflected the “Clico effect” although the economic slowdown also had some impact on the demand for insurance products. Excluding Clico and BA, the sector showed modest gains in both aggregates: 6.0 per cent in gross premiums and 10 per cent in assets.
Gross premiums declined by 57 per cent in 2009, as new premium income into Clico and BA virtually dried up following the acute liquidity problems and subsequent Central Bank intervention into the two companies. (Chart 4.1). The reduction was largely related to the sales of single-premium annuity policies, which represented about 90 per cent of the premium income of Clico/BA over the last few years. For the two intervened companies, premiums in respect of traditional insurance products continued to be paid although there was some decline compared with previous years. Excluding Clico and BA, gross premium income rose by 8.6 per cent in 2009, following an annual rise of 13.4 and 19.7 per cent in the two previous years.
In terms of percentage growth by line of business, the growth in premium income was mainly due to ordinary life, followed by individual annuities, health insurance and pensions (Table 4.1). Excluding Clico and BA, individual annuities accounted for 20 per cent of total premium income while ordinary life products accounted for 43 per cent. In terms of the liability structure as at end December 2009, excluding Clico/BA, individual annuities and unit-linked products comprised approximately 51 per cent of insurance liabilities, ordinary life accounted for approximately 35 per cent with the remainder largely comprising group pensions and deposit administration (Table 4.1). This liability structure, as well as the removal of interest rate guarantees for the annuity products and the growth of unit-linked products (where the investment risk is borne by the policyholder), reduced the vulnerability of companies to market and interest rate shocks.
Total assets of the life insurance industry fell by 7.0 per cent in 2009 (Chart 4.2). Much of this decline reflected the further impairment of certain Clico/BA assets and the reduction in the balance sheet of these companies as a consequence of the increase in withdrawals of annuity-type deposits. Excluding Clico and BA, total assets of the industry increased by 9.2 per cent in 2009. There was also a similar decline in 2008 as Clico and BA’s balance sheet were restated to provide for an initial round of “mark downs.” The data for the life insurance sector as a whole showed that in 2008, 40.8 per cent of total assets were invested in equities, with government investments; the second highest category, accounting for 11.8 per cent of total assets. The high level of equity holdings in the sector also reflected the operations of Clico/BA and their search for superior yields to meet higher interest rate obligations.
This investment strategy proved to increase the companies’ vulnerability. Excluding Clico and BA, equity holdings accounted for 17.1 per cent of total assets in 2008, trailing government securities (21.7 per cent) and bank deposits and cash, which accounted for 17.2 per cent. In 2009, these companies further reduced their proportional holding of equities to 14.1 per cent while, at the same time, increasing the share of government securities to 28.1 per cent (Table 4.2). With the sharp decline in short-term interest rates, holdings of bank deposits and cash were reduced somewhat to 16 per cent of total assets.
(ii) Statutory Fund
In accordance with the Insurance Act (1980), insurance companies are required to maintain assets in their Statutory Fund to cover resident policyholder liabilities. Traditionally, the statutory fund positions were monitored on an annual basis, with the information being submitted to the Regulator six months after the companies’ financial year-end. In 2009, by way of an amendment to the Insurance Act, the Central Bank changed the frequency of the reporting requirements on the Statutory Fund from an annual to a quarterly basis. This meant that companies could no longer wait until the end of the year to replenish the assets in the Statutory Fund. This new requirement should serve to enhance policyholders’ protection by engendering continuous monitoring of the statutory fund balances by the board and management of the insurance companies and by the Central Bank. An analysis of the statutory fund balances over the last three reporting quarters of 2009/2010 showed that the industry held an average margin of 7.3 per cent and 21.2 per cent of assets in excess of the liability requirements for long-term insurance and motor vehicle insurance, respectively (Table 4.3).
Currently, there are no capital adequacy rules for insurance companies. However, a regime of risk-based capital has been proposed for life insurance companies as part of the new draft legislation.
Companies have been encouraged to conduct a “parallel run” of the proposed capital structure using a new common actuarial valuation methodology called the Caribbean Policy Premium Method. In the absence of a formal regime, one proxy for capital adequacy is the ratio of free capital and surplus to policyholder liabilities. Excluding Clico and BA, this ratio has averaged about 23 per cent for the last five years. This was well in excess of a widely-used capital adequacy target of 5.0 per cent.
The life insurance sector was profitable in 2009, with all but two companies reporting gains in their operating activities during the year. Companies benefitted from both underwriting profits as well as investment income.
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