Governor of the Eastern CENTRAL? Caribbean Bank (ECCB), Sir Dwight Venner,said last week, as reported in another section of the Press, that a “meaningful solution” would soon have to be found to the investments at risk by the financial problems affecting both Clico and British American Insurance Company.
Whenever we read about CIL’s financial red ink, the number usually thrown around is just slightly upwards of Bds$300 million. But, in fact, that number is the one attributed to individual investors only.
At December 31, 2009, according to Ernst & Young, another Bds$149 million is held by companies both here and in the Organisation of Eastern Caribbean States (OECS), and, yet another Bds$44 million by government institutions in the OECS.
These are the total sums invested in those Executive Flexible Premium Annuity (EFPA)?products which were hawked up and down the region by the Barbados-headquarted CL Financial subsidiary, long after the company was ordered to stop selling them by the Barbados Supervisor of Insurance. Altogether, they total more than half a billion dollars – Bds$507 million.
That much exposure less the value of the CIL assets would still leave the Barbados Government with a CIL deficit of $211 million on its hands. Government would have to meet this obligation by issuing $44 million in bonds up front, “and the remainder, $167 million, to be paid over a 10-year period beginning in the year 2015”.
That is plenty of money at any time, especially for debts incurred by a private entity which the Government was supposed to regulate. To make matters worse, from a foreign exchange standpoint, 64 per cent of all the EFPA investment came in from the OECS, while 75 per cent of the CIL assets are in Barbados real estate.
Therefore, it should not be surprising that a philosophical argument was mooted as to why the Barbados Government should not have to stand up for all that outstanding debt.
Targeted were the $149 million held in EFPAs by Barbadian and OECS companies, and the $44 million held by OECS government institutions (like their own national insurance boards).
The appendix to the Cabinet paper declares: “Surely the regulators in the OECS should have gotten in touch with the Barbados regulator to ascertain if the product was approved for sale to institutions.”
“The taxpayers of Barbados should not be asked to bail out either companies in Barbados or the OECS which invested in EFPAs, because such institutions are sophisticated investors and should have exercised the necessary due diligence before investing in the product.”
In the case of the OECS government institutions: “A check with the regulator in Barbados would have revealed that the product was only to be sold to individuals. There was therefore regulatory failure in the OECS and the governments there must accept responsibility for the state of affairs.”
Harsh words.
No one, of course, knows, what final agreement will be worked out, but the question I have is this: Can the Barbados regulator only tell an insurance company not to sell a product? Is there no follow-up through the court to ensure its orders are complied with? And does it not have the responsibility to let investors, sophisticated or not, know of its orders? For example, through the Press?
CIL was told to stop selling EFPAs to entities other than individuals as far back as 2006. Yet, according to the Cabinet paper, the Supervisor of Insurance found out that the product was still being marketed (to the National Insurance Board) as late as October, 2008.
Even after CIL was ordered to fully desist from selling apparently anything in August, 2009, “the company continued to write business in defiance of the order,” according to the Cabinet paper.
Was it not the regulator’s duty to see for itself that its own orders were being carried out? To paraphrase the Cabinet paper, was there therefore not regulatory failure in Barbados as well?
If the Barbados Cabinet accepts the recommendations given to it in respect of CIL and refuses to guarantee the deficits incurred by companies and OECS government institutions, it could seriously damage our reputation as a secure place to do business.
Playing the blame game might save us a sizeable cost in the near-term, but its negative effect on us in the future could be much greater and take a long, long time to overcome.
