Barbadians were shocked to learn back in January 2009 that the CL Financial group with its headquarters in the Republic of Trinidad and Tobago was tottering on the brink of collapse because of severe liquidity problems in two of its major subsidiaries – Colonial Life Insurance Company (Trinidad) Limited (CLICO) and CLICO Investment Bank Limited.
Things were so bad that Lawrence Duprey, chairman and chief executive of the group, had no choice but to approach the government of Trinidad for a bailout.
To prevent a recurrence of a bad investment decision or an error, one has to review the circumstances that led to the original decision or error and take the necessary corrective action for the future.
There is no better place to start than to revisit the reasons offered by the governor of the central bank of Trinidad and Tobago back in those heady days of 2009.
The problems identified by the cerebral governor:
• Excessive inter-company or related party transactions – these could involve moving cash around to deal with liquidity and other problems.
• An aggressive, high interest-rate strategy to finance high risk investments – if investments go sour, the company could have problems paying interest rates that are at or above market. Profitability could also be significantly affected.
• Very high leveraging of the group’s assets – this could result from taking on too much debt such as loans and third-party deposits without adequate asset support.
Clearly, we had a group of companies whose top leader showed no aversion to extreme risk-taking. One could almost define this type of behaviour as more akin to gambling than using good judgment based on sound and tested principles.
This type of problem can be tackled by having a cadre of highly trained and qualified individuals at management level, good internal controls and proper oversight by a board of directors supported by such committees as audit, corporate governance, supervisory and operational risk and others.
In Trinidad, the governor of the central bank whose function it is to regulate insurance companies blamed weak and outdated legislation for the failure of Colonial Life.
It’s not certain what factors were attributed to the failure of CLICO Investment Bank by the inspector of financial institutions. Two examinations of the CL Financial operations have been carried out and there is currently a commission of enquiry doing about the same thing.
In Barbados, the Supervisor of Insurance applied in May 2011 to the court for approval to appoint a judicial manager, who has submitted a number of reports to the court with various solutions to secure the funds of policyholders and annuitants.
He recommended that a forensic audit be done to look into assets of CLICO Life that are not supported by appropriate documentation.
This forensic audit is limited in nature, so the jury is out on whether a similar type of enquiry as being carried out in Trinidad will visit our shores anytime soon.
In all of this, CLICO Life Barbados has breached several sections of the Insurance Act, 1996 with impunity, including its failure to desist from selling new insurance policies (as per the Supervisor of Insurance) and publish its audited financial statements annually in the Gazette and in a daily newspaper.
The sad part in all of this is that while there has been a call to strengthen the legal and regulatory framework within the region, not much has been done so far.
Regional governments with their fiscal problems, high public debt and falling revenue seem not to have the appetite to deal decisively with the fallout from the CL Financial debacle.
Is this likely to happen again?
Of course it can, but maybe not in the scope and size of the recent CL Financial group experience.