Insurance regulation in Barbados is without doubt in urgent need of a comprehensive overhaul.
An International Monetary Fund-World Bank Financial Sector Assessment report in 2002 spoke to “serious weaknesses” in the regulatory and supervisory framework of the local insurance sector, and these weaknesses were no doubt evident long before then.
The 2002 Financial Sector Assessment highlighted a lack of compliance with many of the “Core Principles for Effective Supervision” established by the International Association of Insurance Supervisors and recommended that “a substantial strengthening of the regulatory framework should include provisions concerning corporate governance, internal control and, most importantly, solvency requirements.”
In 2010, the Auditor General conducted a special audit of the Office of Supervisor of Insurance and Pensions and identified several areas where insurance companies did not comply with legal requirements but were not penalized.
As an interesting point of comparison, we need look no further than the Central Bank of Barbados, which has endeavoured to keep pace with international best practices and has published rules for local banking institutions that speak to the very areas which are lacking in our insurance regulation.
This includes detailed guidelines for solvency and capital adequacy, corporate governance, operational risk management, stress testing, and liquidity risk management. This approach must be mirrored in the insurance sector. The Central Bank is also known for being a lot less lenient with licensees who contravene the law.
Corporate governance is a critical area as the board of directors and management team are ultimately responsible for the operations and financial condition of the insurance company. It is vital to have directors who are appropriately qualified, experienced and knowledgeable and who are prepared to critically examine the actions of management and challenge these actions where appropriate.
The regulator in turn must assess the competence of the board of directors and closely monitor the board’s fulfilment of its responsibilities.
A strong case can be made that there should be a legal responsibility for the directors and the company’s actuary to report to the regulator on their risk assessments, the company’s activities to address identified risks, and any specific areas of concern. Such a report could be verified in some manner by the company’s independent auditors.
Solvency and capital adequacy are a key area for insurance entities and our current regulations, especially for domestic insurers, fall far short of industry recommendations which emphasize risk-based methods of calculating minimum capital and solvency.
The current statutory fund restrictions on investments must be improved to properly incorporate considerations such as asset-liability matching, liquidity, diversification, and risk management, and the cumbersome requirement for the assets to be held in trust should at least be reconsidered. We also need to institute minimum standards for the estimation of insurance liabilities, perhaps with reference to standards established in other jurisdictions.
One of the challenges of regulation is that the regulated company will in many cases be more knowledgeable and sophisticated than the regulator. In addition to its own staff, therefore, the regulator must utilize independent actuaries and other industry experts to assist with its work.
Mandatory credit ratings for large domestic insurers should certainly help to address the imbalance. And auditors should be called upon to be more accountable to regulators, and to promptly express any concerns directly to the regulator, whether or not these concerns relate directly to the financial statements.
There are a number of actions that must be taken urgently by Government. An investigation into the troubled insurance companies is required to identify the causes of the crisis and areas where we can learn from our past mistakes.
The results of this investigation along with public consultations should inform the work of an insurance sector regulatory and legislative review body which could perhaps be led by the new Financial Services Commission but should include representatives of all of the relevant stakeholders.
