The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian insurance industry will be placed under “significant strain” if there is a further cut in the Prime interest rate, with one underwriter also said to require “recapitalisation”.

Both issues were highlighted in the International Monetary Fund’s (IMF) assessment of the Bahamian financial services industry’s stability, released late Thursday, which expressed concern about limits on the insurance industry’s ability to match long-term assets to liabilities of the same duration.

The Fund noted that these problems resulted from a combination of the Bahamas’ exchange control regime, which restricted both life/health and general insurers to local investments, and the limited amount of long-term, fixed income instruments available.

Its report warned that a further cut to Bahamian Prime, which was last reduced in May 2011, would harm the insurance industry by further reducing its all-important investment income. This is because most of the sector’s investments are in bonds, government securities and mortgages – all instruments whose returns are directly tied to the Prime rate.

“Asset-liability matching for long-term products needs attention,” the IMF report warned. “Liabilities are discounted using the projected performance on the existing investment portfolio for the discount rate.

“The majority, if not all investment, is local due to exchange control restrictions. Insurers hold high levels of mortgages due to a lack of fixed rate, long-term local investment instruments. This lack, if combined with a further reduction in interest rates, would create significant strains in the sector.”

The IMF report added that the assumed 3-11 per cent interest rates attached to whole life

policies “will be difficult to achieve in the current environment”. It added: “Only recently have the products started to be linked to domestic interest rates, implying insurers could be affected by negative spreads.”

The likelihood of a further cut to the Bahamian Prime rate appears remote, at best, given that the IMF noted in its accompanying Article IV report on this nation that the Central Bank of the Bahamas agreed “further monetary easing was not necessary at this time. Further easing may put pressure on reserves and the exchange rate”.

Still, the IMF’s financial sector report noted that three Bahamas-based insurers held more than 70 per cent of their assets in government bonds and cash – again illustrating the lack of diversified, risk-appropriate fixed income opportunities for a sector restricted to the local market.

In response to the IMF findings, the Insurance Commission of the Bahamas (ICB) acknowledged the constraints imposed on insurers by the exchange control regime, but said the latter was a policy decision for the Government.

“While we agree that the current exchange control requirements limit insurers’ ability to diversify their portfolio and match their long-term liabilities, any relaxations to exchange controls will have to be considered by the Government, as the exchange control regime is a crucial part of the Bahamas’ economic stability,” the IMF said.

“However, the Insurance Commission will engage in dialogue with the Government regarding this recommendation.”

While praising the “significant improvement” in industry supervision under the newly-constituted Insurance Commission, the IMF report warned that “confidence in the sector has been severely affected” by the CLICO (Bahamas) collapse into insolvency.

“The ICB has already undertaken a major clean up of non-active insurers and a range of other measures that have positively impacted the insurance market, including the introduction of penalties that dramatically lowered overdue premium receivables,” the IMF said.

“However, there is need for recapitalisation of one insurer, and the liquidation of CLICO and its sister insurer, BAICO, should be handled in a manner that maintains as much as possible the credibility of the ICB as the supervisor of market solvency.”

The IMF report did not identify the insurer in need of recapitalization. It did, though, praise Bahamas-based property and casualty underwriters for “managing risk well”.

“Combined ratios (claims and expenses over premiums) below 100 per cent indicate soundness,” the IMF said. “The ratio of liabilities to equity is low (below two), and solvency ratios are above regulatory requirements.

“Reinsurance is available at a reasonable cost and, as noted, more than 90 per cent of the reinsurers used are A-rated by AM-Best and belong to the top 25 reinsurers globally.” Given their relatively thin capital bases, and frequency with which hurricane strike the Bahamas, the IMF report said the five property and casualty underwriters – Bahamas First, RoyalStar Assurance, Insurance Company of the Bahamas, Summit Insurance and Security & General – reinsured between 60-80 per cent of their business.

The IMF described the Bahamian insurance industry as having “stagnated”, despite its high market penetration levels. The five general insurers, plus Colina, Family Guardian, BAF Financial and Atlantic Medical, were said to write 80-90 per cent of total business.

Yet the report added that the combination of recession and low interest rates had “reversed the growth experienced through 2008, with the insurance premium having declined in recent years to around the level of five years ago.

“With expenditure on insurance already equivalent to over 9 per cent of GDP, levels characteristic of advanced economies, prospects for further growth are limited.”

The Insurance Commission, meanwhile, said it was looking to enter Memorandums of Understanding (MoUs) on co-operation and information sharing with the home country regulators for its foreign licensees over the next 18 months. It was also seeking a similar arrangement with another Caribbean territory.