Cedric Stephens | Counter-intuitive policy on insurance solvency in a pandemic

This is dedicated to Huntley Medley, this newspaper’s Associate Business Editor, who erected the foundation for today’s article.

In an article he wrote titled ‘FinMin drafting new regulations for insurance solvency’, and published February 10, its first paragraph read: “A recommendation for changes to the calculation of the capital adequacy ratio of general insurance companies is now being reviewed by the finance ministry and legislation is being drafted to give effect to either a new minimum capital test, or MCT ratio, changes to the method of computation, or both.”

After reading those 50 words for the umpteenth time, I asked myself the following questions: Will the reduction in the MCT ratio benefit insurance consumers in the short or the long term, and if so, how? Given the many shortcomings of the insurance industry which have been documented in this column for over two decades, what is it about the reduction in this ratio that qualifies it to take pride of place in Financial Services Commission and the Ministry of Finance’s policy priorities at this time?

The Economic Growth Council’s Call to Action Report in September 2016, under the section Improve Access to Finance, recommended the reduction in the MCT ratio for insurance companies from 250 per cent to 150 per cent. EGC wanted to “unlock tens of billions of investable funds that could be diversified away from government bonds and invested in productive activities”.

Three months later, the FSC responded favourably to the recommendation. It announced that it was “allowing a relaxation of the statutory minimum of 250 per cent for the MCT, for two years, thus reducing the amount of capital that the general insurance industry would need to hold to meet capital adequacy requirements”. Then Minister of Finance Audley Shaw said shortly afterwards that the measure made $36 billion available for investment. What were the factors that influenced what was a temporary relaxation in 2017, for them to be made permanent four years later?

Finance Minister Dr Nigel Clarke’s explanation did not address that question. He told the Financial Gleaner that the recommendation for the change was before his ministry following “extensive consultations” with industry players and local and international experts.

“The FSC made certain recommendations after a long process of review and consultation. They started when we were under the standby facility with the International Monetary Fund. We consulted with the Fund and other overseas technical experts. The FSC would have considered their position and they made a recommendation to the Ministry of Finance to make certain revisions to the MCT process that has been under review,” he said.

The editor interpreted the minister’s remarks as providing some indication of the nature of the FSC’s recommendation as being in line with what industry sources say the insurance sector has been proposing for the past several years.

Klaus Schwab, founder and executive chairman of the World Economic Forum and Managing Director Saadia Zahidi, authors of the preface to WEF’s Global Risks Report 2021, 16th edition, wrote: “In 2006, the Global Risks Report sounded the alarm on pandemics and other health-related risks. That year, the report warned that a ‘lethal flu, its spread facilitated by global travel patterns and uncontained by insufficient warning mechanisms, would present an acute threat’. Impacts would include ‘severe impairment of travel, tourism and other service industries, as well as manufacturing and retail supply chains’ while ‘global trade, investor risk appetites and consumption demand’ could see longer-term harms.

“A year later, the report presented a pandemic scenario that illustrated, among other effects, the amplifying role of ‘infodemics’ in exacerbating the core risk. Subsequent editions have stressed the need for global collaboration in the face of antimicrobial resistance (8th edition, 2013), the Ebola crisis (11th edition, 2016), biological threats (14th edition, 2019) and overstretched health systems (15th edition, 2020), among other topics.”

Jamaica, like most other countries, was ill-prepared to meet the many challenges posed by the COVID-19. We are still grappling to get the pandemic under control, despite the 14-year notice period. Have we learned anything from our epic failures? More specifically, did the folks at the FSC in making their recommendation regarding the reduction in the MCT properly anticipate the next pandemic-like catastrophe event?

Ultimately, it will be up to the technocrats in the Ministry of Finance to decide whether what members of the insurance industry have been advocating for the past several years is in the country’s interests given the failures to anticipate and plan for COVID-19.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com