Central Bank cracks insurance whip

Over the past few weeks notices have been appearing in the print media informing the general public that The Insurance (Amendment) Bill 2003 came into effect from May 25, 2004. As we all know this piece of legislation transfers the supervision of insurance companies and pension plans to the Central Bank and the Office of the Supervisor of Insurance under the Ministry of Finance has ceased to exist. The Inspector of Financial Institutions at the Central Bank is now vested with the authority to regulate the insurance business. That Office has lost no time in trying to stamp its authority and to lay out what it expects from the industry. For starters, the Central Bank has tremendous experience in supervising banks and non-banks in the financial services sector and it wants to bring that experience to bear in the way the insurance business is conducted.

The banks have always attached great emphasis on their manual of procedures and the proper documentation of transactions and good record keeping. On the other hand the insurance industry is much more relaxed in particular with the general side of the business and very often rules are not scrupulously followed. Over time there is very definitely going be a culture change which will at first appear to be onerous and cumbersome but in the long run lead to better managed operations. The Central Bank has circulated a number of consultative documents soliciting feedback from the industry, but any objective analysis of them will lead one to conclude that the guidelines can assist if properly applied rather than be an imposition or intrusion in a company’s affairs. The draft guidelines deal with issues of Market Conduct, Corporate Governance, “Fit and Proper,” Establishment of investment policies and Combating Money Laundering and Terrorist Financing.

These are issues that the insurance industry might not have paid much attention to in the past but they have been placed on the table by the Central Bank as important issues which the industry must take on board with some urgency as change is the only constant in the fast moving financial services sector. Market Conduct will present a challenge since there must be documented procedures in respect of the hiring of agents, investigating of complaints, suspected fraud and the reporting of unsuitable agents to the regulators. In particular in the life insurance sub-sector, there have been issues of agents who have engaged in wrongdoing and yet continue to be employed because of inaction and/or failure to alert the regulator. This approach is designed to ensure that only ‘fit and proper’ persons are recruited and continue to deal with the general public through the licensing process. On the issue of sales and service, the regulators are concerned over the level of information provided to consumers and the advertising and promotion of the company’s products and services must be stated in a documented policy.

Emphasis is being placed on claims handling which is welcome news for consumers. It is suggested that statistics are maintained on the average time for settlement and policies in place in respect of the treatment of enquiries, complaints, denial, appeal of the company’s decision, mediation and arbitration. While all of these measures are in the interest of consumers the regulators have not lost sight that there ought to be proper procedures in respect of investigating suspected fraudulent claims which remain a major problem for the insurance industry not only in Trinidad and Tobago but worldwide. Corporate Governance is being addressed as never before as a proactive strategy to prevent wrongdoing which has been highlighted by the high profile scandals that have taken place in the USA and elsewhere. Suggestions have been made relating to the composition of the Board, its role and function, Board committees, practices of the Board and finally the self-assessment of the Board itself. The Board’s role is to ensure transparency by communicating with shareholders openly and promptly any developments that impact on shareholder value.

There are now recommendations for standing committees of the Board — namely an Audit Committee, a Conduct Review Committee, a Compensation Committee and a Nomination Committee. One can readily see the relevance of these Board Committees as they can oversee the company where the Chairperson and non-executive directors are in the majority or independent of the executives or management. In addition, there are recommendations for truly independent non-executive directors who have no financial interest in the company so that they can bring objectivity to the Board. The ‘Fit and Proper’ rule has always been present in the Insurance Act but its interpretation and applicability have always posed a problem. However, with the passage of time this rule has taken prominence in particular with corporate governance and in respect of persons employed in the financial services sector. The regulators have issued draft guidelines as to how ‘fit and proper’ is defined and how this rule will apply and so remove some of the ambiguity since some people may feel that this is subjective and judgmental. However, it is clear that ‘fit and proper’ is a key yardstick in the financial services sector and raises the bar to ensure that only persons of integrity are employed.

The insurance industry will have to follow certain specific guidelines in respect of the country’s drive to identify and combat money laundering and terrorist financing. While money launderers might have been able infiltrate the insurance industry in the past through the purchase of certain products and policies, these guidelines are designed to close the loophole as insurance companies will be required to have a designed officer who will be held accountable. While all these measures are laudable and are proactive the regulator must go beyond them and initiate the separation of clients’ funds so that they are not co-mingled with operating funds. In particular there has been a clamour for this for many years which will ensure that intermediaries maintain separate funds so that they do not use monies belonging to insurers. The Central Bank has made a good start. We now look forward to more positive initiatives in the coming months and years.

E-mail: daquing@cablenett.net