Insurance firms make grade

Citizens would have been pleased to learn that the Financial Ombudsman has been taking action against certain local insurance companies. But they should be even more pleased that such action has had to be taken against only a few organisations. According to Central Bank governor Ewart Williams, who was speaking at an anti-money laundering seminar last Thursday, five out of 28 companies accounted for 95 percent of the complaints made by members of the public. The Central Bank, Mr Williams disclosed, has been working with these companies to address areas of weakness and non-compliance.

It is encouraging to know that the vast majority of insurance companies are, in fact, dependable. This speaks well for Trinidad and Tobago’s financial sector, and it is an especially important message given the recent attempts from certain quarters to demonise the whole business community. It is almost a pity that the Financial Ombudsman has not told the public who the misfit companies are, but presumably this is because any such announcement would cause a run on these companies and certain collapse. However, we hope that the Central Bank is aware that some companies, far from being merely incompetent, deliberately try to cheat customers. In these cases, we hope that sanctions have been imposed, and not mere guidance.

The governor also announced coming changes to the Financial Institutions Act (FIA), which are to be instituted before year’s end. One of these amendments will indeed relate to sanctions, giving the Central Bank the authority to impose civil money penalties immediately, thus bypassing a lengthy court trial. Once the proper safeguards are in place, this is a measure which all legitimate businesses should welcome. This is because, in a market economy, trust and dependability are essential for financial viability. This point is always overlooked by ideologues who believe that Government control of the economy is essential to fair dealing. In fact, experience shows that State control of the economy tends to generate political inequities which are far more oppressive than any market-driven ones. This is why the involvement of the Government in the financial sector should not extend beyond regulatory mechanisms of the type described by Mr Williams.

In the globalising world, high ethical standards are essential for economic success. This contradicts the popular image of underhanded practices ensuring greater profitability, but it is a fact that the market soon eliminates such businesses even if, like Enron, they enjoy huge success for a limited time. The market, however, cannot be continuously fooled, for a basic reason that even experienced investors sometimes forget — you can’t get something for nothing. The reason why ethical markets are more efficient is fairly straightforward. Market economies generate prosperity when they solve five basic challenges — the free flow of information, so people can have confidence in products; mechanisms to ensure that promises will be kept and contracts honoured; competition; protection of property rights; and the protection of third parties, which usually include the poor and unskilled. State-controlled economies break nearly all these rules, hence the reason no such economy has ever prospered.

Market economies tend to solve all these problems, except the last — hence the reason good government is essential for an efficient economy. Trinidad and Tobago has used its oil and gas monies to bypass some of these challenges. It is therefore even more crucial that we start to deal with these issues so that, when the energy boom ends, we will have the basic financial tools in place for continued economic stability. And, if the country’s insurance sector is any indicator, we are already well on the way.