Ewart S Williams: The importance of adequate capitalisation in the
insurance industry
Remarks by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago,
at the signing agreement between Guardian Holdings Limited and International Finance
Corporation, Port-of-Spain, 1 December 2010.
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I wish to congratulate Guardian Holdings Limited on the consummation of this very significant
relationship with the IFC. This new partnership should not only strengthen GHL's balance
sheet, but should redound to the benefit of the public by increasing the availability of
insurance products to markets that are not currently well-served and in this list, I include,
small businesses, micro-finance institutions and agribusinesses.
Over the past several months the insurance industry has been overrun by a chorus of bad
news involving institutions in which the Central Bank has intervened. Unfortunately, even
with its potential for contagion, the current turmoil obscures an insurance industry with
tremendous strengths and resilience. The subsidiaries of the Guardian Holdings Group are
an integral part of this structurally strong and resilient insurance sector.
Since its establishment in June 1996, the Guardian Holdings Group has blossomed into an
integrated financial services entity, covering life, health, property and casualty insurance,
pensions and asset management. GHL has spread its wings throughout the English and
Dutch Caribbean and is now listed on both the Trinidad and Tobago and Jamaican Stock
Exchanges.
Guardian Life, the flagship company of the Group is a major player in the life insurance
sector accounting for 38 per cent of the market's contract liabilities. Guardian General
has become the region's largest indigenous property and casualty insurance company. As
the largest general insurance company in Trinidad and Tobago, Guardian General holds
26 per cent of market share and 21 per cent of total assets of the sector.
Among the many best-practices adopted by GHL is the annual review by A.M. Best to assess
the financial strength of its insurance subsidiaries and to ensure that the companies are in a
position to meet their obligations to policyholders.
In June 2010, A.M. Best gave a rating of A- (excellent) for the financial strength of both
Guardian Life and Guardian General. According to Best, the excellent rating reflected GHL's
improved balance sheet, the decline in total debt and lower intangibles following the write-off
of goodwill related to its European property and casualty operations, and its adequate level
of risk adjusted capitalization. In the case of GGIL, the ratings were due to the support and
commitment of the parent company (GHL), its historical profitability and its adequate
capitalization.
You would notice the words "adequate capitalization" featuring in both cases. These words
add even greater significance to the agreement we celebrate today. If my understanding is
correct, the IFC's investment of US$75 million involves a conversion of US$ 50 million of
subordinated debt into equity, with the balance being an injection of new capital. As a result
of the transaction shareholders' equity in GHL will be increased by close to $400 million.
The IFC's decision to partner with GHL through equity participation demonstrates its
tremendous confidence in the local financial services industry, despite the challenges the
sector currently faces. GHL, in turn, is expected to benefit from IFC's considerable expertise
and its association with a strong reputable partner, which has funds available for follow-up
investments.
From our vantage point, as regulator, this agreement sends precisely the right message to
the insurance industry, and that is, the importance of adequate capitalisation. As you may
(or may not know), with our legislation dating back to 1966, we are one of the few
jurisdictions in the world that do not have robust capital requirements for the insurance
industry. Without doubt, this deficiency contributed greatly to Clico's problems. Adequate
risk-adjusted capital would not only have provided a buffer to absorb losses but moreover,
would have acted as a dis-incentive to risk-taking since the greater the risk, the greater
would have been the need to allocate scarce resources to capital.
I am pleased to say that the Bank is well advanced in the development of a new legislative
framework for the Insurance industry. This new framework will include a robust risk-based
capital regime, a standardized actuarial methodology, tighter prudential arrangements,
enhanced corporate governance and regulatory and supervisory practices, consistent with
international best practices.
Fortunately some insurance companies, including Guardian Life and Guardian General
should be able to adapt easily to the new regulatory structure since they have already
patterned their operations in order to meet higher standards.
Ladies and Gentlemen, the Central Bank is very pleased to demonstrate its strong support
for GHL's capital raising initiative. It is an added bonus that GHL's partner in this transaction
is a progressive reputable global development institution with deep pockets. This partnership
should bring significant benefits to the financial services industry in Trinidad and Tobago, and
the Caribbean.