ewart s williams : preparing enhanced insurance regulations for trinidad and tobago speaking notes by mr ewart s williams, governor of the central bank of trinidad and tobago, for the “ public consultation of the draft insurance bill & accompanying regulations ”, port - of - spain, 10 december 2009. * * * introduction good morning ladies and gentlemen. my role is to make a few introductory remarks to get the main discussion going. obviously we all would like this to be a serious working session and not an opportunity for speechmaking. let me start by saying how delighted i am to be with you this morning as today ’ s public consultation which marks the final phase of a process that started roughly five years ago. as you would recall the regulation of the insurance sector was transferred from the office of the supervisor of insurance in the ministry of finance, to the central bank in 2004. the process of preparing a new insurance act has been a collaborative approach between the central bank and a stakeholders ’ committee, comprising members of attic, the brokers association and other industry consultants. this collaborative approach bears testimony to the firm commitment of the central bank to ensuring that the legislation for the sector strikes the right balance between international best practices and local market conditions and circumstances. prior to april 2004, the central bank had oversight of 6 commercial banks and 15 non - banks. after the shift in regulatory authority, the bank took on responsibility for 51 insurance companies, and 256 registered pension plans. this was a major undertaking and necessitated a significant increase in staffing and infrastructural requirements, including training. the insurance sector, as you know, is a major contributor to the domestic economy. it accounts for close to $ 40 billion, second only to the $ 88 billion for commercial banks. the sector is a major repository for private savings and by covering risks and unexpected developments ; it facilitates private and public sector activity. in short, the industry is one of enormous economic and social value and critical to our developmental efforts. the legislation that underpins insurance activity in trinidad and tobago is grossly outdated. the basic act dates back to 1966 and was modified in 1980. as all of you know better than i, the insurance industry of today bears little resemblance to that of 1966 or even 1980. as i am sure you know, inadequate financial regulation or regulatory failure has been widely cited as one of the factors behind the international financial crisis of 2008 – 2009. as a consequence of this global financial crisis comprehensive reforms are underway to address the weaknesses which were exposed

this requirement serves several of the purposes discussed earlier. a buffer of high - quality liquid assets is a form of self - insurance against liquidity risk that allows banks to meet short - term needs in the event of creditor runs. because holding the buffer is likely to be somewhat costly, the lcr should also encourage banks to reduce use of very short - term wholesale funding that increases buffer requirements. the buffer will also provide central banks and other national authorities time to assess the financial condition of a firm encountering liquidity difficulties and to determine the extent to which these difficulties are a function of essentially firmspecific factors or a harbinger of market - wide funding stress. a revised version of the nsfr has recently been released by the basel committee. 12 it complements the lcr by looking beyond a 30 - day period to achieve a stable funding profile for firms more generally. in this regard, it is important to recall that the deterioration of funding markets began well before the financial crisis reached its acute stages. in the summer of 2007, responding to signs of trouble in the subprime mortgage markets, creditors reduced the maturities of funding they were willing to provide to financial intermediaries that had been creating and holding securities backed by subprime – and eventually other – mortgages. 13 this process left those intermediaries in increasingly fragile funding positions, and by the time lehman brothers collapsed in september 2008, the system was primed for a devastating run. given the possibility of this type of sustained erosion of firm funding structures over an extended period, simply requiring firms to hold a liquidity buffer against 30 - day outflows, as required by the lcr, would be insufficient. while there is thus a need for a longer - term structural standard such as the nsfr, the conceptual challenges in crafting it were greater than in designing the lcr. simply extending the lcr to one - year – that is, requiring firms to hold enough liquidity to survive a one - year funding market freeze – seemed the kind of excessive self - insurance that would lead to undesirably reduced maturity transformation and financial intermediation. so a different set of standards needed to be developed, which themselves occasioned considerable discussion about the effects and incentives they would create. also, one could argue that the nsfr should have aimed for a more complete term structure in order to protect against maturity mismatches within and beyond the one - year mark, and to create stronger incentives for firms