Wednesday, October 3, 2012

A progressive approach to the insurance industry in The Bahamas is necessary... ...Bahamian insurers are at a real disadvantage ...as they are restricted to local investments ...from which the availability of high quality long-term fixed rate bonds is extremely limited

A progressive approach to the insurance industry is necessary


By CFAL Economic View


In 2011 the ICB made significant steps forward re-designing the solvency framework used by long term life insurers in The Bahamas.  However, further reforms are required to protect policyholders and to help strengthen the financial situation of life insurance carriers.

We support insurance reforms that are aimed at ensuring strong reserves and capital adequacy which recognize and account appropriately for the relative risk inherent in an insurer’s operations and level of product guarantees.  We also support reforms and policies which also allow for good risk management through appropriate assets and liability cash flow matching.

In particular, high quality long-term fixed investments are essential for insurance system stability in order to prevent or at least limit the emergence of serious market distortions.  These long-term fixed assets are key to protecting the strength of a life insurer against changes to interest rates, but they are in short supply in The Bahamas and it is critical that the situation be addressed shortly.

Traditional insurance products offer long-term protection to policyholders with fixed guaranteed coverage for periods that can exceed 50 years.  In most economies, in order to provide this long-term protection, insurance companies rely on the availability of high quality long-term fixed income assets to manage the risk inherent in offering this level of protection.  That is, the matching of fixed asset cash flows to the expected long-term liability associated with policyholder benefit payments is the optimal strategy to manage the risk in offering traditional life insurance and annuities.

A sound insurance carrier would spend a large amount of actuarial resources trying to optimize its mix of assets to match the policyholder benefit payments.

Unfortunately, Bahamian insurers are at a real disadvantage, as they are restricted to local investments, from which the availability of high quality long-term fixed rate bonds is extremely limited.

Given the proposed changes to the international accounting framework which all Bahamian insurers will have to follow, the limited access to long-term fixed investments will become a serious limitation that cannot be ignored by insurers, the regulator and the Bahamas government.

The potential solutions include giving insurers more access to foreign fixed investments and/or the Bahamian government offering fixed rate debentures.  However, there must be sufficient political and regulatory consensus supporting these measures which are needed to ensure sound insurance markets.

• CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com

Oct 03, 2012

thenassauguardian