A new report by the International Monetary Fund (IMF) paints a frightening picture of the impact that “the failure or near failure” of this island’s most dominant insurance company could have on Barbados and the Caribbean, hinting that it could be worse than the CLICO collapse.
And while stating that “a brief review” of the Sagicor’s financial statements and actuarial reports “did not reveal any untoward or serious financial or risk-related issues”, the IMF warned that the Sagicor group (SG) “poses systemic risk” for Barbados and the Caribbean region.
“The size and complexity of the SG operating in 21 countries throughout the Caribbean, and holding assets equivalent to about 50 per cent of the GDP [gross domestic product] of Barbados, is larger than CLICO before it collapsed,” it said in the 16-page report from an October 9 -13 mission here by its monetary and capital markets department.
Worryingly, the Washington, DC-headquartered international organization, which was invited here by the Financial Services Commission (FSC) to review the current supervisory framework which it uses to supervise Sagicor Life Inc, found that the FSC was not in a position to conduct group-wide supervision, “and solo supervision is weak”.
“The group structure, business philosophy and operations are in many ways similar to those of the CLICO Group, another Caribbean financial conglomerate which failed ten years ago, and resulted in substantial losses. Notwithstanding the acknowledgement of the systemic relevance of the group resulting from its size and interconnectedness, no formal college of supervisor exists, nor is the group subject to basic group-wide supervision,” it said in the executive summary of the report, a copy of which was obtained by Barbados TODAY.
It said engagement in non-insurance activities, in particular real estate investments, imposed challenges for risk management oversight, while pointing out that “the complexity of the group could potentially masks significant risks, critical correlations, and assessment of contagion risk arising from interconnectedness”.
“The Sagicor group poses systemic risk for the Caribbean region, which should be monitored on an ongoing basis,” the draft report stated of the company, whose holding assets total $13.1 billion.
The report comes against the backdrop of Government’s decision to shell out $91 million to pay thousands of CLICO policyholders.
The study found that the FSC, which was established in 2011 and is assumed to be the group supervisor of Sagicor, has neither developed, not implemented group-wide supervision processes and practices since its establishment.
“Notwithstanding that the FSC is the home supervisor of the SG, the FSC conducts supervision of the group on a solo basis with focus, though not comprehensive, on the entities domiciled in Barbados. Group supervision is absent from the regulatory and supervisory frameworks, which is considered a major weakness, and also at variance with the expectations of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles,” the report states.
“International standards require, and other regional supervisors will reasonably expect, that Sagicor’s overall operations are being overseen by the FSC, and that Sagicor risks are being evaluated on a region-wide basis, which is not the case.”
Sagicor last year re-domiciled its holding company, Sagicor Financial Corporation (SFC), to Bermuda. However, until a reinsurer under the holding company is established in Bermuda, home supervision would likely remain here.
In this regards, the IMF found that home supervision for Sagicor was unclear, and made even murkier by the fact that the company has not disclosed the type of operation it envisions to establish in Bermuda.
It said because of the size of the group, “it is quite possible that emerging risks or potential vulnerabilities exist or have not been detected.
“Having successfully navigated and survived past crises and major catastrophic events appears to have created a false sense of security, and could potentially desensitized managerial assessments with regard to potential threats to the strength and resilience of the group,” it said.
The three-member mission team of Ralph Lewars, Lawrie Savage and Rodolfo Wehrhahn identified several key concerns, including that the group has had the same external actuary over 26 years, depriving it “of a fresh look at the reserve requirements”; the absence of a consolidated actuarial report for the whole group, which “makes it difficult to ascertain a comprehensive assessment of the actuarial valuation of the group” and that the last on-site examination was conducted between July and September 2013 with an exclusive focus on Barbados operations.
The report also said there had not been much in the way of ongoing monitoring and assessment since that time, and it pointed out that the FSC “does not receive any material supervisory information from the regulatory authorities in other jurisdictions where Sagicor operates”.
The team found that the FSC “lacks the resources to undertake the effective supervision of the group”, with the regulator operating with a staff of 56 to fulfill a range of responsibilities, including an off-site insurance supervisory team of seven officers who are responsible for over 200 companies, and six specialists to conduct on-site supervision of over 100 registered entities.
“The FSC’s current human and IT resources for insurance supervision are inadequate to effectively undertake the task of consolidated supervision of a large, and complex financial conglomerate such as Sagicor. Further, the Insurance Act does not include a provision for consolidated supervision,” the report said.
It recommended that the state regulator be given adequate resources to address the current resource deficiency, and immediate enhancements in several key areas to improve supervisory oversight of the insurance sector, including liability valuations, risk-based capital adequacy standards, cross-border group supervision, and risk identification and assessment, as well as assessment of the effectiveness of corporate governance and risk management oversight practices.
“The findings of this mission confirm the need for urgent progress in these areas, and most relevant for this mission, the implementation of group-wide or consolidated supervision of the Sagicor group,” it stressed, while adding that given the size and complexity of the conglomerate “there is urgency to develop a consolidated supervisory framework for Sagicor as a regional systemically important financial institution.
“Given the size and complexity of Sagicor Life and its affiliated operations, and the enormously negative impact for the region and the economy of individual territories should Sagicor be unable to meet its obligations, FSC should designate Sagicor Life as a Regional Systemically Important Financial Institution (R-SIFI). The designation should entail additional, but necessary prudential requirements, and an intrusive supervisory regime to monitor its safety and soundness, and allow for its resolution in the event of failure,” the report said.