At the request of the Financial Services Commission (FSC) of Barbados, a Monetary and Capital Markets (MCM) Department mission from the Washington-based International Monetary Fund visited Barbados from October 9 to 13, 2017 to review the current supervisory framework utilized by the FSC to supervise Sagicor Life Inc. on a solo and consolidated basis.
The mission team of Ralph C. Lewars, Lawrie Savage and Rodolfo Wehrhahn, met with the staff of the FSC that has supervisory responsibility for Sagicor, as well as key members of the senior management team of Sagicor Life Inc (Group President and CEO, Group Chief Risk Officer, Group Chief Financial Officer, Deputy CEO of Sagicor Life, and Head of Internal Audit).
Following is the report issued on October 13, 2017 at the end of that review.
The Sagicor Group is a systemically important financial conglomerate in the Caribbean region, and operates without being subject to consolidated supervision. At year-end 2016, this highly complex financial group, operating across the Caribbean region and in the United States had total assets of BBD 13.1 billion, or about 50 per cent of the GDP of Barbados. 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.
The FSC Barbados is deemed to be the group supervisor for Sagicor, but has not developed or implemented a group-wide supervisory framework, and lacks the resources to undertake effective supervision of the group. The FSC Barbados is presumed to be the agency responsible for group-wide supervision of Sagicor by other regulators in the region due to the group’s historical antecedents, and because the operational headquarters for Sagicor is located in Barbados. However, 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 financial stability of the region needs to be safeguarded by implementing adequate supervision applicable to a regional systemically important institution (Regional -SIFI). Much work has been done to enhance the supervision of SIFIs by the FSB and IAIS that should be applicable to Sagicor. The urgency to develop and implement an appropriate supervisory framework for this R-SIFI is highlighted in this report.
1. The systemic importance for the Caribbean region of the Sagicor Financial Group provides strong motivation for an assessment of the quality and intensity of its supervision. The mission reviewed the current supervisory framework utilized by the FSC-Barbados to supervise Sagicor Life Inc. on a solo and consolidated basis, and assessed progress made in implementing recommendations made in December 2016 under a CARTAC sponsored TA workshop on Consolidated Supervision; reviewed the scope and depth of current prudential reporting requirements of Sagicor Financial Corporation (SFC) and Sagicor Life Incorporated (SLI), including actuarial submissions, and other managerial reports such as solvency assessment and Recovery and Resolution Planning.
2. Barbados is the operational base for Sagicor Life Inc., which is the largest operating entity of the Sagicor Group (SG). Although in 2016, the group holding company, SFC re-domiciled to Bermuda, the operations of other existing businesses have remained in their current domiciles as at mission date. As a next step, a reinsurer under the holding company will also be established in Bermuda. This structure would likely result in a change in home supervision responsibility from Barbados to Bermuda. SG carries on business through 54 subsidiary companies operating in 21 countries, including the United States and most of the Caribbean. In addition to life insurance, the group provides property/casualty insurance, commercial banking, mutual funds, investment advisory services, property management, pension fund asset administration and other financial and non-financial businesses. At year end 2016, SFC had total assets of BBD 13.1 billion, or about 50 per cent of the GDP of Barbados.
THE FSC BARBADOS
3. The Financial Service Commission is exposed to significant reputational risk. The current organizational structure of the FSC’s resource teams responsible for regulation and supervision results in operational silos. The current structure, coupled with limited resources available to fulfill its mandate create vulnerabilities, and significant reputational risk for the agency. In this section, we highlight the constraints faced by the FSC in fulfilling its supervisory mandates, including the aged insurance law and the slow pace of implementing multiple recommendations that have been provided to the FSC over several TA missions. Recommendations for the improvement of key areas of the FSC’s operations are provided.
4. Financial Service Commission (FSC) founded in 2011 is assumed to be the group supervisor of Sagicor, but group-wide supervision processes and practices have not been implemented nor developed. The FSC was established under the FSC Act 2010-21 (FSC Act), and is the supervisory agency responsible for all regulated financial entities, both on-shore and off-shore in Barbados, excluding banks. The FSC Act provides wide powers to regulate and supervise the financial sector, including insurance. The 2013/2014 FSAP indicated that the FSC’s supervision of credit unions and the insurance sector, as well as data quality and reporting standards remain work in progress. Key areas where immediate enhancements are needed to enhance supervisory oversight of the insurance sector, include liability valuations, risk-based capital adequacy standards, cross-border group supervision, and risk identification and assessment, and assessment of the effectiveness of corporate governance and risk management oversight parctices. 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.
5. 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 enties 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 (as indicated in its guidelines and explicitly in ICP23, ICP25 and ICP 26). 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 regionwide basis, which is not the case.
6. The FSC has not implemented formal or informal procedures with regard to a number of areas that are critical for effective financial supervision. For example, operational divisions are not making use of or completing risk assessment matrices that will serve to generate consistent, reasonably objective risk assessments for the prioritization of risk-based supervisory activities. Stress testing that is carried out annually does not appear to complement supervisiory activities, resulting in very limited utilization for risk identification, and monitoring of the risk exposures of regulated insurers. On-site inspections are planned and executed with limited coordination or input from the off-site analytical team. Examination reports take an inordinate amount of time to be completed, and it is not unusual that a year can pass between the commencement of the inspection process for a particular supervised institution, and the finalization of the report for submission to FSC’s senior management and the operational division involved.
7. Equipped with very limited resources, the FSC struggles to discharge its mandate with respect to the insurance sector supervision. The FSC has a staff of 56 to fulfill its responsibilities, which include licensing; supervising and regulating the operation of financial institutions and promoting stability, public awareness and public confidence in the operations of financial institutions. The FSC’s off-site insurance supervisory team consists of seven officers who are responsible for licensing and supervising 20 domestic insurance companies, approximately 50 insurance company branch operations, more than 200 companies registered in the offshore sector as well as all of the country’s insurance intermediaries and loss adjusters. On-site supervision is carried out through a separate division consisting of six specialists for over 100 registered entities. Since the establishment of the FSC, about 50 per cent of the insurance companies and insurance brokers have been inspected. The FSC has no actuary because the chief actuary position has never been filled, and no reinsurance expertise is available. The bulk of financial resources to support the FSC operations are derived from corporate registration fees, which are very minimal. The FSC currently imposes a flat annual fee for insurance companies of BBD 20,000 per year. This means that Sagicor Life, with revenue of BBD 2.3 billion per year, pays only 1/1000 of 1 per cent of its annual revenue for the cost of home country supervision.
8. Given the limited resources allocated for supervision, administrative duties (such as licensing and registration, review of requests for approvals) accounts for a disproportionate amount of staff time. The FSC supervisors are burdened with myriad administrative procedures with the result that very limited time is allocated for supervision. In addition to their responsibility for the safety and soundness of licensed insurers such as Sagicor, the staff of the Insurance Division are tasked with the licensing of insurance agents and brokers as well as dealing with licensing activities for insurance companies. The offshore insurance sector, comprised of several hundred insurance companies, also falls within the remit of the off-site analysts in the Insurance Division. Most supervisory agencies allocate these types of activities to separate work groups, so that off-site analysts are able to focus on their key responsibilities relating to the ongoing monitoring of the regulated financial institution safety and soundness. Work-flow issues, combined with the shortage of human and IT resources, severely limit the effectiveness of supervisory oversight, especially with regard to a large, complex entity such as the SG.
9. FSC has made little progress in implementing the recommendations made in December 2016 from a CARTAC workshop on consolidated supervision. The mission attributes the slow progress to the following: (1) the exceptional lack of human and IT resources available to FSC supervisors as discussed above; and (2) as identified by several FSC staff members, there is an atmosphere of “implementation paralysis” within the FSC. The latter point was explained to mean that there is a general lack of confidence and fear to adopt policies and procedures that have been recommended by various expert reports such as the one referenced above.
10. Regulation and/or guideline for comprehensive group-wide supervision with the allocation of adequate resources needs to be enacted/developed and implemented. Effective supervision of large, complex financial groups is critical for maintaining financial stability, given the potential for contagion arising from interconnectedness. A comprehensive group-wide supervision framework should be in place with a clear focus on consolidated supervision and the articulation of the responsibilities and powers of the group supervisor:
• The regulation/guideline should define the entities that are subject to group supervision together with the responsible supervisor. The regulation/guideline should include proper definitions of affiliations, related parties, and participating entities, intermediate holding companies, financial holding companies, mixed activity of insurance holding companies and financial holding companies, and insurance holding companies.
• The supervisory framework for comprehensive group supervision should address, among others, the preconditions for group-wide supervision; the establishment and functioning of a college of supervisors; the supervision of intra-group transactions (highlighting the importance of understanding intra-group transactions), the supervisory steps to review and assesss intra-group transactions, and the associated risk to the regulated entities; the supervision of risk concentration within the group; and group governance.
• Sufficient powers for the group supervisor should be granted, including the ability to require group capital, effective enterprise risk management, and fitness and propriety of key positions, as well as to request relevant information and undertake inspections of any entities with the group as needed.
11. FSC’s current resources gap/deficiency in expertise should be addressed. An assessment on the adequacy of the resources at the FSC should be carried out, and based on the results adequate staffing should follow. The FSC should have authority to pay market rates, otherwise it will not be possible to attract and retain qualified staff. As a short-term measure to bolster capacity with regard to assessing Sagicor risks on a consolidated basis, FSC should utilize its powers under the FSC Act to retain one or more expert advisors on contract, such as a qualified actuary and a reinsurance specialist.
12. Current funding of the FSC should be reexamined. The fee structure for companies should consider the required level of supervision, and adopt international benchmarks, which range from half to one per cent of premium income.
13. For the implementation of key and urgent recommendations technical assistance over sufficient period of time should be explored. Once the adequate level of staffing is in place, a technical assistance programme with the objective of assisting with the implementation of key recommendations should be considered. The TA programme should be designed to assist the FSC over at least one year intermittently to allow the FSC and the market to get use to the new supervisory approach. This is particularly important since a major paradigm change in the FSC’s supervisiory approach is envisioned, such as operationalizing risk based supervision and/or introducing a risk capital regime.
THE SAGICOR GROUP
14. The Sagicor group with business in 21 countries, including the United States and most of the Caribbean through 54 subsidiary companies, is not subject to consolidated supervision. In this section, the systemic importance of Sagicor and the urgency of having the group subject to consolidated supervision isn highlighted. Recommendations for achieving the proper level of supervisory oversight are provided.
15. The domestic insurance sector in Barbados is dominated by Sagicor, and the international insurance sector is one of the largest in the world. Total assets for the international insurance sector was BBD 104 billion, liabilities BBD 70 billion and the gross premium written was BBD 40 billion as at December 31, 2014. With 15 new registrations during 2015 the international insurance sector stood at 271 registered entities. Pure captives represent the largest type of insurer in the international insurance sector, holding 46 per cent of total assets. At the end of 2015, total aggregate assets for the domestic insurance sector stood at BBD 3.2 billion and total liabilities of BBD 2.13 billion. At the end of 2015, the gross written premium of the domestic insurance market reached BBD 916 million, with almost 50 per cent split between life and nonlife business. Total assets amounted to BBD 3.2 billion. BBD 2.1 billion in assets was held by companies writing long term insurance business as at December 31, 2015. The assets of these companies include significant amounts of government securities as well as major holdings of related party investments. There were six life insurance companies in Barbados during 2016, with Sagicor holding over 75 per cent of assets for the entire life industry. The general insurance sector is more competitive with the largest six general insurers representing 70 per cent of all industry premiums.
16. The Sagicor conglomerate emanated from a mutual company. Sagicor Life Inc. is the name adopted by The Barbados Mutual Life Assurance Society following its conversion on December 6, 2002 from a mutual company to a company with share capital under the Companies Act of Barbados. On February 1, 2005, the Company amalgamated with its wholly-owned subsidiary, Life of Barbados Limited. The amalgamated company continues as Sagicor Life Inc. Sagicor Life Inc. is a wholly owned subsidiary of Sagicor Financial Corporation (the Parent Company). The principal activities of SG are as follows:
• Life and health insurance
• Annuities and pension administration services
• Property and casualty insurance
• Banking, investment management and other financial services
17. Sagicor Financial Corporation (SFC) is incorporated as a publicly-listed holding company, and was recently relocated to Bermuda. SFC operates in 21 countries in the Caribbean, the USA and Latin America, and is the major provider of insurance and other financial services in the Caribbean. Until recently, SFC was domiciled in Barbados. However, in 2016, SFC was relocated to Bermuda. During the mission team’s discussion with the senior management team at Sagicor, we were advised of plans to establish a reinsurance operation in Bermuda, and of the company’s request to the Bermuda Monetary Authority (BMA) to be the agency responsible for group-wide supervision. However, as at the date of the mission, no operational entity has been established in Bermuda and the senior management team still operates out of Barbados.
18. The home supervision of Sagicor remains unclear. Given that as at mission date, only the holding company of the group had been relocated to Bermuda, home supervisory responsibility still resides with the FSC-Barbados. Also, given that the type of operation that Sagicor envisions to establish in Bermuda has not been disclosed, it is unclear what responsibility the BMA will have with respect to the group. Ultimately, the intensity of supervision carried out by the BMA will depend on the type of entity (enties) that Sagicor ultimately establish in Bermuda, and the importance and risk posed by that/those institution(s) to Bermuda. Both questions are central to avoid supervisory gaps of the
19. SFC’s corporate or group structure is very complex. SFC has divided itself into four segments for purposes of operations and administration:
• Sagicor Life – This segment operates from Barbados and consists of five companies where SFC has a 100 per cent ownership interest with the main activity of each being the underwriting of life insurance. The companies are incorporated in Barbados, Aruba, Panama and Trinidad and Tobago but conduct business throughout the eastern Caribbean through branch office operations. There are also four associated companies incorporated in Trinidad & Tobago, Barbados and Bahamas which carry on insurance business, as well as property investment and management.
• Sagicor Jamaica – This segment operates from Jamaica and consists of 16 companies where SFC has an ownership interest of slightly greater than of 49 per cent. These companies carry on a wide range of financial service activities, including the underwriting of life and general insurance, pension administration, insurance brokerage and administration, investment banking, commercial banking and securities trading. Sagicor Jamaica’s insurance business accounts for 32 per cent of Sagicor’s life premium income. The companies are incorporated in Jamaica, Cayman Islands, Costa Rica and St. Lucia. There is also one associated company incorporated in St. Lucia which undertakes real estate investment activities.
• Sagicor USA – This segment consists of a holding company incorporated in the State of Delaware and a life insurance company incorporated in the State of Texas, both of which are 100 per cent owned and controlled by SFC. The US operation now exceeds the Barbados operations in terms of premium income.
• “Head Office” – This segment operates from Barbados and consists of 11 companies incorporated in Barbados, Trinidad & Tobago, St. Lucia and the Cayman Islands. The companies undertake life insurance and general insurance business, lease financing, deposit taking and real estate activities. The two companies incorporated in Cayman Islands provide services to the group.
20. The past success of Sagicor is a vulnerability for the group. A brief review of the Sagicor financial statements and actuarial reports does not reveal any untoward or serious financial or risk-related issues. However, the group is large and complex, and 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.
• Having the same external actuary over 26 years deprives the group of a fresh look at the reserve requirements. SG executives view this as making the actuary more familiar with the group’s operations and thus better able to assess the actuarial liability. The idea that a person may develop blind spots or become overly familiar with certain situations after looking at the same issues over a long period of time, was not accepted by SG. The same danger of blind spots can arise among group executives as well since they are likely to have spent time thinking about certain issues and how to respond to or address them, they may develop a false sense of security.
• This above situation is aggravated by the use of the outdated Canadian Policy Premium Method (PPM) methodology that allows for the use of current portfolio returns together with a set of assumptions made by the actuary for the reinvestment returns, instead of a risk-free rate as the discount rate of the liabilities. The effect on of the assumptions utilzed are significant in the case of Sagicor, which has been writing long term business for many years.
• The absence of a consolidated actuarial report for the whole group makes it difficult to acertain a comprehensive assessment of the actuarial valuation of the group.
• Engagement in non-insurance activities, in particular real estate investments, and the complexity of the group, imposes challenges for risk management oversight. Insurers are directly interconnected with the financial sector though their non-insurance activities and this can lead to accelerated asset liquidation and elevation in market and funding liquidity risks..
• The complexity of the group could potentially masks significant risk, critical correlations, and assessment of contagion risk arising from interconnectedness. With more than 50 corporate businesses under the Sagicor umbrella, it is not possible to determine from high level financial statements whether or not there are significant related party transactions or double-gearing of capital.
• The Group CEO, described the corporate governance framework at some length, and indicated having well qualified, active independent directors who demand pertinent, comprehensive information with regard to group risks and other matters that need to be addressed at the board level. However, he did not provide a concrete examples of key or recent challenges to management posed by the board.
21. The last on-site examination of SLI was conducted between July and September 2013 with an exclusive focus on the Barbados operations. The primary purpose of the review was to examine the operations of Sagicor Life Inc. and its exposure to various business risks, effectiveness of risk management oversight, corporate governance, related party transactions and anti-money laundering. However, there has not been much in the way of ongoing monitoring and assessment since that time. FSC Barbados receives the audited financial statements of SFC, and Sagicor Life Inc.; and receives the quarterly and annual prudential returns of the Barbados operations of Sagicor Life Inc. Currently, FSC Barbados does not receive any material supervisory information from the regulatory authorities in other jurisdictions where Sagicor operates.
22. There is urgency to develop a consolidated supervisory framework for Sagicor as a regional systemically important 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. These requirements should include:
• The establishment of a dedicated team at the FSC to monitor and supervise the group.
• Establishment of an effective college of supervisors for a coordinated approach to the supervision of the group’ crossborder entities.
• Establishment of a crisis management framework for the group.
• Require the SFG to develop a credible recovery and resolution plan based on an agreed template or framework designed by the various regulatory authorities responsible for the supervision of entities within the Sagicor group.
• The supervisory fee payable by Sagicor (designated R-SIFI) should reflect the cost of supervising the group.
23. The supervisory responsibilities for the Sagicor group and its multiple entities should be made transparent. As part of an effective college of supervisors based on the CAIR framework or IAIS principles, the responsibilities of each supervisor in each jurisdiaction where Sagicor operates should be clarified. In particular, group-wide and subgroup supervisory responsibility should be clearly articulated, and the level of consolidated supervision carried out by each supervisor should be elevated to an acceptable intensity according to the complexity of the group and/or operations in each territory.
24. An independent actuarial review of the Sagicor 2016 actuarial report should be undertaken. The independent actuary should look at the adequacy of the assumptions for the reinvestment returns, the lapses and the mortality assumptions. A sensitivity test on the discount rate should also be conducted. Further, since the current actuarial assessment excludes the Jamaica and the US operations, a comprehensive actuarial report should be provided, that includes all entities of the group.
25. The Sagicor group poses systemic risk for the Caribbean region, which should be monitored on an ongoing basis. 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 of Barbados, is larger than CLICO before it collapsed. The FSC-Barbados is currently not in a position to conduct group-wide supervision, and solo supervision is weak.
Enhanced regulations and supervision of Sagicor should be viewed as a priority to reduce systemic risk to the financial sector in most countries within the Caribbean. Given the potential cost that could arise from the failure or near failure of the group, enacting regulations and/or guidelines that align with R-SIFI designation, and conducting the corresponding group-wide intrusive supervision of Sagicor are desirable objectives. In this respect, the recommendations provided should be implemented, along with a desirable level of technical assistance to ensure successful implementation.