“This matter has dragged on for a very long time. It is essentially a private sector matter in which the Government was forced to get involved in order to protect the financial system and in order to protect large numbers of policyholders,”
– Prime Minister Freundel Stuart; December 7, 2017
The Colonial Life Insurance Company (CLICO) collapse has become one of the most contentious and complex financial matters of this generation and should be required study for all regional MBA students, lawyers, economists, accountants and political scientists.
The moot topic at the source of the debate was why did the governments of both Barbados and Trinidad feel compelled to get involved in what former Prime Minister Stuart accurately described as a private sector matter?
The answer to this is not a simple one, thus the writer will reserve comments to the Barbados situation only.
Throughout this column, the title Supervisor of Insurance will be mentioned, so it is necessary to state clearly the role, authority and reporting matrix of the Supervisor.
The Supervisor of Insurance is empowered to regulate the conduct of all insurance companies operating in Barbados, including limits on their exposure and thus ability to settle their debts, what business they can offer, their officers, actuaries, accountants and brokers under the Insurance Act (the IA) and the Exempt Insurance Act (the EIA). The Supervisor at the time of the CLICO collapse had a staff of 19, and reported to the Minister of Finance, through the office of the Permanent Secretary in the Ministry of Finance. The Permanent Secretary at the time was William Layne and the Minister of Finance was Owen Arthur.
William Layne was Supervisor of Insurance prior to becoming Permanent Secretary. After his retirement as Permanent Secretary in the Ministry of Finance, he was appointed to chair the CLICO Oversight Committee established by the late Prime Minister David Thompson.
Our journey begins as early as 2002, when the then Insurance Supervisor, the late Carlos Belgrave, wrote the Registrar of Co-operatives instructing that office that the Executive Flexible Premium Annuities (EFPAs) being proffered by CLICO could not be marketed to credit unions. This letter was largely ignored and the Supervisor of Insurance, though concerned, appeared to lacked the legislative authority or fortitude it seems to take any further action.
Three years later and four years before the collapse of its parent company in Trinidad and Tobago in February 2009, the Supervisor of Insurance in Barbados ordered the management of CLICO International Life (CIL) to stop selling its Executive Flexible Premium Annuities (EFPAs) to companies, credit unions and institutions. In fact, the company was told by the Supervisor’s office to “cease and desist from marketing the product until a review is complete”.
Again, nothing was done and the order was ignored.
The Supervisor of Insurance issued an order to CLICO International Life (CIL) in 2009 prohibiting that company from selling any new business. This, too, was ignored.
In the case of CLICO, insurance funds held in a fiduciary relationship for pensioners, policyholders and annuitants(depositors), were used to invest in high-risk asset purchases, many of which made little or no returns. Many of these acquisitions were distressed sugar plantations and corporate entities, that could not be easily converted to cash if required. The cash security deposit was also significantly below what was required by law. This breach was highlighted by the Supervisor of Insurance to the management of the company, and copied to the Permanent Secretary, Ministry of Finance; nothing changed and again, no action was taken.
Interest rates on the EFPA promised to depositors were well above normal commercial rates offered by banks or other insurance companies. This was yet another glaring failure of oversight as again, nothing was done.
This financial model was not sustainable for any business far less for an insurance company. Policyholders, depositors and pensioners of insurance companies expect well-regulated, low-risk, highly secure, prudent management and oversight from their insurance companies and regulators.
CLICO was allowed to act with impunity, not only in Barbados, but across the region, in plain sight of the financial regulators. Despite the concern, there was no action taken by regulators when CLICO began its inappropriate aggressive asset class diversification strategy more than 20 years ago.
Successive Auditor-General reports dating back from 1982 to 2008 paint a woeful pattern of increasing levels of malfeasance and infelicity and a seeming unwillingness or inability to adhere to established regulatory processes. This period of sustained and ineffective regulatory oversight imploded with the CLICO collapse.
In response, the Government did two things; convened a commission to review the collapse and created the Financial Services Commission effective July 1 2010, with responsibility for the regulation of insurance and pension business, credit unions, the securities industry and international business companies, where applicable, to replace the blatantly ineffective Office of the Supervisor of Insurance.
The former Governor of the Central Bank, Winston Cox, believes the Supervisor of Insurance was duty-bound to protect the interests of policyholders and investors in the company, and his failure to do so, places the issue and responsibility of solving the problem squarely at the feet of the Government. There is general agreement on this point.
Since 2003, the order was issued in a letter to CIL president Geoffrey Brewster who had earlier advised the company that its EFPAs should be “withdrawn from the market with immediate effect”. CLICO officials were repeatedly ordered not to sell or even market its EFPAs to anyone other than individuals, but the company ignored the ruling, going as far as to send a proposal to Barbados’ National Insurance Board inviting it to invest $20 million in the financial product, according to an official paper trail dating back to 2005.
According to data from accounting firm Ernst & Young, as at December 2009, $507 million in EFPAs were sold, including $149 million held by companies, $44 million by government institutions in the Organization of Eastern Caribbean States, and $314 million by individuals. Attached to the Layne Committee’s report as mentioned earlier are several documents showing repeated warnings from the Supervisor of Insurance to CLICO management, cautioning them against marketing and selling EFPAs to institutions.
An oversight committee led by a former Supervisor of Insurance and a former Permanent Secretary in the Ministry of Finance to whose office the Supervisor of Insurance would have reported during this period – William Layne – basically admitted to Government’s role in the failure by issuing the following statement: “The Government of Barbados should only be responsible for individual Executive Flexible Premium Annuity (EFPA) investors, as they are the only ones whom it could reasonably be argued were duped into purchasing the product,” the oversight committee wrote. CLICO has over half-a-billion dollars in the EFPAs in its portfolio with maturities that stretched into 2012.
This was a failure of epic proportions, where the government failed to take the necessary action to protect depositors and policy holders. It also failed to be transparent, by not publishing an advisory to alert new policy holders from investing in what they saw as a highly questionable instrument. How can we be certain that this does not happen again as suggestions put forward by the Layne Commission run counter to the current DNA of business and politics in the Caribbean?
The Commission suggested the following:
a. Regulators must be given tools to do their job and be allowed to function by the political directorate.
b. There is a need for public education about investing.
c. Special attention has to be paid to regulating conglomerates which own regulated entities
d. Regulators must publish all decisions about regulated entities.
e. Corporate directors must not allow themselves to be mere appendages of the CEO.
f. The Auditors must do their jobs.
g. We need to rethink how political parties are financed.
h. Citizens must demand that where corporate executives are by their fraudulent actions responsible for the demise of corporations, the full weight of the law must be brought to bear on such persons.
As you can see, none of the points suggested has led to legal amendments and consequently there is nothing enshrined in law that stops another CLICO debacle from taking place.
After the psychological trauma that comes with having the company where you place your life savings in a regulated industry collapse due to failure by the government regulator, and after that regulator accepts culpability and takes eight years to create a business model to repay those funds, more trauma is packed on when a new government administration comes in and halts those payments; stating it has to be reviewed and included in a government toxic debt pool. This is the plight of EFPA holders today, several of whom are pensioners and several of whom have passed away waiting for a resolution.
Despite the failure and the finger-pointing; despite the assumption of culpability by stepping in to ‘correct’ the egregious act; despite seizing, judicially managing and horse-trading the best parts of the CLICO assets and despite all other points raised, the Government is not guaranteeing payments. Rather, it has chosen to guarantee the bonds in support of the restructured ten-year annuities for the EFPA holders. That basically is the extent of the amendments of Section 5 and Section 6 of the 2015 legislation. Now, this, too, is under threat.
George Connolly is CEO of Business Technology Solutions Firm and a former candidate of the Democratic Labour Party.