Latest update April 19th, 2024 12:59 AM
Mar 08, 2009 Features / Columnists, Peeping Tom
One of the sad indictments against the government has been its signal failure to effectively analyse and predict the possible fallout from not only the global financial crisis but also the related problems from the meltdown of CLICO companies in the region.
When the global financial crisis was already fully blown, it was predicted that Guyana could suffer in the form of reduced remittances and a fall-off in demand for its commodities. But the government seemed uncertain as to what would be the real effect and thus has made no specific adjustments or advanced no policy measures to mitigate these anticipated problems.
When the global financial crisis broke, the government met with the financial sector and was assured that there was no great exposure because the parochial nature of our financial system meant that there were very little investments in the volatile capital markets. The government seemed to have overlooked completely the fact that local companies may have invested in companies which were investing in the troubled capital and real estate markets and thus could suffer as a result of these companies running insolvent. The government was short-sighted in relation to the crisis.
Even when CL Financial in Trinidad and Tobago experienced problems, we were told that the most that could happen was that there could be a mismatch between assets and liabilities of the local company.
Unfortunately, none of us seemed to have picked up on the seriousness of this worst-case scenario because, as it turns out, what we have is not just a minor mismatch but a major mismatch, so large that the Commissioner of Insurance has had to apply to the Courts to place CLICO (Guyana) under judicial management. All of us should have known that all that it takes for a company to become insolvent is for there to be a mismatch between its assets and its liabilities.
Again, we are being assured that no policyholders will lose their monies. And that is reassuring. But is it practical for this to happen? And is this the full picture? Or is the government again in a reactive mode and overlooking the fact that there can be serious repercussions for the financial sector because of the fallout from CLICO.
Yesterday I mentioned one of those fallouts, which is the loss of confidence in the insurance industry. But it goes much further and the government must not downplay the problems that are likely to afflict Guyana as a result of this crisis.
It is naïve to believe that because only about 3% of our financial sector is likely to be affected that there is no systemic effect. There is going to be a systemic effect. For one, while we are only dealing with 3% of our overall financial sector, it must be understood also that the insurance industry is generally governed by the Insurance Act, while the banking sector is under much better protection by the Financial Institutions Act. Thus, overall, the effect may not be that great on the banking sector but there will be problems within the overall insurance industry, because CLICO’s share of this sector is likely to have been significant.
Also, it must be appreciated that insurance companies tend to reinsure with each other. That if when a citizen takes out an insurance policy, the insurance company does not keep all the risks associated with this policy. Instead, it reinsures part of that risk with other insurance companies. It spreads its risks around so as to reduce its overall exposure.
Thus, the portfolios of other insurance companies would have been reinvested in CLICO (Guyana) and thus these companies will have to seek alternative reinsurance in the event that CLICO has to be wound–up, and they may in any event move in this direction considering the present mismatch between assets and liabilities in CLICO (Guyana).
While the President has given assurances to policyholders, it is not clear whether these assurances extend to those insurance companies that have reinsured with CLICO (Guyana). There is an urgent need for this issue to be clarified because if a local insurance company is to pay a local claim at the moment, and a portion of its coverage had been reinsured with CLICO (Guyana), that local company would wish to know whether it could recover its reinsured amount.
The problems of CLICO (Guyana) and the likely impact of it having to be wound-up are therefore not as cut and dry as simply protecting policyholders. There are a whole range of other inter-related issues which must be addressed, including the overall effect on business in Guyana, before one can conclude definitively that there will be no systemic impact on the country’s financial sector.
To be continued
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