Safety net: FSC to rule on policyholder protection scheme

BARBADOS BUSINESS AUTHORITY Monday, March 3, 2014

Safety net: FSC to rule on policyholder protection scheme

by Shawn Cumberbatch 

The Financial Services Commission (FSC) is contemplating the introduction of a special Policyholder Protection Scheme (PPS) as part of efforts to ensure consumers do not suffer when their insurers collapse.

This follows a new International Monetary Fund (IMF) recommendation for the establishment of a “privately-funded” PPS and related concerns from the Barbados Investors and Policyholders Alliance (BIPA), which is representing thousands of Barbadians with money still tied up in CLICO and its sister company British American Insurance Company (Barbados) Limited.

As part of a series of recommendations related to the FSC and issued in its latest Financial System Stability Assessment report on Barbados, the IMF said: “Consideration should be given to the establishment of a PPS for insurance. A privately financed PPS could help secure continuity of insurance coverage and payments by the transfer of insurance policies to a bridge insurer or third party and to compensate policyholders for their losses in liquidation.

“In order to establish a PPS, further discussions would need to be undertaken by the authorities about its governance, coverage level, funding arrangements, and position within the resolution framework.”

After BARBADOS BUSINESS AUTHORITY asked the FSC to respond to the IMF suggestion and BIPA’s related concern that the recommendation might be an inference of a wider concern, its director of insurance and pensions, Randy Graham, said while implementation of a PPS was “a relatively new regulatory tool”, the FSC was examining the feasibility of having one here.

But Graham also emphasised that this had nothing to do with his organisation’s current mandate to ensure the statutory funds of insurance companies operating in Barbados were operating in accordance with the law.

“The Financial Services Commission notes the recommendation from the IMF about reviewing the use of a Policyholder Protection Scheme.

“The PPS which is separate and distinct from the statutory fund is more akin to the deposit insurance scheme in the banking sector. It essentially forms an additional layer of protection for policyholders that creates a structured approach which could allow for the continued settlement of legitimate policy holder claims during a period where there is corrective action ongoing for an insurance entity,” he said.

“FSC actively conducts ongoing supervision of the statutory funds of insurance companies operating in Barbados in accordance with the legislation. The implementation of a PPS is a relatively new regulatory tool recommended by financial safety net specialists as a response to financial crises that would have occurred globally over the past 30 years.

“It is not a response to the characteristics of the statutory fund mechanism. FSC has taken the initiative to review the feasibility of a PPS for the insurance sector as a work in progress. We also continue to work in developing, in collaboration with fellow regulators, a deposit insurance scheme for the credit union sector as we seek to increase the robustness of the safety net for the non-bank financial sectors,” Graham added.

In its own response, BIPA said it supported the IMF recommendation “in principle”, but said it hoped such a scheme “would be operated and managed by a body independent of the insurance companies for which it provided policyholder protection”.

“However, as there is already a legal requirement for Insurance Companies to maintain a Statutory Fund for such purposes, the IMF appears to be inferring that it is concerned about the ability of the Financial Services Commission to adequately oversee and enforce the law as it relates to individual Statutory Funds,” it asserted.

“Certainly, it would appear that the FSC’s predecessor, the supervisor of insurance, failed to adequately monitor the activities of the BAICO and CLICO Statutory Funds and enforce the law when those companies continued to breach the minimum requirements for the fund, as well as failing to submit timely annual accounts.”