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Why is the Central Bank silent?

Thursday, March 17, 2011
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The Twin Towers

One of the aspects of this Clico matter that has continued to puzzle is the absolute reluctance by the Central Bank and the Ministry of Finance to disclose any information to the policyholders of the insurance company relating to its statutory fund. As has been noted in this space previously, all insurance companies in T&T that are registered to carry on long-term business (such as life insurance, pensions and annuities) are required to place in trust, in the country, assets equal to their liabilities and contingency reserves. The purpose of the statutory fund is to protect the policyholders of the insurance company such that if it needs to be placed in judicial management or liquidated, there would be assets to cover their policies.

Therefore, if it turns out that Clico’s statutory fund is in surplus or in balance, there would be no need for the Government to take more taxpayers’ funds to pay the policyholders, either fully or in part. Instead of the Government paying the holders of short-term investment policies who invested funds of over $75,000 up to $12 billion over 20 years, the insurance company would simply be required to sell the assets in its statutory fund and pay the policyholders. It stands to reason, then, that the financial status of the statutory fund is very important in the resolution of the Clico debacle. Yet for more than two years, neither the Governor of the Central Bank, Mr Ewart Williams, nor either of the Ministers of Finance have given any information that could be construed as clarifying the current financial position of Clico or its statutory fund.

The last time the Central Bank Governor spoke specifically on the issue of the status of Clico’s statutory fund was at a press conference on February 13, 2009 at which he said that if the statutory fund’s holdings of related party assets are excluded from the 2008 calculation, “the notional deficit rises to $10 billion, on a policyholder liability base of $16.7 billion.” This would imply that the statutory fund only had “clean” assets of $6.7 billion, which would only be enough to satisfy the requirements of the so-called traditional policyholders. What perhaps the Governor did not say on February 13, 2009 was that among the related party assets in Clico’s statutory fund were shares in Republic Bank and Methanol Holdings (Trinidad) Ltd. These shares, of course, are of great value while the other related party assets, such as the deposits in Clico Investment Bank and securities issued by the parent CL Financial are of little value.

The question that neither Governor Williams nor Minister Dookeran have deigned to address, then, is what is what are the assets in Clico’s statutory fund and what value can be ascribed to those assets if they were to be sold by a judicial manager or a liquidator? Not only have the regulators failed to provide any information on the insurance company’s statutory fund, they have failed to provide any information on Clico itself. Clico has failed to publish any audited accounts since May 2008, when it issued its 2007 financial report. This means that Clico has failed to publish its 2008, 2009 and 2010 audited financial statements—and there has been no statement from the Central Bank explaining this failure.

Why the Central Bank?
Well, in February 2009, by virtue of Section 44D of the Central Bank Act, the institution took direct, total and complete control of Clico which, as it were, is a wholly owned subsidiary of the Central Bank. As such, the Central Bank is directly responsible for the failure of Clico to produce any audited financials for the company as a whole or a statement of affairs for the statutory fund. In other words, what moral right does the Central Bank have to insist that every other insurance company in the country must produce its accounts in a timely fashion, when the insurance companies (British American as well) it has direct, total and complete control over have consistently failed to do so. Also, by virtue of the amendment to the Insurance Act on February 6, 2009 and a circular letter on July 10, 2009, it was stipulated that the reporting requirement for the statutory funds of all insurance companies should be issued on a quarterly basis instead of annually.

With effect from the quarter ending September 30, 2009, all insurance companies were mandated to submit their quarterly statutory fund reports to the Central Bank within 20 working days of the end of the quarter. One assumes that all insurance companies have complied with this requirement. All, apparently, except Clico and British American. An indication of this is that in the 2010 Financial Stability report, it is striking that the Central Bank was able to report that insurance companies (excluding Clico and British American) had a surplus on their statutory funds. Is it that the Central Bank knows the statutory fund information for Clico and British American and just failed to disclose it in the Financial Stability report? It can well be argued that, in failing to provide policyholders with the statutory fund information and the audited financial information that the Central Bank is prejudicing the position of all the policyholders of the insurance companies.

One can understand Minister Dookeran’s reluctance to provide the true facts on the status of the statutory fund—he must know that clarifying the position of the fund may reveal that his plan for Clico’s resolution could turn out to be more expensive for taxpayers and would result in Republic Bank and Methanol Holdings (Trinidad) Ltd being sold to the highest bidder (if the shareholders’ agreement for the methanol company is cast aside, that is). But it is more difficult to fathom the reluctance of Governor Williams to provide an honest, audited assessment of the current value of Clico’s statutory fund and of the company itself. The Governor, after all, is a technocrat and not a politician. He is someone with a sterling reputation from his 30 years at the International Monetary Fund and his nine years on the job here. He has earned his reputation here by the quality of his stewardship of the Central Bank in that period in issues of monetary policy if not in the regulation of Clico.

One possible answer to the conundrum is that the technocrat’s position is being dictated by the politician. According Section 44F(5) of the Central Bank Act: “In the performance of its functions and in the exercise of its powers under Section 44D, the Bank shall comply with any general or special directions of the Minister and shall act only after consultation with the Minister.” Does this mean that the Central can only “act” to publish, disclose or report on information involving the insurance companies “only after consulting the Minister?” And does consultation mean that the technocrats at the Central Bank can be dictated to by the politician at the Ministry of Finance or can the Central Bank consult and then accept/reject/modify the advice it receives from the Minister?


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