The Tribune

• Sector warns proposal will cause 'collapse of industry'

• Regulator's letter says suggestion came from the IMF

• Industry warns of 'false market', 'rate fix' on Gov't debt

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian insurers yesterday blasted the Davis administration for seeking to "dictate" their investment strategy by mandating that a "minimum" 50 percent of their total portfolio be held in government securities.

The Bahamas Insurance Association (BIA), in a letter issued yesterday to the sector's regulator, warned it has "grave concerns" with a proposal - seemingly suggested by the International Monetary Fund (IMF) - that could ultimately "lead to the collapse of the industry" by disrupting its ability to match assets, and the returns they generate, with its liabilities as they mature.

The industry body also argued that mandating insurers hold at least half their investments in government paper will create "a false market" for these securities, as well as lead to potential "rate fixing" and the "creation of a pricing monopoly" in the Bahamian dollar debt market.

The BIA hit out in response to a letter from Michele Fields, the Insurance Commission of The Bahamas' superintendent, which gave the insurance industry just six days to provide feedback on a proposal which - if implemented - would require both life and health and property and casualty underwriters to meet the "minimum" 50 percent threshold within two years.

Mrs Fields, in the May 19, 2023, letter to all "registered domestic insurers", wrote: "The Government of The Bahamas is considering the imposition of a mandatory minimum holding of government securities by regulated insurance companies. We have been informed that the International Monetary Fund has recommended this course of action to the Ministry of Finance.

"The Government is suggesting a minimum holding of 50 percent of its assets to be held in government securities. It would allow a transition period of 24 months for companies to attain this minimum threshold. The Commission has not determined how the minimum holding would be calculated.

"However, it is being considered that it be based on the statutory funds held in accordance with section 45 of the Insurance Act 2005. The Commission has conducted a benchmark in consideration of this proposal, and has found that one jurisdiction imposes this requirement in which the calculation is based upon minimum required capital/surplus."

Acknowledging the consequences for Insurance Commission licensees, and their ability to match assets with liabilities, Mrs Fields said the regulator wanted feedback on the implications for liquidity; credit risk; yield; duration; risk concentration and what was described as " other unintended consequences".

"We request feedback on an urgent basis and apologise for the time constraint," she added. "However, this matter might be included in the Budget presentation at the end of May. In this regard we should be grateful if you would provide the Commission with your comments by May 25, 2023." That deadline is today, with the Budget due to be unveiled next Wednesday.

Neither Simon Wilson, the Ministry of Finance's financial secretary, nor Michael Halkitis, minister of economic affairs, responded to messages or could be contacted for comment before press time last night, so the rationale, intent and details behind the move could not be ascertained. Mrs Fields was said to be in a Zoom meeting when Tribune Business called and, despite leaving contact details and information on the nature of the call, it was not returned.

In the absence of explanation, speculation was rife yesterday that the Government has been forced to take such action because there is insufficient demand for its domestic Bahamian dollar debt securities. "Your guess is as good as mine," Anton Saunders, Royal Star Assurance's managing director, told Tribune Business.

"I have a feeling that the banks are over-leveraged with government securities, and I know all of them - because the country has been downgraded several times - had to take provisions against their holdings of government securities. They're not able to invest more in government stocks so they're looking at other industries to invest."

One source familiar with how the Government funds its operations told this newspaper they were "amazed" by the contents of Mrs Fields' letter as it suggested it was struggling to raise net new financing in the domestic market. Increasing the proportion of Bahamian dollar funding, and reducing reliance on foreign currency debt, has been a key objective for the Davis administration.

"I can't imagine what set of circumstances would make the Government take this extraordinary step," the source said. "You're telling private entities they must take on government debt, and all have prudential limits and risk management standards. This seems draconian and extreme.

"The only plausible explanation is nobody is taking up the paper. They don't have sufficient take-up of the paper; that people are not taking up the debt in sufficient quantum. It distorts your private market for debt by forcing businesses to take on the paper. It's very, very strange. This seems like the kind of thing you do when you run out of options. You come out with a very socialist, totalitarian option like China does."

They suggested that the Government should "move the market", if there is insufficient appetite for its debt securities, by increasing the interest coupon such that investors receive increased returns to compensate for the perceived extra risk they are taking.

Julian Rolle, the BIA's chairman, in a brief interview with Tribune Business said he was baffled by the minimum 50 percent investment threshold proposal. 'It's going to lead to losses, and also lead to downgrades of companies that are rated internationally," he added of carriers rated by A. M. Best. "The industry has indicated its grave concerns as to why this would have been done and the timing etc."

As to the impact for insurance customers, namely Bahamian businesses and consumers, he added: "That has yet to be determined. Unfortunately, we cannot say what the impact will be. They haven't provided us with what level of assets they are talking about."

Insurance industry sources, speaking on condition of anonymity, yesterday said individual underwriters and the sector at large "need clarity" on whether the 50 percent applies to total assets, investment assets or statutory reserves. One contact suggested there would be "minimal" impact if it applied to the latter, as the statutory reserves for life and health underwriters and their property and casualty counterparts are $2m and $1m, respectively.

The BIA, though, thought otherwise. In its May 24, 2023, letter, which was obtained by Tribune Business, the Association blasted: "The industry has grave concerns with a requirement for a minimum investment holding of government securities for a number of reasons. The industry would like to clearly state that it is opposed to having its investment appetite and strategy dictated to it by the Government.

"The industry would be aided by additional information and context surrounding the IMF’s recommendation for which this consideration has been based. The BIA asks that you share the IMF’s recommendation and its rationale with us. Additionally, we require clarification as to whether or not the reference to '50 percent of assets' was in fact intended, or if the intention was, to refer to 'investment assets'. If the latter was intended, please provide a definition of the same."

Pointing to the short six-day consultation period, the BIA added: "This is of great concern as it does not allow the industry to fully consider the implications of the proposal, nor for the Government to consider the industry’s position. The BIA believes that effective consultation is a critical element in good governance, and is concerned that in both this and the previous national Budget, the Government has sought to introduce significant policy changes affecting the insurance industry without the benefit of adequate consultation.

"The insurance industry is a vital part of the Bahamian economy, and its ability to generate sustainable returns for the payment of claims is critical to the survival of the industry. Our businesses provide protection of lives and property across The Bahamas. Major changes that affect the industry should not be introduced without due care."

Asserting that the "mandatory minimum 50 percent" threshold would go against all established principles of portfolio diversification and risk management if implemented, the BIA argued that the Government "should not mandate the investment appetite of a private industry". And it added that forcing a significant concentration of risk is also contrary to the Insurance Commission's mandate to maintain a stable industry.

"The structural concentration risk that is associated with a mandatory minimum threshold being established is a significant concern," the BIA warned. "Insurers have to properly match assets with liabilities. From an actuarial standpoint this also increases liability. Increasing liability while decreasing returns due to a mandatory government securities requirement will quickly lead to negative income and eventually to failure of our businesses."

These problems, it added, would worsen for Bahamian property and casualty insurers during multi-million dollar hurricane claims payouts. "The Government’s ability to collect taxes and fund its obligations may be negatively impacted by a catastrophic event, so this will inevitably put pressure on the carrying value of any Government securities," the BIA warned.

"Having to deal with underwriting losses and investment losses simultaneously will negatively impact solvency and balance sheet strength at the most inconvenient time. Individual companies should have the freedom to invest in Government securities based on their own risk profile and risk appetite."

And, given what it described as the present "illiquidity" of domestic government debt, the BIA said the insurance industry would struggle to convert these securities into cash should a hurricane or another pandemic strike. "If there is a significant catastrophe or another health pandemic, liquidity will be required quickly. Forced sales of Government registered stock may lead to loss in value, and harm the insured public," the Association added.

Noting that two Bahamian life insurers have previously been downgraded by A. M Best, the industry's rating agency, because of their government securities holdings, the BIA said forcing the industry to increase these would make carriers more vulnerable to negative rating actions that impact the cost and availability of reinsurance.

"Asset/liability matching is a key focus of insurers, and yield and duration is a vital part of that mixture. Mandatory levels of Government securities, which have mostly fixed rates of return, limit profit potential and increase reserve liabilities at the same time. This mix of results over time will lead to the collapse of the industry," the Association's letter continued.

"[A] mandatory level of government securities for the insurance industry will lead to a false market. It also lends itself to rate fixing by the issuer, with the creation of a pricing monopoly. Rate fixing should be the opposite intent of the Government and the regulators of a private industry.

"The forces of supply and demand, and the issuer’s ability to set and reduce rates in the absence of true market forces, will also have a knock-on effect on the public overall. National Insurance Board assets would decrease as they are a large holder of government securities, [and] a similar effect would be felt by pension plan funds and, by extension, the members of the same."

The BIA said that, if implemented, the two-year transition will force insurers into a 'fire sale' of assets to comply. "This will reduce sales prices of those assets, impacting not only the profitability of the industry but also the ability of the industry to buy Government securities. Competitive disadvantage issues will arise as international insurers operating in The Bahamas market would not be subject to the same requirements," it added.

Kwasi Thompson, the Opposition's finance spokesman, yesterday demanded an explanation from the Government as to why it is seeking to impose this mandatory threshold on insurance industry investments. The Prime Minister, who is also minister of finance, was present in the House of Assembly when he made those remarks but - like the rest of the Government - provided no explanation or response.