There are companies in the insurance industry engaging in under-cutting of prices in order to boost volumes. Non-performing bank loans have gone up due to the existing difficult economic environment. Credit unions impact one-third of the population and are an important part of the financial landscape of T&T. These are some of the views of key stakeholders in the financial sector who committed to the Business Guardian on Central Bank Governor Jwala Rambarran’s address last Thursday, where he dissected and gave an overview of the financial sector in the context of the global and local economic challenges. Rambarran, in describing the insurance sector, said generally most large insurance companies are well capitalised, but added some small insurance companies specialising in third party motor insurance are under capitalised and the Central Bank is likely to take further interventions in this part area of insurance. Within this context, Musa Ibrahim, managing director, Tatil, a member of the ANSA McAL Group, said on Tuesday some insurance companies engage in price under-cutting, ignoring the true “price: risk” relationship in order to increase business volumes, cash flows and short-term profitability.
“Therefore, identification and pricing of risk need to be improved across the industry. The issue of improving of pricing is not only a requirement of smaller insurers, but a requirement of all insurers in the industry. However, due to competition levels, there is severe underpricing to win business. “Unfortunately, these prices do not support the true risk being underwritten, and could eventually lead to losses. I do not think that there is direct correlation with low pricing and intervention by the Central Bank. However, where low pricing is linked to under reserving, loss making and capital erosion, Central Bank intervention is expected,” he said. Ibrahim pointed out that under reserving, in addition to avoiding claim payments, are tactics that some insurers may use to manage their profitability levels and cash flows. “This practice is no different to a bank not providing for bad debts or not writing off impaired loans, two items that clearly impact profitability,” Ibrahim said. “Capitalisation is critical to sustainable business model. The extent of liabilities, both existing and future, will determine the level of capitalisation that is required.
“All companies should be adequately capitalised in order to qualify to sell general insurance requiring companies, including smaller payers. To become better capitalised is therefore of critical importance. However, the more important question may be whether companies have the capability to meet the capital adequacy requirements. “If a company does not have, firstly, adequate capitalisation, secondly, the ability to improve capitalisation, or the assets, statutory funds and deposits to back liabilities, continued interventions by the regulators will be inevitable,” Ibrahim said. He said Tatil well capitalised and has stood up under international scrutiny. “Our reinsurance programmes, which protect us in the event of natural disasters, are underwritten by international ‘A’-rated reinsurers and our existing pricing model allows us generate positive underwriting results in all business, and, in particular our motor line. Tatil is also an AM Best A– rated insure,” he said. Baliram Sawh, vice president, Association of T&T Insurance Companies (ATTIC) commenting on Rambarran’s statements said the association supports the work of the Central Bank. “We are supportive of the bank taking action to make the sector strong and robust. This is so because of the key role the insurance plays in the economy.” Rambarran spoke last Thursday at the Chartered Financial Association (CFA) breakfast meeting at the Hyatt Regency Hotel, Port-of-Spain. The Central Bank supervises a number of financial institutions which include 25 banks and non-banks, six life insurance companies, 16 active general insurance companies (including Clico and BAT) and 256 active pension plans. Rambarran added that the Central Bank intends to supervise 100 active credit unions that are currently not under its purview.
Challenging real estate projects
Richard Young, president, Bankers’ Association of T&T (BATT), told the Business Guardian on Tuesday that during economic downturns, people have problems paying their loans. “There are some real estate projects in the West that were challenges and only now they are getting out of it. An example is the Renaissance project. In today’s environment, where there is a reduction in activity, people are challenged to get income to service loans. If you do not service loans after three months, you have to classify loans as non-performing,” Young said. The Governor had said while the banking sector is strong, it’s not without its share of challenges. “Banks’ non-performing loans rose to almost seven per cent of gross loans, up from around one per cent at the end of 2007, prior to the onset of the global crisis. Some banks have seen their non-performing loan ratio increase above ten per cent, mainly reflecting the sourcing of a few corporate loans in the luxury segment of the real estate mortgage market. Excluding these loans, the system-wide ratio of non-performing loans to total loans was much lower at around five per cent in March 2012,” Rambarran said. Young said the non-performing loans can be categorised at the industry and individual levels.
“The fact that there is a five per cent non-performing loan would suggest an increase in these loans. Some of it is corporate, but some of it is in the category of the personal. Banks have a system of creating commercial accounts and that is how we determine if it is a good one and we do a risk assesment,” Young said. The Scotiabank executive agreed with Rambarran that local banks are doing well despite the global problems. “The local banks have survived the whole financial crisis that started in 2008. The only exceptions were Clico and Hindu Credit Union (HCU) and with them, it was a question of management. I do not think their collapse was because of the worldwide economic crisis. In general, T&T’s banking system did well. I think the only thing is we were not boastful about the fact we survived.” Although some people are now fearful of losing their money because of what is happening globally and in T&T, Young said they must make wise choices in choosing financial institutions in which to invest their savings. “The world is in a tailspin and people are reluctant and cautious. People must have a good sense of which bank is good and not, and which banks are well managed,” Young said. “Which bank has more oversight and is strong in its credit and there is no compromise in it.”
Stricter monitoring of credit unions
Brian Moore, president, Co-operative Credit Union League, welcomes the Credit Union Bill which seeks to update the Co-operative Society Act, saying discussions about monitoring co-operatives are continuing with the Central Bank. Rambarran said: “The case for stricter regulation of the credit union sector could not be more compelling. Credit unions account for more than five per cent of total financial system assets and reach one-third of the population. Some of the biggest credit unions have assets the size of smaller banks. We expect to lay the revised Credit Union Bill in Parliament around the middle of 2013.”
Moore said since the 1990s, he has been calling for reforms to the Co-operative Act of 1971. “We are happy for the move to update and modernise the credit union legislation. We were the first ones to call for these reforms,” he said. Moore said the league does not agree with all of what the new bill proposes. “Some of those proposals have the ability to do irreparable damage to the credit union movement, especially the smaller credit unions. We have discussed these things and will continue our talks with the Central Bank over the next few months.
Depending on how quickly we can agree on what is best for the credit union movement, then all will be well by the time the bill is tabled in 2013 ” Moore said. Rambarran had said: “A number of credit unions has taken on risky credit exposures and investments, which they do not have the capacity to properly address.” Reacting to this statement, Moore said this is not generally true of the entire credit union sector. “I would like to ask the Central Bank Governor to produce the evidence. Apart from one so-called credit union, HCU, there has not been the collapse of any other credit unions. During the 1980s, up to 40 per cent of the banking sector in this country failed, but nothing like that has happened in the credit union movement,” Moore said. Despite this, Moore said the Credit Union Bill contains mechanisms to prevent any other credit union from taking the same path like HCU. “That is not to say the credit union sector must not be careful. The new legislation will not allow credit unions to undertake risky ventures that will jeopardise people’s money,” Moore said.