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Insurance Bill 2011: Companies speak out on consolidation, cartel and hike in premiums
Douglas Camacho, Guardian Holding Ltd’s chief operating officer, says the new insurance bill would not have a negative impact on smaller insurance companies. Camacho was responding to the question about whether or not the Insurance Bill, 2011 would likely lead to the closure of some smaller companies, resulting in other companies merging to survive.
In a telephone interview on Monday, Camacho said he believed companies have adequate time to make the required capital adjustments, so they may not be negatively affected.
Camacho, who is also vice-president of the Association of T&T Insurance Companies (Attic), said the smaller companies are capable of meeting the required capital because it was a reasonable adjustment.
In the global context, he said T&T’s capital requirements are very low, where the minimum requirement was about $1 million as opposed to the United States, which is US$5 million.
“It is important for companies to be well capitalised in order to meet their claim payments.”
Even after the new bill is passed, companies have a couple of years to become compliant, so those which do not have the capabilities, it would actually be a good thing for the industry because the industry is saturated, he said.
“This country has one of the highest per capita in the world... too much companies in the industry.”
Consolidation, he said, would be a good thing for the market. He said some level of consolidation is already taking place with companies forming mergers to offer a one stop shop.
Camacho said this practice was not a new trend because it has been happening for a while, whereby a car insurance company would offer financing and insurance to its customers through a single payment. He said this practice is happening with financial conglomerates that have the required subsidiaries under their belt.
Financial institutions, Camacho said, were also bundling their services with products to offer the customer that convenience. For example, an insurance company may offer joint services with a private health facility, where customers could access free health services with an affinity card.
Echoing similar sentiments was GTM general manager Christopher Henry, who disagreed that smaller companies would experience closure or there would be consolidation in the market as a result of the new insurance bill.
He said he doesn’t believe it would significantly change the market.
Henry pointed out that most companies were compliant already because the tenets of the bill have been on the table for a few years, so the stakeholders in the industry know what’s coming.
He said most of the regulations of the bill have been implemented, so it was a matter of making it law.
Henry said smaller insurance companies are quite capable of meeting the required $1 million capital.
Some have already met their requirements while others are close to doing so because companies have been put under the rigour of the Central Bank’s stress test, Henry said. He said the Central Bank has mandated companies engage in a stress test to determine its capabilities, requirements and performance in the case of any harsh economic downfall or otherwise.
He said GTM has just completed its second stress test and is on a solid footing.
Henry said once companies are committed, have acquired good reinsurance and good reserves, they would survive.
He said T&T has a fairly good insurance industry, but there are some companies that make the industry look bad.
“I am for the bill. We have been operating under it. When it is passed, it would just formalise everything.”
Closure and consolidation
Contrary to the views of Camacho and Henry, representatives from the smaller insurance companies said they believe the bill is likely to lead to the closure of some companies.
One director from a small insurance company, speaking anonymously, said, “Yes, I believe the smaller companies would face some kind of closure, which would result in consolidation among the larger ones.”
The director went a step further to say a cartel would be formed among the giants in the industry where they would seek to raise premiums.
The director justified his claim saying the companies would be making a larger investment so they would be looking to recoup that investment by raising premiums.
He contended that the whole idea is to squeeze out the small and medium insurance companies.
Asked what criteria is used to categorise the insurance companies into small, medium or large, he said large companies offer life and general insurance, medium companies offer general, but non-life insurance, while small companies do less general lines and non-life insurance.
He said the raising of premiums would be unfortunate as customers would be the ones affected. The director said raising premiums would cause customers to change their behaviour by engaging in fraudulent practices.
He said some people would start driving without insurance because it would be too high for the average motorist to afford.
“They are already scanning insurance certificates to avoid repayment.”
The director said while the Central Bank is working with the stakeholders to become compliant, there are some new draconian regulations that may be difficult to handle.
“For example, there are very stiff fines and penalties if your returns are filed late; somewhere in the vicinity of $500,000 per day. This is not attracting directors to come on board because all would be held responsible.”
He said there are so many rules and regulations to keep up with that you could falter by mistake.
Meanwhile, the manager of a small company, also speaking anonymously, said it could go in any direction because it depends on the managers and shareholders willingness to invest in a company.
“Some shareholders may ensure the company is adequately funded by injecting more capital, but it is difficult for me to gZive a definite yes or no.”
On the issue of increased premiums, he said premiums could be adjusted, but it was not an easy thing to do.
“The prices of any new products entering the market could be adjusted, but not the older products that are under contractual commitments between the company and its customers.”
He said while he may tend to agree on the likelihood of consolidation, it may be farfetched to say the larger companies will form a cartel. The large companies have been competitive and continue to be competitive because they each want their own market share.
Consolidation and mergers are not easy to accomplish, he said.
The manager said the new capital requirements may not solve the problem of delinquency in paying claims, but may bring some relief.
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