AssetLiability Management Reasons the FSC is interested

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Asset-Liability Management Reasons the FSC is
interested

• CAIR/CARTAC/World Bank Conference
• Caribbean Insurance Supervisors Initiative
• June 18, 2009
• St. Georges, Grenada
• Angela Beckford
• Financial Services Commission - Jamaica

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Definition of ALM

• Practice of management so that decisions and
  actions taken with respect to assets and
  liabilities are coordinated (IAIS)

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ALM is a Process
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Business Characteristics that call for ALM

• Profits mostly on spread
• Cash flows to reinvest
• Liabilities payable on pre-set dates
• Difficult to find assets to match liability flows
• Embedded options
• Investment performance guarantees
• Potential reinsurance settlement time lags
• Claims volatility

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Benefits of ALM Program

• Promotes identification and control of risks
• Improves capital and liquidity management
• Enhances internal and external communication

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Liabilities - New Insurance Products were
Introduced

• Investment or lump-sum policies
• A small amount of the premiums towards life
  insurance, with the majority for investment
• Projected to yield rates of return similar to, or
  higher than those offered by commercial banks or
  other financial institutions
• Some offered guarantees of 12 to 24
• Clients were allowed to make withdrawals with
  little or no penalty
• Income earned on investments not subject to
  withholding tax

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Assets - Economic Climate of the late 1980s to
early 1990s

• High inflation rates and relatively low interest
  rates of late 1980s caused increases in asset
  prices
• As way of maximizing nominal returns financial
  institutions broadened asset bases to include
  long-term, illiquid assets (real estate and
  stocks)

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Change in Economic Conditions

• Currency depreciation and strong money supply
  growth led to high inflation rates (up to 80) by
  1992
• 1993 - a tight monetary policy stance to
  stabilize the exchange rate and inflation
• As real interest rates increased, asset prices
  fell
• Sluggish GDP growth, which increased the
  incidence of non-performing assets

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Results of Uncoordinated Assets Liabilities (I)

• Withdrawals and surrenders increased
  significantly
• Clients funds were tied up in long term
  investments and poorly performing funds
• Insurers tried to take out loans (at high
  interest rates) or sell more policies, which
  deepened the problem
• Illiquidity led to insolvency

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Results of Uncoordinated Assets Liabilities
(II)

• 11 entities were intervened
• 5 Life Insurance Companies
• 6 Commercial and Merchant Banks
• Fiscal cost of support was 40-42 of GDP, a
  significant proportion of which was financed by
  public debt

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Financial Sector Reform

• Recognition of the importance of ALM and capital
  adequacy requirements
• Actuary is required to discuss and comment on the
  insurers ALM practices in the annual report to
  the FSC

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Current ALM Practices of the Insurers Vary
Considerably

• Highly developed comprehensive ALM programs
• Limited program as part of Investment Policy
• Doing something, but not structured
• Just getting started
• Some are driven by the group while others are
  leading their group

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ALM Regulation

• Results of assessment revealed the need to go
  further
• Develop a regulation to which the FSC can ensure
  they are adhering
• Draft circulated for consultation in April 2009
• www.fscjamaica.org

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Asset Liability Management

• Thank you,
• Questions?