Business Page – December 15th, 2002


Redesigning The Insurance Industry (Part 1)

Introduction

The Act goes well beyond its predecessor the Insurance Act of 1970 which is now being repealed. It has far broader objectives and it is also wider in its coverage. Whereas the original Act had merely set “to provide for the regulation of insurance business in Guyana and for purposes related thereto or connected therewith” current Act adds as its objectives “the promotion of competition in the insurance industry, the protection of consumers”  Falling within the purview of the Act now are not only the insurance companies but brokers, agents and other intermediaries and pension funds while the rules governing insurance companies themselves have been made tougher.

The Act is part of the whole package of financial and business legislation “recommended” by the IMF and other international financial institutions for the restructuring of the economy in return for support under various agreements. Other legislation include the Companies Act, 1991, the Financial Institutions Act, 1995 (FIA), the Securities Industry Act, 1998 and the Money Laundering (Prevention) Act, 2000. It is interesting to note that despite the fact that none of these Acts came into effect immediately on enactment, we were generally unprepared when they did. In this case the Commissioner-designate had been meeting with players in the industry which should allow for greater compliance.

The entire Act is being brought into force immediately and this is likely to place a strain on the administrators as well as the industry. The Securities Industry Act was brought into operation in stages which allowed first for the establishment of the Council and later the effecting of the various sections. It appears that because of different language used in the two Acts, it may not be possible to have partial introduction of the Insurance Act. Some consistency in drafting is surely desirable to contribute to the more orderly introduction of detailed provisions particularly in cases where new concepts are introduced.   

Commissioner

The position of Commissioner of Insurance under the 1970 Act had been vacant for some time but on this occasion a Commissioner has actually been functioning before the new Act was brought into force. This person appears to have won the confidence of the insurance industry, a confidence which is likely to be tested as the she enforces the rather stringent provisions of the Act.

As Commissioner she is charged with the general administration of the Act under which the Minister of Finance exercises wide powers and responsibility over the Commissioner’s office. Not only is the Minister responsible for appointing the Commissioner, but he can set the terms and conditions of work including remuneration, dismiss the commissioner (with the consent of the President), approve budgets in relation to the Commissioner’s office, receive annual reports and present these to Parliament, make regulations under the Act, appoint an insurance board, etc. For all practical purposes, the Commissioner’s boss is in fact the Minister although the Commissioner is required to keep proper accounts of money and to make reports to the Minister which are required to be available to the National Assembly. 

That we continue with this type of legislation is truly regrettable as it allows for too much political influence if not interference in the workings of what should be essentially independent bodies, possibly compromising the professionalism of the holder. Business Page also believes that it is time that we consider the creation of a separate Financial Services Authority with responsibility for the regulation and supervision of the entire range of financial services. It is interesting to note that section 39 of the Act deem insurers to be licensed financial institutions for purposes of section 14 (restriction on certain activities) and 28 (conflict of interest) of the FIA.

The Bank of Guyana is of course the supervising authority under the FIA and the Money Laundering (Prevention) Act. A reconfiguration will allow the Bank to concentrate on the critical monetary matters for which it is best suited.   

Funding for the office will come from a number of sources including levies, fees, fines and appropriations from Parliament which may be supplemented by a general assessment on the Industry. Section 14 of the Act authorizes the Commissioner to make an annual assessment against “each insurer, insurance broker, Association of Underwriters, and, manager of a pension fund” based on the revenues of each of the entities. The Act requires that the accounts be audited by an accredited auditor rather than specifically the Office of the Auditor General and there must also be some doubt whether all expenditure incurred has to be authorised by the National Assembly.

The Act provides for the establishment of an Insurance Arbitration Board responsible for arbitrating on any dispute or difference arising between a policy-holder and an insurer or broker in relation to an insurance policy. The Act also makes provision for the establishment by the Minister of  an Insurance Board of Review to hear appeals from any decision, direction, or order of the Commissioner.

Registration of Insurers

The Act provides that only companies or associations of underwriters registered with or and authorized by the Commissioner may carry on insurance business in Guyana. As stated, it does not appear to affect situations whereby a Guyanese resident in Guyana goes off-shore for insurance under a contract made under the laws of another country and under which the premiums and sum assured are paid outside of Guyana. The fee for registration is $250,000 and the application must be submitted along with several documents including incorporation documents, a copy of the latest revenue-account and balance sheet, a copy of the latest actuarial valuation report upon the financial position of the company or association, a copy of the premium rate book in use for long-term insurance business and specimens of the various standard forms of proposals and policies to be issued in Guyana. Existing companies have two months in which to apply for registration.

In order to be registered under the Act, a deposit as prescribed has to be paid. In the case of long-term insurance business the deposit is $5Mn. and in the case of general insurance business the deposit is 20% the net premium income for each class of insurance or $5,000,000, whichever is greater. The Act provides for annual adjustment based on changes in the net premium income.

Long-term insurance businesses are required to carry out once in every three years an actuarial review of its financial condition, including its liabilities. No distribution of a surplus may be allocated or paid unless the Commissioner has approved presumably on the basis of the report of the actuary.

All companies are required to establish and maintain a statutory fund in respect of each class of insurance on the date of commencement of the business in that class or not later than four months after the commencement of the Act. Long-term insurance companies are required to place in trust in Guyana assets equal to its liabilities and contingency reserves less the amount deposited on account of the insurance business in respect of its policy holders in Guyana. In the case of non-long-term insurance business, the amount to be placed in trust in Guyana would be assets equaling its liabilities and reserves.

Companies carrying on long-term insurance business are required to have assets invested in Guyana of not less than eighty-five per cent of its statutory fund. Schedule 3 of the Act specifies the type of securities in which the assets of a statutory fund may be invested.

The issue is whether there are in Guyana sufficient securities for possible investment, whether they provide adequate returns, are secure and will not cause any impairment which could affect the viability of a fund. The authorities need to realise as well that the changes required may take some time to effect.

Financial Statements

An insurer other than an external insurer shall at the expiration of each financial year prepare a revenue account in respect of each class of insurance business carried on as well as a separate profit and loss account (or income and expenditure account if the long-term insurance business is not operated for profit) and balance sheet in respect of long-term insurance business. Currently, companies are not required to and generally do not prepare a revenue account for each class of business and this has implications for accounting systems, the separation of funds and the allocation of income and expenditure.

Financial statements are to be presented to the Commissioner within six months of the relevant year end which is the same period prescribed under the Companies Act.

Unlike the FIA, this Act does not require the auditor to report whether there has been compliance with its provisions but the Act will clearly affect the work of the auditor and the profession expects to have some consultations with the Commissioner on the application of the Act.

To Be Continued.