Business Page  The woes of an insurance company

Sunday, December 18th, 2005



This is a short story of an insurance company that was described as "well-known and highly respected" and one that would have "a very bright and prosperous future." It is as much a story of being open, honest and straightforward not only with the regulators but with everyone else as it is about the practice of good corporate governance and how the courts and the regulators interact. Insurance companies are special and insurance contracts are of a special genre called uberrimae fidei, meaning the 'most abundant good faith' according to Black's Law Dictionary which is not known for hyperbole.

Insurance companies could also be seen as part of the financial services and public interest companies. These directly affect members of the public and not only are they normally licensed and regulated, but their failure can have direct consequences for their policy-holders and implications for the economy. Yet even with regulations insurance companies have from time to time run into financial difficulties as a result of bad governance, under-capitalisation and major natural and other disasters.

Public confidence plays a major role in the success of an insurance company and explains why companies like GTM, Hand-in-Hand and Demerara Life love to market their origin and ancient heritage even as they adapt to a modernised and competitive world. While there is no guarantee of survival let alone success in business, with age come strength, trust and confidence.

Yet failure can also visit sometimes with little notice shattering the front door and the image. When Jamaica went through its travails of the eighties and nineties, the government was forced to intervene to prevent losses to policy-holders in no less than nine insurance companies and five banks.

This story is not about history repeating itself, for despite the trauma of hurricanes and floods insurance companies in the region seem to have avoided the worst, even though growth in Guardian Holdings and other regional companies has slowed considerably.

The story:

The story is about the Dyoll Group Limited (Jamaica), an insurance company listed on the Jamaican Stock Exchange. The episode for the purposes of this story began in February 2004 when the National Commercial Bank Jamaica Limited announced that it had invested in approximately 45 per cent of the outstanding shares of Dyoll Group Limited.

In seeking to justify its investment decision, the bank described the company in terms quoted in the first paragraph of this article. Yet one year later the bank announced that "the Group made a full provision during the second quarter for the impairment of the investment in Dyoll Group Limited of $536 million." The Jamaican public was stunned at the dramatic turnaround, and things got worse when trading in shares of Dyoll was suspended on February 15, 2005 as the company had failed to provide information which the Jamaica Stock Exchange considered material.

A digression:

Here it is impossible to resist the temptation to interrupt the narrative and contrast the Jamaican response with what happens in Guyana. The sad experience here is that companies run for cover under orders of the court, gagging the regulator and exposing the ill-informed public.

When penalties are imposed on public companies in the developed economies, the companies quietly pay and go to great lengths and expense to reassure the market and their stakeholders of the action to prevent a recurrence. In Guyana, the injunction operates almost as a licence, since the regulator is barred from entering the door and the law effectively made inoperative.

For all the omissions and commissions, the directors of Globe Trust never sought to block the regulator once the regulator had followed the law, even though many consider Globe Trust as much a regulatory failure as a governance failure, a point which the administrator appears to have completely ignored. When a company decides to operate in a regulated sector, it implicitly agrees to being regulated and there seems to be something wrong when having been granted a licence it turns around and wants to shut out the person holding the umbrella over its head.

But let us not stay in Guyana for too long. After it became clear that the Jamaican company's exposure had continued to increase, new investments were not forthcoming and the information provided by the company was misleading, the Financial Services Commis-sion (FSC) sent in its examiners assisted by Office of the Superintendent of Financial Institutions of Canada providing expert guidance.

Less than one month after the suspension of share trading, a temporary manager was appointed, pursuant to Section 8 of the Financial Services Commission Act, effective March 7, 2005 in order to:

* Establish the true position of the company

* Address the matter of settlement to its claimants

* And ensure that its policies would remain in force

And one week later, Grace Kennedy came to the rescue of the policy-holders when through its subsidiary Jamaica International Insurance Company Limited (JIIC) it entered into an agreement with the company to provide insurance cover to the motor and accident policy-holders.

Hurricane Ivan:

How did the problem arise? It seems that Hurricane Ivan, the storm that devastated Grenada was responsible for the company's failure - huge claims came from policy-holders in the Cayman Islands and, to a lesser extent, Jamaica.

The first interim report of the Temporary Manager placed the deficit of the company at approximately $1.146 billion. On November 29, 2004 the company's share price peaked at JM$28 - at its last trade on November 1, 2005 - the price was JM$1.35. Trading in the company's shares resumed in October 2005 after the company submitted its outstanding financial statements.

That, then, should have been the end of the story. But look a little closer at the governance issue involved, the relatively innocuous vagueness in statements from the company in respect of the impact of Hurricane Ivan and promises of funding which did not bear fruit.

On the day that the Jamaica Stock Exchange (JSE) suspended trading in the company's shares, a statement issued by the Chairman of the JSE read "The JSE has required that the Company make a public announcement in response to rumours that Dyoll Group has experienced material financial losses.

This information has not been reported to the JSE in accordance with Appendix 8 (of the Stock Exchange Rules). The Exchange in seeking to establish whether such rumours and speculation were factual or not, was informed by the Managing Director of Dyoll Group, Mr. Stephen Thwaites that he was stopped by the Acting Chairman, Mr. Peter Lawson from providing any information and was therefore not able to respond to the Exchange's requirement that an announcement be made immediately by the Company. The Exchange advises that the suspension will remain in place until the relevant information has been disclosed."


That is how a regulator needs to act and be allowed to act - promptly and decisively. In Guyana for whatever reason, regulators - and they include the PUC, the Registrar of Companies, the Bank of Guyana and the Commissioner of Insurance, the GGMC, the Forestry Commission as well as the Registrar of Co-operatives - either do not act or act far too late.

Such failure constitutes an abdication of their statutory responsibilities and duties, but then who cares that the public and its interest are left exposed and endangered? It is therefore ironic that the one regulator who has shown a willingness to act promptly is in fact accused of shooting from the hip and who sooner rather than later will start second-guessing the regulated and the court before taking any action.

As we reduce our dependence on agriculture and shift to services including financial services, trust and confidence in the regulator's ability to administer the regulatory laws will become increasingly important.

Our private sector needs to understand that the society will only succeed if the law works and is seen to work.

While the role of the court must be to protect everyone under the law, it needs to guard against unsuspectingly becoming instruments of self-serving businesses. Intervention in what are often governance and regulatory issues can set precedents which might not be intended.