Redesigning the insurance industry
By Christopher Ram
December 15, 2002
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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 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 deems insurers to be licensed financial institutions for the 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 $5M, 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 their 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. A long-term insurance company is required to place in trust in Guyana assets equal to its liabilities, as well as contingency reserves less the amount deposited on account of an insurance business in respect of its policy holders in Guyana. In the case of a non long-term insurance business, the amount to be placed in trust in Guyana would be assets equalling 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 their 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.
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.
Part 2 (Conclusion)
Today we continue our review of the Insurance Act, 1998, which has now been made effective. In the first part last week we looked at the main provisions in the Act relating to insurers which now have four months within which to register with the newly appointed Commissioner of Insurance. As we noted last week, the current Act goes well beyond the 1970 Act which it replaces and in today's article we address the provisions relating to brokers and agents and other intermediaries who are now more formally recognised under the new Act.
It is perhaps worth noting that the new Act has different definitions of some of the more common terms associated with the insurance industry. This suggests that the whole exercise was more than mere updating and is considerably wider in scope. The Insurance Association of Guyana may well consider a training programme to educate industry participants on the more important changes brought about by the Act. The penalties prescribed for offences under the Act are considerably harsher than those under the former Act which in any case could not have been effectively enforced in the absence of a Commissioner.
The Act provides that only corporations (in Guyana terminology, incorporated companies) or partnerships authorised by the Commissioner may carry on the business of insurance broker. Any such entity in business at the date the Act comes into force has to register with and be authorised by the Commissioner. The filing fee for registration as a broker is $50,000.
There are some serious conditions which must be met before the Commissioner registers a broker. These include a minimum of ten million dollars of indemnity insurance; that the company includes in its insurance business mane the words "insurance broker" or "risk manager" in its name; the insurance business is restricted to that of broking and activities directly ancillary thereto; the applicant or any partner, controller or officer of the applicant is sufficiently qualified.
The Commissioner is required to prescribe forms for registration and renewal and also to issue a code of conduct for brokers similar to a pro forma code set out in Schedule 4 to the Act. The underlying objective of the code is the best interest of the public by conduct of "utmost good faith and integrity." The standards which are extremely high would challenge some of the more recognised professionals and will require resources to enforce.
All insurance agents including existing agents must register with the Commissioner and no person may operate as an insurance salesman, sub-agent, adjustor, loss assessor, insurance consultant or insurance surveyor unless registered with the Commissioner under regulations issued by her. The Act allows for the delegation of the responsibility for registering agents to the Insurance Association of Guyana (IAG) but the IAG must have a programme of continuing education for agents that is satisfactory to the Commissioner. It is worth noting that several other professions do not have continuing education as a mandatory prescription.
While branches have some peculiar treatment under the Companies Act, 1991, and the Income Tax Act, the requirements and provisions of those Acts would seem to be unaffected by section 97 of the Act which provides that an insurer incorporated in Guyana whose business comprises acting as an agent for an external insurer shall be deemed for the purposes of the Act to be a branch of the (external) insurer.
In order to protect the consumer from any improper action by the agent, the Act provides that the insurer, i.e. the company, is deemed to have received any premium paid to an agent appointed by the insurer.
Pension fund plans
The Act includes some important provisions for pension fund plans and their managers. It provides that no person may establish or operate a pension fund plan in Guyana unless the plan is registered. Existing plans have a period of three months within which to register. The filing fee for the registration of a plan is $250,000 but the manager of more than one plan may consolidate his application and pay a single fee. There is no fee in the case of self-administered plans for fewer than twenty-five employees.
The Act requires every plan to invest in Guyana eighty per cent of the plan's total assets. Where the plan has invested in the common stock (ordinary shares) or long-term debt of a company in Guyana, then for every one per cent of its assets so invested, the eighty percent minimum may be reduced by one percentage point, up to a maximum of a ten percentage point reduction. In other words, under no circumstances must the plan invest less than seventy per cent of its assets overseas.
To prevent the Enron type loss to pension fund members, the Act prohibits the investment of the assets of a pension or provident fund in the equity, debentures or other evidence of indebtedness of the employer or related company.
Each plan must be subject to an independent audit annually and to an actuarial investigation every three years. The Act prescribes the format of the Revenue Account and the balance sheet which must be prepared and submitted to the Commissioner.
Conduct of insurance business
The Act makes it an offence for an insurer, broker, agent, pension fund manager etc. to make any statement, promise or forecast which is willfully misleading, false or deceptive or which conceals any material information. This extends to advertisements, circulars and booklets.
The Act deems an insurance company to be a licensed financial institution under the Financial Institutions Act (FIA), 1995 but only in relation to section 14 (restriction on certain financial activities) and section 28 (conflicts of interest). Section 14(1) of the FIA provides that no loan or advance should be granted to any person in excess of twenty (20) per cent of the capital base of the insurance company. In addition, Section 14(3) provides that no unsecured loan or advance greater than two percent of the capital base should be granted to a shareholder owning more that 25% of the paid-up capital.
Section 28 requires any director who is a party to a material contract or transaction; or who is a director or officer of, or who has a material interest in or a material relation to, any person who is a party to a material contract or transaction, to disclose in writing the nature and extent of the material interest or relation.
The Act deals in detail with other issues such as acquisition of an external subsidiary, contracts for long-term insurance, protection of policies, paid-up policies, surrender values and non-forfeiture and associations of underwriters.
Protection of the consumer is a critical focus of the new Act. It is clearly a very modern type of legislation being introduced into a country of weak structures. Its efficient operation will impose strict standards of compliance by industry participants and will require a strong office of the Commissioner of Insurance. The view in the industry is that the Commissioner is well qualified but whether she will be given the resources to carry out her mandate is an entirely different matter. It would be verily chaotic if the office of the Commissioner were to become vacant at any time, a possibility that must never be excluded in Guyana.
The language of the Act suggests that it is an importation and it may give rise to disputes and disagreements between the Commissioner and the industry players. The courts and the legal profession will have to come to grips with some new terms and concepts while there is a lot of work to be done by the consumer bodies.
Last week's column raised the troubling issue of the status of Commissioner and her office. The 1970 Act was clear that the office was a public office but this does not appear in the current Act. Since the office is not a constitutional one and is not an independent agency, then it is reasonable to assume that it is still a public office. Hopefully, the Commissioner or the government will clarify this not unimportant question.
Merry Christmas to all.