Navigating Disruption
Ravi Rambarran
IAC 2017
Content
• International Environment
• Caribbean Environmental
• Insurance Environment
• Tale of Two Elephants
• Possible Solutions
• Summary
International Environment
• Political
 Post WWII, Western democracies embraced liberalism
 Role of State increased significantly
 Post 2001, an increasing tension between extremism and
liberalism
 Post 2008, an increasing tension between liberalism and
nationalism
 Nationalism reflected in trade, fiscal, monetary and travel
policies
 Small Island Developing States a political casualty
International Environment
•
Economic
 Outlook for growth remains weak
 Prior to global financial crisis, advanced economies had a bias
towards fiscal deficits funded with debt
 Global crisis resolution resulted in prolonged and higher fiscal
deficits funded by debt and unconventional monetary policy
 Uncoventional monetary policy of ultra low interest rates and
printing of money is new territory
 Governments continue to write pension & insurance liabilities,
another form of debt, with no rules despite ageing which
increases the number of workers required to support retirees
Caribbean Environment
•
Economic

Small open economies highly vulnerable to world events

State is the major actor in the economy

Statistics exclude quasi state bodies, national insurance funds and state enterprises

Primary economic activity relates to the extractive industries (oil, gas, mineral,
tourism)

All countries, with the exception of Jamaica, run primary deficits

All countries with the exception of Guyana and Haiti have debt above the target of
60% of GDP

All countries, with the exception of Guyana, run current account deficits

All countries, with the exception of Belize, Surinam and Trinidad & Tobago grew in
2016

All countries, with the exception of Surinam expect to grow in 2017

All countries have structural fiscal gaps
Caribbean Environment
Antigua & Barbuda
Bahamas
Barbados
Belize
Dominica
Grenada
Guyana
Haiti
Jamaica
St kitts & Nevis
St Lucia
St Vincent &
Grenadines
Surinam
Trinidad & Tobago
Total
GDP Debt
US$ %GD
B
P
1.4
93
8.9
67
4.6 107
1.7
99
0.5
81
1.0
84
3.4
48
8.3
33
14.0 115
0.9
66
1.4
83
0.8
3.6
21.0
71.4
79
65
61
74
Saving
Size Current
s
%GD
P %GDP %GDP
25
-6
18
25
-11
15
45
-5
8
34
-11
10
36
-8
8
25
-18
-5
33
3
18
18
-1
29
29
-3
12
32
-14
16
32
-7
14
29
21
38
31
-19
-4
-6
-5
2
56
9
15
2016A
2017F
Growth Growth
%
%
3.7
2.2
0
1.4
1.6
1.7
-1
3
0.6
3
3.1
2.7
3.3
3.5
1.4
1
1.5
2
2.9
3.5
0.8
0.5
1.8
-10.5
-5.1
-1.1
2.5
-1.2
0.3
1.2
Caribbean Environment
• Regulatory
 No common rules on investment, capital, reserving,
market conduct, reporting so high fixed deadweight cost
 Distressed entities receive a free pass
 Disorderly resolution of distressed entities
 Governments continue to write pension & insurance
liabilities with no rules
 Capital controls for institutional investors ignore the good
faith expectation of responsible fiscal behaviour
Caribbean Environment
•
Capital Markets
 Insufficient long term assets for life and pensions industries
 Fiscal position results in high risk free rates and cost of capital
 Borrowing needs of governments crowd out private capital
 Access to international bond markets requires a minimum issue
 Weak domestic stock market microstructures so markets highly
illiquid
 No market makers
 No stock lending
 No short selling
 Rights issues successful only if underwritten by anchor investor
Caribbean Environment
• Financial Services Industry
 Multi nationals “exiting” region through sale and/or
no new capital
 Expected ROEs 12%+ in USD to attract new capital
 Derisking by foreign banks poses risk to
remittances and trade
Insurance Industry
•
Smooth consumption of goods and services over time by investing
savings with the expectation of a real return
•
Smooth consumption of goods and services between good (healthy,
employed, physically able, peace, long life ) and bad states (sick,
unemployed, short life, disabled, catastrophes, accident)
•
Sustainability of industry has the constraints
 Foreign exchange earnings is the economic lifeblood of SIDS
 Consumption of goods and services that are net users of foreign
exchange require the production of goods and services that are
net sources of foreign exchange to reduce instability
 Major component of debt (commercial, bi/multi lateral is foreign
Insurance Industry
• Demand Constraints
 Weak messaging that industry is a large domestic producer with
limited reliance on foreign inputs unlike the non-extractive industries
that are net users of foreign exchange
 Weak lobbying because the industry associations do not have full
time lobbyists and staff that can craft and negotiate laws that support
the industry on a continuous basis
 Uncertainty on fair and timely resolution of failed entities have tainted
industry
 Socialisation rather than institutionalisation of insurance so free rider
problem
Insurance Industry
• Demand Constraints
Voluntary purchase with the exception of loans,
motor third party and employer’s liability
Tax deductible expense for firms but not
individuals, with the exception of pensions
Major components of price are high costs of
distribution and administrative expenses
Incomplete markets e.g. crop, health insurance
Insurance Industry
• Supply Constraints
Lower economies of scale in P&C because sector
more fragmented
Primarily indigenous capital supported by foreign
capital/reinsurance
Scarcity of indigenous capital from crowding out by
government
Life insurance industry eroded by debt restructurings
and provision for credit risk under risk based capital
standards
Insurance Industry
• Supply Constraints
 High cost primarily from high risk free rates because equity risk
premiums are consistent with advanced countries
 New standards require new capital for existing business rather
than new business
 No reward for an insurer that is diversified by country, line or
client segment by the requirement to hold less capital
 Localisation of capital creates the perverse need for more capital
 Limited support by the ultra long term investors, pension funds
A Tale of Two Elephants
•
Life Insurance
 Minimum domestic content, 40%-100% of total assets
 Since 2000, 10 debt restructurings, Antigua & Barbuda (2010), Dominica
(2004), Grenada (2006, 2010,2015), Jamaica (2010,2013), Belize (2007,2013),
St Kitts & Nevis (2013)
 3 debt write offs, Guyana, Jamaica (2004), Antigua & Barbuda St Vincent &
Grenadines (2007)
 1 debt swap, Belize
 2 debt buybacks. Antigua (2005), Jamaica (2015)
•
Property & Casualty Insurance
 Heavy reliance on foreign capital/traditional reinsurance, circa 50%,$400m pa
 Market failure for USD in many countries in the Caribbean
Possible Solutions
State
• Implement fiscal rules for macro economic stability
 Articulate a path to fiscal sustainability to reduce policy uncertainty
 Fiscal rules based on the premise that individuals act in their self interest
whether they are in the private or public sector
 Fiscal rules required for fiscal and debt policy
 Legislated debt/GDP and fiscal balance/GDP ratios with exceptions for
catastrophes
 Golden rule that borrowing should only be for investment
 Any breach results in automatic tax increases and/or cuts in public
spending
Possible Solutions
State
•
First adjustment relates to excess debt above 60% and second relates to maintenance of 60%
•
Adjustment either through tax hikes or cuts in spending as % GDP
Antigua & Barbuda
Bahamas
Barbados
Belize
Dominica
Grenada
Guyana
Haiti
Jamaica
St kitts & Nevis
St Lucia
St Vincent & Grenadines
Surinam
Trinidad & Tobago
Total
Excess Threshold
First
Second
Adj
Adj
3.3
1.8
0.7
1.8
4.7
1.8
3.9
1.8
2.1
1.8
2.4
1.8
-1.2
1.8
-2.7
1.8
5.5
1.8
0.6
1.8
2.3
1.8
1.9
1.8
0.5
1.8
0.1
1.8
1.4
1.8
Total
5.1
2.5
6.5
5.7
3.9
4.2
0.6
-0.9
7.3
2.4
4.1
3.7
2.3
1.9
3.2
Possible Solutions
State
• Increase economic pie (growth)
 Improve incentives for capital in productive sector, starting
point is reduction of risk free rates through fiscal rules and
changes in employment laws
 Increase number of working hours by the number of
workers, work time
 Increase quality of workers by shifts in funding of education
and type of training
Possible Solutions
State
• Exit insurance and pension space
 Increase retirement ages, reduce incentives for early
retirement and improve incentives for late retirement on
benefits earned
 Competitive bids to administer public employees pension
and health plans to improve efficiency
 Future contributions to national insurance plans should
cover only a universal minimum pension
Possible Solutions
Industry
• Improve organisational capacity and lobbying
Equalisation of tax treatment for individuals between
insurance and pensions
Equalisation of tax treatment of life and p&c insurance
sectors
Compulsory insurance of property and health to
reduce free rider problem
Reduction in deadweight costs arising from form over
substance in regulations
Possible Solutions
Industry
• Consolidation
• Increased scale to harvest expense synergies for better pricing
• Increased scope through investment in extra regional markets
with higher growth prospects
• Diversify sources of funding by use of alternative capital e.g.
insurance linked securities
• Enter new lines that generate/protect fx earnings
• Increased use of cross border reciprocity in domestic currency to
reduce fx spend
Summary
• World has changed and we are on our own
• Economic stability with predictable and sustainable tax,
spending and debt policy (tipping point above 60%) which
requires a reduction in the size of the state
• Private sector led growth with a focus on exports and/or
reduction in imports to preserve economic lifeblood
• Collaborative approach by insurance industry to reduce the
constraints on demand and supply because there can be no
sustainable growth without an insurance industry