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Chapter 1
Insurance Regulation
1.1 Introduction
The Commonwealth Caribbean insurance industry is regulated by statute, associated regulations and the common law. Statute vests responsibility for insurance administration in the regulator – historically described variously as Supervisor,1 Registrar or Commissioner2 of Insurance, depending on jurisdiction. This arrangement for oversight of financial services represents a sectoral approach, which in the modern era has been abandoned in favour of consolidated super-regulators known as Financial Services Commissions. Variance in descriptive title notwithstanding, regional Insurance Acts bestow on the regulator powers relating, inter alia, to registration of insurance companies and qualification of insurance personnel3 for which regulatory approval must be had. The Bahamian decision Commonwealth General Insurance Co. Ltd v The Minister Responsible for Insurance et al.4 illustrates this. The issue was whether the company was transacting life insurance business for which it had no licence. Applying Section 2 of the Insurance Act5 and Prudential Insurance Co. v I.R.C.,6 the Court found that appellant did indeed carry on life insurance business for which it had no licence. The action failed. More recently, actions of regulators and governments were addressed by the Privy Council in United Policyholders Group et al. v Attorney General.7 The Privy Council decision stands atop an unsettled environment, triggering jurisprudence with assertions of guarantee and legitimate expectation. This places regulators under the microscope while reflecting the significance of the CLICO collapse in the Commonwealth Caribbean.
1.2 Caribbean Law Institute Insurance Bill
The Caribbean Law Institute’s Insurance (CLI) Bill, adopted throughout the Caribbean in varying versions, has strengthened the regulatory regime. The preamble to the Barbados Insurance Act captures the object and intent of CLI’s reforms:
An Act to revise the law regulating the carrying on of insurance business in Barbados in order to strengthen the protection given to policyholders under the existing Act; to increase the capital and solvency requirements of insurance companies; to expand the existing regulatory framework to include the regulating of all insurance intermediaries; and to give effect to matters related thereto.
Effectively, response to the CLICO collapse expands the regulator’s power in many jurisdictions by incorporating CLI’s position. Far more expansive than earlier Insurance Acts, the current Acts exhibit, inter alia, increased financial requirements, more robust corporate governance safeguards and recognition of spousal relationships. The latter, if not for purposes of insurable interest, then certainly for recognition of the distinction between revocable and irrevocable beneficiaries. Undoubtedly, in light of disputes surrounding the validity of ‘policies’ such as Executive Flexible Premium Annuity (EFPA) as true insurance contracts and not fixed interest deposits, some jurisdictions have made provision for variable life products. Mindful of life insurance companies’ creativity, Section 152 of the St Kitts and Nevis Insurance Act 2009,8 for instance, describes a ‘variable product’ as meaning ‘a variable life insurance policy, a variable annuity contract, or a universal life insurance policy.’ Such a concept was foreign to Insurance Acts of the 1960s.
1.3 Statutory Requirements
To mitigate the risk of corporate failure, recent regional insurance legislation imposes more robust regulatory and financial obligations, the underlying objective being maintenance of solvency – solvency of course being the prerequisite for insurance companies’ ability to honour obligations when, as probabilities dictate, they shall become due. Regulatory oversight therefore provides added policyholder protection.9 The regulator’s function ensures requirements are met as conditions precedent to registration. The Act in most jurisdictions expressly stipulates that ‘no person other than a body corporate may carry on insurance business.’10 The regulator must be satisfied that the entity is a company before authorising registration of an insurance company. This is not the case, however, in St Vincent and the Grenadines Insurance Act No. 45 of 2003, which recognises an Association of Underwriters and further makes provision for unathorised insurers to conduct insurance business.11 Apart from the latter category, in order to be registered the insurer must have a minimum paid-up capital which varies in accordance with the nature of the insurance business being conducted (i.e. whether long-term, general or motor vehicle insurance business). For instance, the Barbados Insurance Act stipulates that the company must have paid-up capital not less than $3 million for long term insurance business and $3 million for general insurance business. In the case of composite insurance business, the requirement is $5 million.12 Other financial prerequisites to registration apart from minimum paid-up capital exist. These include the payment of a prescribed deposit to the regulator13 and the maintenance of a statutory fund. A statutory fund requires an insurance company’s placement in trust of assets equal to the company’s liabilities and reserves.14 In Guyana, for instance, Section 46 of the Insurance Act provides that insurers registered to carry on business ‘shall establish and maintain a statutory fund in respect of each class of insurance business.’15 The classes of insurance business in Schedule 2 annexed to the act, are accident and liability, auto, marine and aviation and fire. Finally, before the insurer is entitled to receive a registration certificate, the company must disclose the nature of business to be pursued and the qualifications of key personnel. The regulator, upon receipt of an application, may request additional information considered relevant. Once satisfied of the insurance company’s solvency, the adequacy of the reinsurance arrangements for that class of insurance business16 and the fitness and suitability of each of the persons managing or controlling the company, a certificate of registration in the prescribed form will be issued.
The initial statutory requirements for registration may be summed up as follows:
- 1 The insurer must be a body corporate;
- 2 The insurer must have a minimum paid up capital;
- 3 A deposit must be lodged with the regulator;
- 4 A statutory fund must be created and maintained;
- 5 Disclosure of the nature of business to be pursued and the qualifications of key personnel.
1.4 Imposition of Penalties
In some jurisdictions, an insurer’s failure to observe any of the requirements under the Act triggers subjection to a penalty. Accordingly, Section 6 of the Jamaica Insurance Act imposes a penalty on the insurance company if it conducts insurance business without being an authorised body corporate, fails to satisfy deposit requirements and/or fails to submit the names and addresses of persons resident in Jamaica who are authorised to accept, on behalf of the body corporate, service of process in legal proceedings.17 The consequences of breach are severe. By virtue of Section 6(3), any person found to be in contravention shall be guilty of an offence and liable on summary conviction in a Resident Magistrates Court to a fine not exceeding $3 million or to imprisonment for a term not exceeding three years or to both such fine and imprisonment. In St Vincent and the Grenadines, by virtue of Section 24 of the Act, a company that fails to comply with the deposit requirement is liable on summary conviction to a fine of $10,000 and in addition to any other punishment is liable to having its certificate cancelled.
1.5 Financial Mechanisms
In addition to the initial requirements, regional statutes also contain financial mechanisms aimed at ensuring the financial viability of insurance operations. These mechanisms can be grouped into two categories: provisions governing the insurer in the conduct of insurance business, and provisions which, although inherently part and parcel of the conduct of insurance business, specifically pertain to the supervisory powers of the regulator.
1.6 Provisions Governing Operations of the Insurer
In addition to the initial requirements for registration, regional Insurance Acts contain provisions governing the operation of insurance business. These include the requirement that insurance companies file annual financial returns and submit audited accounts.18 Restrictions are also placed on the insurer’s borrowing powers,19 and the insurer’s investment strategy is circumscribed by specific rules on the insurer’s asset to debt ratio and the percentage of equity investment. The restrictions on the insurer’s investment strategy essentially channel investment to meet the state’s objectives while additionally serving to mitigate the risk of financial distress. This approach is evident in Section 55 of the Guyana Insurance Act,20 which lays out with some particularity rules regulating the insurer’s investment strategy:
every insurer carrying on long-term insurance business in Guyana under this Act shall have assets in Guyana and shall maintain such assets in an amount of not fewer than 85 per cent of its statutory fund, provided however that for each percentage point of its assets invested in the common stock or long term debt of a company in Guyana, the 85 percent minimum may be reduced by one percentage point, up to a maximum of a ten-percentage point reduction.
Collectively, these ongoing mechanisms buttress the solvency mandate of the St Kitts and Nevis Insurance Act.21 Section 33 of the Act provides:
‘(1) a registered insurance company that transacts more than one class of insurance business shall maintain records which accurately identify the assets comprising each insurance fund: (2)a registered insurance company shall, within four months of the end of each financial year, furnish a statement showing particulars of (a) liabilities in respect of each insurance fund and (b) assets comprising each insurance fund. Additionally, in the same act, section 34 prescribes rules governing the investment of insurance fund in assets: (1) an insurance bond shall be invested only in the assets prescribed in the fourth schedule; (2) the Minister may, by order published in the Gazette amend the fourth schedule.’
1.7 Supervisory Powers of the Regulator
Throughout the Caribbean, mechanisms for financial services regulation are transitioning from a sectoral to a consolidated approach. Historically, the region embraced the sectoral approach to regulating both financial and non-financial institutions. Contemporary mechanisms clearly reject the view that th...
