Dear Editor,

We refer to an article in the Caribbean Business section of the Observer of Friday, April 16, 2010 entitled ‘Most Ja insurance firms fail to pass asset requirement test’. The article referred to the recent publication of the financial statements of some general insurance companies in the newspapers and then attempted to analyse these statements by drawing attention to the Minimum Asset Test (MAT) results of the companies.

The attempted analysis concluded that “if a major natural disaster were to befall Jamaica, most of the country’s general insurance companies would be unable to pay out claims …” If by major natural disaster the author of the article is referring to catastrophes similar in intensity and strength of events that have hit Jamaica since 1988, then the conclusion is flawed and certainly not supported by the evidence provided by the MAT results or the published financial statements.

The MAT is a conservative solvency test that compares the Available Assets of an insurance company with its Required Assets for test purposes. Available Assets represent assets that are admissible for the purpose of solvency; illiquid assets such as certain items of furniture and fixtures and intangible assets are omitted.

Required Assets represent all liabilities plus margins added for outstanding claims and unearned premiums. The test, therefore, recognises only assets that are capable of being converted into liquid form in the short term, while at the same time adding margins to certain estimated liabilities.

For the year 2009, the standard was 135 per cent, which means that Available Capital must exceed Required Capital by at least 35 per cent. The base MAT standard is 100 per cent.

We concur that the companies which did not achieve the standard of 135 per cent failed the test and are in breach of the insurance regulations. We hasten to add, however, that notwithstanding the companies’ failure to achieve the 135 per cent standard, these MAT results nonetheless provide a relatively strong cushion and protection for the companies and their policyholders and the companies should face no difficulties in meeting their normal claims obligation.

The FSC has been in dialogue with the companies on the issue of the MAT and has decided to exercise forbearance in light of the global economic crisis which resulted in significant impairment in the fair values of certain investment assets of some companies.

In the opinion of the FSC, the insurance companies have adequate catastrophe reinsurance cover to overcome an event similar to Hurricane Gilbert. The Insurance Act requires insurance companies, as a condition of registration, to make adequate arrangements for reinsurance. This means that the insurance companies cannot rely solely on their capital to cover their insurance liabilities but are required by law to mitigate these risks by ceding portions to reinsurers in order to ensure that the insurance risks assumed can be adequately managed.

Reinsurers bear the greater portion (close to 90 per cent) of the property insurance risk, in addition to significant risks for motor vehicle and other classes of insurance.

The FSC regrets the sensational headline and unfortunately worded opening paragraph of the article and once again refutes them.

Rohan Barnett

Executive director

Financial Services Commission