Asset-Liability

Management
– Reasons the FSC is interested

CAIR/CARTAC/World Bank Conference

Caribbean Insurance Supervisors Initiative
June 18, 2009
St. Georges, Grenada
Angela Beckford
Financial Services Commission - Jamaica
Definition of ALM
 Practice of management so that decisions
and actions taken with respect to assets
and liabilities are coordinated (IAIS)

Asset-Liability Management 2
ALM is a Process

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Business Characteristics that
call for ALM
 Profits mostly on spread
 Cash flows to reinvest
 Liabilities payable on pre-set dates
 Difficult to find assets to match liability flows
 Embedded options
 Investment performance guarantees
 Potential reinsurance settlement time lags
 Claims volatility

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Benefits of ALM Program
 Promotes identification and control of risks
 Improves capital and liquidity management
 Enhances internal and external
communication

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Liabilities - New Insurance
Products were Introduced
 Investment or lump-sum policies
 A small amount of the premiums towards life insurance,
with the majority for investment
 Projected to yield rates of return similar to, or higher than
those offered by commercial banks or other financial
institutions
 Some offered guarantees of 12% to 24%
 Clients were allowed to make withdrawals with little or no
penalty
 Income earned on investments not subject to withholding
tax

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Assets - Economic Climate of
the late 1980s to early 1990s
 High inflation rates and relatively low
interest rates of late 1980s caused
increases in asset prices
 As way of maximizing nominal returns
financial institutions broadened asset
bases to include long-term, illiquid assets
(real estate and stocks)

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Change in Economic Conditions
 Currency depreciation and strong money supply
growth led to high inflation rates (up to 80%) by
1992
 1993 - a tight monetary policy stance to stabilize
the exchange rate and inflation
 As real interest rates increased, asset prices fell
 Sluggish GDP growth, which increased the
incidence of non-performing assets

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Results of Uncoordinated
Assets & Liabilities (I)
 Withdrawals and surrenders increased
significantly
 Clients’ funds were tied up in long term
investments and poorly performing funds
 Insurers tried to take out loans (at high interest
rates) or sell more policies, which deepened the
problem
 Illiquidity led to insolvency

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Results of Uncoordinated
Assets & Liabilities (II)
 11 entities were intervened:
5 Life Insurance Companies
 6 Commercial and Merchant Banks;
 Fiscal cost of support was 40-42% of
GDP, a significant proportion of which was
financed by public debt

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 Six Largest Cost of Banking Failures Before 2003 (As a Percentage of GDP)

60

50

40
Percenatge

30

20

10

0
Argentina (1980) Indonesia (1997) Jamaica (1996) Chile (1981) Thailand (1997) Uruguary (1981)

Argentina (1980) Indonesia (1997) Jamaica (1996) Chile (1981) Thailand (1997) Uruguary (1981)
Financial Sector Reform
 Recognition of the importance of ALM and
capital adequacy requirements
 Actuary is required to discuss and
comment on the insurer’s ALM practices in
the annual report to the FSC

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Current ALM Practices of the
Insurers Vary Considerably…
 Highly developed comprehensive ALM programs
 Limited program as part of Investment Policy
 Doing something, but not structured
 Just getting started
 Some are driven by the group while others are
leading their group

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ALM Regulation
 Results of assessment revealed the need
to go further
 Develop a regulation to which the FSC can
ensure they are adhering
 Draft circulated for consultation in April
2009
 www.fscjamaica.org

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Asset Liability Management

 Thank you,

Questions?