Trinidad and Tobago: Selected Issues

International Monetary Fund

doi:10.5089/9781455228119.002.A001

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Trinidad and Tobago

Selected Issues

Author: International Monetary Fund

Publication Date:: 30 Mar 2011

eISBN:: 9781455228119

ISBN:: 9781455228119

Language:: English

Keywords:: ISCR; CR; rate; repo; excess reserves; interest rate; CLICO Trinidad; CLICO affiliate; capital shortfall; CLF collapse; CLICO policy holder; insurance subsidiary; Insurance supervision

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In this study, the economic developments and policy responses of Trinidad and Tobago after the crisis is reviewed. Policy recommendations are used to strengthen the legal and regulatory framework. According to the IMF’s financial system stability assessment (FSSA), there were critical gaps in the overall legal, regulatory, and supervisory structure for the insurance sector. The quality of insurance sector supervision can be assessed against internationally accepted established “core principles.” In this paper, an overview is presented of why the crisis occurred and some suggestions on how to prevent a future crisis.

Abstract

I. Collapse of CL Financial and Government Intervention¹

A. Introduction

1. The January 2009 collapse of Trinidad and Tobago-based CL Financial Limited (CLF) and related companies has represented a major financial shock to the Caribbean, which was already reeling from the global crisis. The collapse has had spillover effects in all 15 CARICOM states except for Jamaica and Haiti, with exposures as high as 17 percent of GDP in the Eastern Caribbean, leading to costly government interventions. CLF’s insurance subsidiaries, the Colonial Life Insurance Company (CLICO), the British American Insurance Company (BAICO), and related companies took in funds via deposit-like investment products as well as through traditional insurance and pension products, and channeled these to over-leveraged sister companies and real estate developments which have sharply lost value during the global crisis. The collapse has placed at risk the assets of a wide range of depositors, investors and policyholders, including individuals, corporate and public pension schemes, and financial institutions. The government intervention of CLICO, British American Insurance Trinidad (BAT), and CLICO Investment Bank helped contain contagion, but the cost net of assets could be as high as TT$13.6 billion (10 percent of GDP), including the TT$7.3 billion already injected.

2. This paper provides some background to the developments that led to the crisis, describes how the crisis evolved, and assesses the business practices and regulatory weaknesses which led to the collapse. It also describes policy responses to date to address the crisis and to prevent a recurrence, and presents key policy lessons on putting in place sturdy regulatory frameworks. Section BI describes the precursors to the collapse of CLF and efforts to resolve the crisis. Section C presents policy lessons and recommendations for strengthening the regulatory framework. Section D concludes, and an Appendix describes insurance sector crises and their resolution in Jamaica, the Republic of Korea, and Canada.

B. Collapse of CL Financial

3. CLF grew out of the Colonial Life Insurance Company (CLICO) founded in 1937. CLF was created in 1993 as a holding company as operations expanded beyond insurance into other sectors, including energy, financial services, real estate, and the beverages industry. According to the company’s 2007 annual report, the last one published, the consolidated assets of CLF were about US$16 billion—equal to some 30 percent of the Caribbean region’s GDP. ² The conglomerate has operations in at least 28 countries through at least 52 subsidiaries and associates in a complex structure (see Chart 1). It has majority ownership of the largest commercial bank, Republic Bank, and owns the largest insurance company in Trinidad and Tobago, CLICO (Trinidad) which had assets of US$2.9 billion at end-2008 (11 percent of Trinidad and Tobago’s GDP). The conglomerate’s enormous size may have contributed to a sense of security by policy holders.

Precursors to the Collapse

4. As CLF expanded into other sectors, a key source of financing for its expansion particularly after 2004 was the offer of deposit-like annuity products through CLF’s insurance subsidiaries—CLICO Trinidad which operated primarily in the domestic market and British American which operated in many countries of the region. The products offered returns that were substantially higher than bank interest rates but were not subject to stricter banking regulation and supervision. As described below, the rapid growth in illiquid assets concentrated in these sectors, through connected exposures financed by comparatively liquid liabilities, set the stage for the collapse.

5. CLF’s assets grew by 32 percent during 2005–07 (see Table 1). As of end-2007, about 25 percent of total assets were illiquid assets in the form of properties, including investment properties, plant and equipment, and land for development. These included real estate investments in Florida and petrochemical plants. During 2005–2007, property holdings increased by 78 percent.

Table 1.

Consolidated Balance Sheet of CL Financial

Source: Annual Reports of CL Financial Group and the Central Bank of Trinidad and Tobago.

Table 1.

Consolidated Balance Sheet of CL Financial

		2005	2006	2007
(In billions of U.S. dollars)
Assets		12.1	14.1	16.0
	Properties	2.2	2.8	3.9
	Loans and advances	2.8	3.2	3.5
	Financial assets	3.5	3.7	3.3
	Cash	1.1	1.5	1.9
	Other	2.4	2.9	3.3
Liabilities		10.9	12.9	14.6
	Insurance contracts	1.8	2.2	2.9
	Borrowings	1.1	1.3	2.4
	Deposits	4.0	4.5	4.7
	Other current liabilities	3.1	3.4	3.3
	Other	1.0	1.4	1.3
Equity		1.1	1.2	1.3
(In percent of total assets)
Assets		100.0	100.0	100.0
	Properties	18.0	20.1	24.8
	Loans and advances	23.3	22.5	21.9
	Financial assets	29.4	26.0	20.8
	Cash	9.1	10.9	11.6
	Other	20.2	20.6	21.0
Liabilities		90.5	91.3	91.6
	Insurance contracts	15.2	15.6	17.9
	Borrowings	8.8	9.5	14.7
	Deposits	32.9	31.8	29.7
	Other current liabilities	25.4	24.1	21.0
	Other	8.1	10.3	8.3
Equity		9.5	8.7	8.4
Memorandum item:
Exchange rate (TT$ per US$)		6.3	6.3	6.3

Source: Annual Reports of CL Financial Group and the Central Bank of Trinidad and Tobago.

Table 1.

Consolidated Balance Sheet of CL Financial

		2005	2006	2007
(In billions of U.S. dollars)
Assets		12.1	14.1	16.0
	Properties	2.2	2.8	3.9
	Loans and advances	2.8	3.2	3.5
	Financial assets	3.5	3.7	3.3
	Cash	1.1	1.5	1.9
	Other	2.4	2.9	3.3
Liabilities		10.9	12.9	14.6
	Insurance contracts	1.8	2.2	2.9
	Borrowings	1.1	1.3	2.4
	Deposits	4.0	4.5	4.7
	Other current liabilities	3.1	3.4	3.3
	Other	1.0	1.4	1.3
Equity		1.1	1.2	1.3
(In percent of total assets)
Assets		100.0	100.0	100.0
	Properties	18.0	20.1	24.8
	Loans and advances	23.3	22.5	21.9
	Financial assets	29.4	26.0	20.8
	Cash	9.1	10.9	11.6
	Other	20.2	20.6	21.0
Liabilities		90.5	91.3	91.6
	Insurance contracts	15.2	15.6	17.9
	Borrowings	8.8	9.5	14.7
	Deposits	32.9	31.8	29.7
	Other current liabilities	25.4	24.1	21.0
	Other	8.1	10.3	8.3
Equity		9.5	8.7	8.4
Memorandum item:
Exchange rate (TT$ per US$)		6.3	6.3	6.3

Source: Annual Reports of CL Financial Group and the Central Bank of Trinidad and Tobago.

6. A significant portion of CLF’s liabilities comprised insurance contracts, borrowing, and deposits. Of particular concern were the deposit-like products called Flexible Premium Annuities and Executive Flexible Premium Annuities. These were sold for a fixed term of 3–5 years, paid interest of 8–9 percent and up to 11 percent for large local currency deposits, with a penalty for early surrender before the instrument matured. By contrast, the ordinary savings deposit rate in 2006–08 in Trinidad and Tobago was about 2 percent.

7. CLF sold these as well as traditional insurance products throughout the Caribbean via CLF’s network of insurance subsidiaries and branches in 22 countries. These included CLICO affiliates in The Bahamas, Barbados, the Cayman Islands, Guyana, Panama, and Suriname. CLICO Barbados and another subsidiary, BAICO Bahamas, operated in the eight members of the Eastern Caribbean Currency Union (ECCU).³ CLICO Bahamas operated subsidiaries in Belize and Turks and Caicos Islands.

Insurance Regulatory Framework

8. The insurance sector in Trinidad and Tobago is governed by the Insurance Act of 1966. The Central Bank took over supervision of the insurance sector in 2004. To address shortcomings of the Act, the Central Bank issued Guidelines on matters including corporate governance, prudent lending, and claims handling. Financial returns are required quarterly, and companies are subject to on-site inspections roughly every 1½ years. Enforcement has been constrained by legal challenges to these Guidelines and the Act.

9. According to IMF’s 2005 Financial System Stability Assessment (FSSA), there were critical gaps in the overall legal, regulatory and supervisory structure for the insurance sector. Despite considerable strengthening of financial supervision, the framework was not fully aligned with the evolution of the financial system. Financial sector legislation did not endow regulators with sufficient formal powers to oversee cross-market and cross-border activities, and issues such as prudential and market conduct aspects of the insurance business.

Collapse and Intervention

10. With the deterioration of global economic conditions in 2008, many of CLF’s subsidiaries faced liquidity and solvency pressures. Methanol Holdings, one of the largest methanol producers in the world and a big contributor of dividends to CLF, suffered a collapse in methanol prices. Real estate investments in Florida held by regional BAICO and CLICO affiliates turned sour. As news of CLF’s difficulties spread, withdrawal requests from policyholders increased, and shortfalls in the statutory funds of many insurance entities became acute.

11. The Trinidad and Tobago authorities intervened in the affairs of CLF in January 2009 and announced a financial support package for three domestic subsidiaries: CLICO, Trinidad BAT, and CIB. In the announcement, the Central Bank identified the key factors leading to the intervention as:

Excessive related-party transactions which carry significant contagion risks,
An aggressive high interest rate resource mobilization strategy to finance equally high risk investments, and
Very high leveraging of the CLF’s assets, which constrains the potential amount of cash that could be raised from the asset sales.

The Central Bank indicated that it was aware of these deficiencies but had been “stymied by the inevitable challenge of change and by inadequacies in the legislative framework which do not give the Bank the authority to demand these changes.”

12. As part of the government intervention, an agreement was reached with the shareholders of CLF. Under the January 2009 memorandum of understanding (MoU) with the government, the shareholders of CLF agreed to take steps to correct the financial condition of CIB, CLICO Trinidad, and BAT by selling its stake in Republic Bank, Methanol Holdings Trinidad, and the Caribbean Money Market Brokers and any other assets as necessary. The Central Bank assumed control of CIB, CLF agreed to sell assets to meet the statutory fund requirements for CLICO Trinidad and BAICO Trinidad, and the government agreed to provide loan financing to meet those requirements. The government injected an initial US$191 million. An amendment to the Insurance Act in February 2009 addressed shortcomings in the legal framework by requiring quarterly reporting, by requiring that statutory fund requirements be met on an ongoing basis and not only at the end of the year, by implementing timely corrective action by insurance companies, and by authorizing information sharing among regulators. It was also announced in February that CIB’s third-party deposits would be transferred to the First Citizens Bank.

13. Subsequently, another agreement was signed in June 2009 under which the authorities gained a greater say in management to ensure that the assets owned by and managed by CLF would provide a source to repay the government. The new agreement required the appointment of a new Board of Directors of CLF with majority government representation and established an escrow account for the proceeds of any asset sales. The chairman of CLF was replaced shortly thereafter.

14. The difficulties of CLICO were initially perceived to be a liquidity problem which would be resolved as assets were sold and as the economy recovered. The objective stated at the time of the intervention was to “return CLICO to its original moorings.” Annuity holders were encouraged to roll over policies, and payouts were made to the extent possible.

15. In June 2010, the new government elected in May announced that repaying principal only to CLICO policy holders would require a further injection of capital. It charged a Select Committee with recommending a preferred solution for the repayment of CLICO’s traditional and non-traditional insurance liability products; a financial reorganization plan for CLF that demonstrates financial stability and ensures full satisfaction of commercial and inter-company debt; and a clear path and timetable on how the government will exit its loan capital position and restore public confidence.

16. In line with the Committee’s recommendation, the September 2010 budget speech announced a restructuring plan that would pay all investors in full up to a threshold (TT$75,000 or US$12,000) and pay the remainder over 20 years with no interest. Payments by CLICO to holders of nontraditional insurance products stopped at that time. The traditional insurance businesses of CLICO and BAICO would be combined and divested. The plan to restructure payments has met strong opposition from policyholders and after a review, is moving forward with modifications to provide a liquidity support window for credit unions and a compassionate window for vulnerable individuals.

Spillover Effects

17. Because BAICO and to a limited extent CLICO Trinidad drew funds throughout the Caribbean, the collapse of CLF has had large spillover effects affecting all 15 CARICOM states except for Jamaica and Haiti.

Barbados: In February 2009, following the difficulties of CLICO Trinidad, the government of Barbados intervened to provide liquidity to CLF’s domestic subsidiaries. The central bank deposited US$5 million into CLICO’s mortgage subsidiary and provided access to a special credit window in the event that additional liquidity was needed. An oversight committee was set up to conduct the resolution process. So far, the mortgage line of business has been sold, and there have been negotiations to sell the general insurance business, but the life insurance company faces a significant shortfall estimated at about 3.3 percent of GDP on the basis of unaudited statements. In October 2010, the government requested the appointment of a judicial manager for BAICO Barbados and did the same for CLICO Barbados in December 2010.
The Bahamas: In 2003, CLICO Bahamas, a subsidiary of CLICO Barbados with branches in Belize and Turks and Caicos, began making cash advances to its CLICO Enterprises Limited (CEL) subsidiary, primarily to finance a real estate project in Florida. CEL paid above-market interest rates to its parent company on the cash advances, with no fixed maturity. CLICO Bahamas was placed under provisional liquidation in February 2009 when it was unable to pay claims in Turks and Caicos. The judicial liquidator determined that it was unlikely CEL could repay the advances in full, leading to an estimated shortfall of about 0.2 percent of GDP as of end-June 2010. BAICO Bahamas raised funds in the ECCU also primarily to finance real estate projects in Florida. BAICO’s ECCU operations were placed under judicial management in July–August 2009, and a judicial manager for BAICO Bahamas was appointed in September 2009.
ECCU: The flow of funds from the ECCU through BAICO Bahamas and CLICO Barbados prior to the crisis was largely in one direction—funds were taken in locally and the corresponding assets were for the most part held elsewhere. This left the region with the highest exposure—the liabilities of the two companies were nearly EC$2.1 billion (17 percent of ECCU GDP). However, their assets in the ECCU were limited. Judicial managers found that BAICO had been insolvent since 1997. Trinidad and Tobago contributed US$50 million through the Petroleum Fund toward the resolution of BAICO. CLICO Barbados operated in the ECCU through branches, and the key decisions will therefore be taken in Barbados.
Guyana: Guyana’s commissioner of insurance petitioned the Court to liquidate CLICO Guyana, which was the country’s largest insurance company, the day after the decision to liquidate CLICO Bahamas, on which it had significant claims. The government has offered guarantees to policyholders (excluding life insurance products) up to G$30 million (about US$150,000) and to the National Insurance Scheme (with an exposure in the amount of 1.3 percent of GDP). Concerning life insurance policyholders, the government will facilitate (including using the residual cash in CLICO Guyana as collateral) the auctioning of the portfolio of performing life-insurance contracts. CLICO Guyana’s capital shortfall is estimated to be 1.4–2.9 percent of GDP, depending on the extent to which assets can be recovered. Part of the losses would be covered by US$15 million (0.7 percent of Guyana’s GDP) from Trinidad and Tobago through the Petroleum Fund.
Belize: CLICO Belize was placed under judicial management in April 2009 and into liquidation in September 2010. The life and health portfolio of the branch was transferred to a local insurance company in December 2009. The court approved a distribution of 25 percent of funds due to the annuity holders which was made in October 2010. The fixed assets of the company have not yet been disposed of.
Suriname: Following a run by depositors and policyholders in July 2009, the Court approved a moratorium on payments by CLICO Suriname, a subsidiary of CLF. The authorities have facilitated the sale of CLICO Suriname to another local insurance company.
Cayman Islands: The Cayman Islands branch of CLICO Trinidad was barred from writing new business in March 2009, and the branch closed in December 2009.

C. Policy Recommendations⁴

18. Strengthening the legal and regulatory framework to avoid a repeat of the experience with CLF is clearly essential. Country experience shows that good supervision matters. For instance, the stronger framework Jamaica put in place after the crisis in the 1990s successfully insulated the country from the CLF crisis (see Appendix). In addition, in St. Lucia, the statutory fund deficits of CLICO and BAICO were significantly smaller than in other ECCU countries, reflecting a stronger supervisory regime. This section provides policy recommendations on strengthening the legal and regulatory framework.

Principles for Effective Supervision

19. The quality of insurance sector supervision can be assessed against internationally accepted established “core principles” (see Box 1).⁵ The supervision of nonbanks, including insurance companies, is not unlike the underlying principles for the supervision of commercial banks. The overarching criteria for effective supervision of nonbanks are similar to the regulatory powers expected in banking supervision:

An effective legal framework;
Rigorous licensing powers and powers to revoke a license;
Powers of investigation such as on-site examinations, reporting, and off-site supervision; and
Enforcement powers, including the power to request the subscription of additional capital.

20. Among these general principles of effective insurance supervision, the CLF collapse underscores the particular importance of several aspects given the cross-border nature of activities:

Regional cooperation. Regulators can only get the complete picture of insurance companies operating in many jurisdictions through extensive sharing of information. To this end, the 30th CARICOM Meeting of Heads of State in July 2009 agreed to create a College of Regulators to share information regularly in order to address cross-border financial issues and to provide for consolidated supervision, both cross-border and cross-functional. Plans are also underway to establish a regional regulatory framework.
Trusteeship. An especially difficult aspect of the CLF experience is that liabilities and assets were in different jurisdictions. For this protection to be meaningful, assets should be under the control of trustee—for instance, a domestic commercial bank.

Box 1.

Core Principles for Effective Insurance Supervision

According to the core principles established by the International Association of Insurance Supervisors, effective supervision of the insurance sector requires:

An appropriate policy, institutional and legal framework;
A supervisory authority with adequate powers, legal protection and financial resources; operational independence; adequate capacity; transparent operations; the ability to undertake group-wide supervision; and capacity for market analysis;
Sharing of information with other supervisors domestically and abroad;
Clear, objective and public licensing, with fit and proper owners, board members, and management;
Supervisory authority to approve or reject significant changes in ownership, and a corporate governance framework recognizes and protects rights of all interested parties;
Insurers with adequate internal controls, risk management, reinsurance, and tools to establish adequate premiums;
Effective reporting, off-site monitoring, and on-site inspections;
Preventive and corrective measures that are timely, suitable and necessary, and enforcement of corrective actions and sanctions;
A range of options for orderly exit of insurers from the market;
Adequate technical provisions;
Investment standards including requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management;
Standards on the use of derivatives;
Capital adequacy requirements with suitable forms of capital that enable the insurer to absorb significant unforeseen losses;
Requirements for the conduct of intermediaries; and requirements for consumer protection, including timely, complete and relevant information to consumers both before and after a contract is signed;
Disclosure of relevant information on a timely basis to stakeholders; and
Measures to prevent, detect, and remedy insurance fraud and to deter, detect and report money laundering and the financing of terrorism.

The Policy Agenda

21. Building on the general principles outlined above, further work is needed to strengthen the regulatory framework in Trinidad and Tobago. In particular, new legislation and stronger supervisory personnel and procedures are needed to tackle problem companies. A new Insurance Act had been drafted by the time of the crisis after extensive consultation with the industry. The draft contains a modern approach to supervision, including measuring company solvency against a risk-based capital formula, strengthening corporate governance, and establishing more effective protection of policyholders. However, it has weaknesses and needs accompanying Guidelines. Although it would introduce risk-based supervision, it would still impose statutory fund requirements, which is a source of inconsistency in the insurance business. In addition, the draft law does not define the investment limits of statutory funds.

22. Proposed regulatory changes, when enacted, should permit consolidated supervision of internationally-active institutions and strengthen the present informal relationships with other foreign host regulators of the conglomerates’ foreign banking entities. It will be important to implement new rules for the valuation of insurance liabilities and formulas for risk-based capital. More generally, market discipline over the activities of the large groups should be substantially improved by encouraging them to disclose more than pro-forma information in their published reports, particularly in relation to credit and market risk management policies and actual positions, and average levels of connected exposures during the reporting period.

23. Identification of possible system-wide spillovers arising from problems within the large financial groups should be a key part of a risk-based approach to consolidated supervision. Part of this process could involve stylized stress-tests of the portfolios and counterparty risk management practices of individual large institutions and identifying the most vulnerable channels for contagion. It is likely to involve a mix of quantitative and qualitative analysis. The results should be discussed with institutions and appropriate mitigation measures put in place where necessary.

D. Conclusion

24. The collapse of CLF has had a devastating impact on much of the Caribbean, and has been costly to governments, public and private pension schemes, bank and non-bank financial institutions, and individuals. The cost could be as high as 10 percent of GDP in Trinidad and Tobago and 17 percent of GDP in the ECCU. The resolution of the crisis is nearly complete in countries with smaller exposures, and is taking some time in those with larger exposures.

25. The causes of the crisis were rapid growth in illiquid assets through connected exposures financed by comparatively liquid liabilities. The inadequate legal and supervisory framework provided supervisors with weak authority to address these issues.

26. This paper has provided an overview of why the crisis occurred and some suggestions on how to prevent future crises. It is hoped that it will assist authorities in addressing the significant remaining challenges, including completing crisis resolution efforts and strengthening the regulatory framework.

Appendix: Parallels with Previous Insurance Crises

The collapse of CLF differs from previous insurance sector crises in the extent to which it crossed jurisdictional boundaries to affect a large number of countries. However, there are many parallels with previous crises which provide a useful context for understanding why CLF collapsed and how to avoid a future crisis.

A. Jamaica

Insurance companies played a key role in triggering the second stage of the Jamaican financial sector crisis during the late 1990s. Life insurance companies offered new insurance products, known as investment or lump-sum policies, which enabled them to take deposits disguised as insurance premia. Only a small portion of deposits went toward insurance coverage, while the majority was used to invest in real estate, stocks, bonds, and securities. The interest paid was unrelated to the performance of insurance company assets. Rising interest rates brought the maturity mismatch of assets and liabilities into the open, as insurance companies borrowed from connected banks.

During 1996, a group of chief executive officers of life insurance companies approached the government for help with what they described as liquidity problems. Further examination revealed that there was in fact an insolvency problem to various degrees, and, moreover, that the banking sector was also affected through linkages within conglomerates. Almost 500,000 policyholders and over 2 million depositors were at risk. The government announced that it would bear the losses of covering the total exposure of depositors, life insurance policyholders, and pensioners. The bailout of the banking and insurance sectors led to a partial nationalization of the domestically-owned financial sector at a cost of over 40 percent of GDP.

The government established a new institution in 1997, the Financial Sector Adjustment Company (FINSAC), which had the objective of restructuring, merging, and recapitalizing financial institutions. FINSAC took ownership stakes in five commercial banks, seven insurance companies, three building societies, and three investment banks. In each case, FINSAC purchased ownership stakes of at least 25 percent to obtain veto power over management decisions, and in some cases FINSAC took over management of the institutions.

The government also pushed through a number of reforms to strengthen financial sector supervision. These led to the establishment of the Financial Services Commission in 2001. Apparently as a result of these reforms, CLICO and BAICO chose not to operate in Jamaica, which was therefore unaffected by the CLF crisis.

B. Republic of Korea

During 1997, the Republic of Korea faced a systemic collapse of its financial sector not limited to insurance. Eighteen life insurers were deemed to be insolvent by the end of 1997. Both life and non life insurers had been encouraged to become shadow banks, partly to fund their chaebol parents. The Asian financial crisis then exposed the chaebol balance sheets and those of their creditors, a number of which had also engaged in risky real estate investments.

The Financial Supervisory Commission asked all insolvent insurers to submit rehabilitation plans. Following plan submission, four life insurers immediately had their policy books transferred to other large insurers. Subsequently, another five troubled insurers were merged into other insurers, and another was resolved through portfolio transfer. Other insurers were placed in the hands of legal custodians and put up for sale.

These enforcement actions were funded by issuance of specialized bonds, public reserve funds and borrowing from the World Bank. The insurance sector received 12.6 trillion won from the government to protect policyholders, which was used to fill the asset liability gap and where necessary to acquire troubled insurers. The key principles adopted in this resolution program were: minimize the fiscal impact; ensure speedy resolution of troubled insurers; pursue regulatory reform in a transparent manner; and improve corporate governance. A key regulatory outcome was that insurers have to now submit their solvency position on a quarterly basis.

C. Canada

Confederation Life of Canada (Confed) entered liquidation in August 1994, following large losses in its real estate and mortgage portfolio. Confed was a life insurance company with 1.8 million Canadian policyholders with operations also in the United States and the United Kingdom. At the end of 1993, 71 percent of its assets of US$14 billion were in real estate and mortgages.

There were failed rescue attempts by another company in 1993 and by the six leading Canadian life insurers in 1994. Regulators became concerned that public apprehension over the company could lead to wave of withdrawals and cancellations, with potential systemic risks. The liquidator ultimately determined that the company was not in fact insolvent. There were no losses to policy holders, and the cost to the industry-financed compensation fund was only Can$5 million.

References

International Association of Insurance Supervisors, 2003, Insurance Core Principles and Methodology, (Basel: International Association of Insurance Supervisors).
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International Monetary Fund, 2006, Trinidad and Tobago: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes, (Washington DC: International Monetary Fund).
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International Monetary Fund, 2010, Trinidad and Tobago: Financial System Stability Assessment, (Washington DC: International Monetary Fund).
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This chapter was prepared by Hunter Monroe. It covers developments to January 6, 2011. The author is grateful to the authorities for providing information and clarification; to Judith Gold, Philip Liu, and Yi Wu for valuable comments and suggestions; to Lulu Shui for excellent research assistance; and to Sherrie Barnes for her assistance in preparing the manuscript.

The conglomerate is privately owned, and more recent financial data, either at a consolidated or subsidiary level, has not been readily available to the public.

The members of the ECCU are: Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. Although BAICO was legally headquartered in the Bahamas, it operated from Trinidad.

This section draws upon IMF (2010).

International Association of Insurance Supervisors (2003).

Appendix

This appendix provides more detail on the quantitative analysis described above. It discusses in more detail the data used, the statistical test results, and their robustness. It also presents impulse response charts, showing the response over time of each variable to shocks to other variables. Significance refers to the 5 percent level if not indicated.

Lending Rate

The lending rates used in the analysis are the lowest rates that customers received for demand loans. Rates for the median loan rate and for other types of loans follow similar trends. Weighted rates on new loans would be the ideal lending rate for the analysis; however, the data are not available. We use monthly data from June 2005 to September 2010. The null hypothesis of no Granger causality can be rejected at the 5 percent level. We use the level instead of the log of excess reserves because of the existence of a few negative observations. The default lag for all the analyses is 2.

The null hypothesis of a unit root for the lending rate can be rejected at 5 percent level using the augmented Dickey-Fuller test. The null however cannot be rejected for the repo rate, and the deposit and T-bill rates that are discussed below. This is probably the result of high persistence in the rates, short data period, and the low power of the test.

Credit Growth

Our measure of credit growth is non-mortgage credit since mortgage credit seems to have different dynamics. For example, from January 1994 to November 2003, mortgage loans declined by 36 percent while credit to the private sector excluding mortgage grew by 149 percent. In addition, it is not possible to control for housing prices as data are not available. We use quarterly data from 1997Q3 to 2010Q2 on banking sector’s non-mortgage credit to the private sector in nominal TT$ (in log), non-oil GDP in TT$ (in log), and the real prime lending rate.

The prime lending rate instead of the actual lending rate is used because of data limitations over the longer period, and the correlation between the prime lending rate and the lowest demand loan rate for the overlapping period is 0.88. Quarterly non-oil nominal GDP is constructed using the quarterly real non-oil GDP growth from the central bank and CPI inflation, and the real lending rate is calculated as nominal rates minus y-o-y inflation. We use non-oil GDP because loans to the energy sector account for less than 4 percent of total loans. Although the null hypothesis of a unit root cannot be rejected for non-mortgage credit and GDP, the hypothesis of no cointegration can be rejected at 5 percent level.

Deposit and T-bill Rates

The null hypothesis of no cointegration for the VAR variables can be rejected at 10 percent and 5 percent respectively.

Inflation

The VAR analysis uses monthly data from May 2002 to October 2010 and includes headline inflation (yoy) and the repo rate. We also include the oil and gas price changes (yoy) as proxies for the domestic economic activity and international food price inflation, all as exogenous variables (all helps forecast domestic inflation). In an alternative specification, we also add private sector growth as a proxy for economic activity and the results (not reported) are similar.

Since there are potential large measurement errors in the inflation data, especially for food products, we also use core inflation for the analysis. ¹¹ The repo rate again does not help forecast core inflation, and the VAR impulse response show that a 15 bps increase in the repo rate could lead to a very small (0.03 percent) decline in core inflation in the second month, but the impact is not statistically significant (Figure 6). We conduct similar analysis using quarterly data covering the same period, where we use the non-energy sector GDP growth as a measure of economic activity. The results (not reported) again point to little impact on inflation from the repo rate.

FX Queues

We use monthly data from January 2006 to November 2010, and oil and gas prices (in log) as exogenous variables to control for FX supplies. We use the level instead of the log of queues because the existence of zero values. Although the null hypothesis of a unit root cannot be rejected for queues, the null hypothesis of no cointegration can be rejected, including for the subsequent analyses involving the T-bill rates and excess reserves. We also conduct similar analyses adding inflation rate (either headline or core) to the VAR. The results (not reported) are broadly similar, and the inflation does not have a statistically significant impact on the queues.

References

International Monetary Fund, 2004, “Monetary and Exchange Rate Policy,” in Trinidad and Tobago—Selected Issues, IMF Country Report No. 05/6.
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International Monetary Fund, 2006, “The Monetary Transmission Mechanism in Trinidad and Tobago,” in Trinidad and Tobago—Selected Issues, IMF Country Report 07/8.
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This chapter was prepared by Yi Wu. Data are from International Financial Statistics and the central banks of Trinidad and Tobago, Barbados and The Bahamas. The author is grateful to Central Bank staff including Daryl Cheong, Carlene Coker, Wendy D’arbasie, Shanta Dhoray-Baig, Angela Henry, Susan Ramirez, Avinash Ramlogan, and Veronica Ramcharan for providing data and clarification; to Judith Gold, Philip Liu, and Hunter Monroe for valuable comments and suggestions; to Lulu Shui and Genevieve Lindow for excellent research assistance; and to Eneshi Kapijimpanga and Sherrie Barnes for their assistance in preparing the manuscript.

See also the discussions in IMF (2004, 2006) of the transmission mechanism in Trinidad and Tobago.

See http://www.central-bank.org.tt/monetary_policy/index.php?pid=2001.

For example, a November 2010 press release indicated that the decision to lower of the repo rate was made to “provide further stimulus to domestic demand and private investment.”

There is no reserve requirement for foreign currency deposits.

Commercial banks held 44 percent of total Treasury bills and notes outstanding as of end-October 2010, up from 15 percent in January 2009. Treasury bills and notes accounted for 7.5 percent of bank’s total assets in June 2010, up from 3.6 percent in January 2009.

In principle, short-term government securities would be more preferable for liquidity management.

In the current circumstances, where the deposit rate is already extremely low (0.3 percent), the impact would probably be limited. The pressure on the FX market would be higher if there were associated liquidity injections.

In late 2009, a major mutual fund converted its funds from fixed net asset value (NAV) to floating NAV, triggering a large withdrawal and a substantial increase in bank deposits.

A bivariate Granger causality test examines whether variable y helps forecast another variable x once lags of x are controlled for. The reasoning is that if event Y is the cause of event X, then the event Y should precede the event X.

See the accompanying Article IV Consultation staff report for more details.

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Trinidad and Tobago: Selected Issues

Author: International Monetary Fund

Volume/Issue:: Volume 2011: Issue 074

Publisher:: International Monetary Fund

ISBN:: 9781455228119

ISSN:: 1934-7685

Pages:: 39

DOI:: https://doi.org/10.5089/9781455228119.002

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CL Financial Organizational Structure, 2007

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Selected Countries: Deposit Interest Rates, 2008

(In percent)

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Average CFR methanol prices of major exporters

(US$/tonne)

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S&P Case/Shiller Indices

(Jan. 2000 =100)

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Repo rate, excess reserve, and lending rate