day 4 pres 2 asset liability management fsc jamaica angela beckford

8/8/2019 Day 4 Pres 2 Asset Liability Management FSC Jamaica Angela Beckford

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Asset-LiabilityManagement

Reasons the FSC is interested

CAIR/CARTAC/World Bank Conference

Caribbean Insurance Supervisors InitiativeJune 18, 2009

St. Georges, Grenada Angela Beckford

Financial Services Commission - Jamaica


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Definition of ALMPractice of management so that decisionsand actions taken with respect to assetsand liabilities are coordinated (IAIS)

Asset-Liability Management 2


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ALM is a Process



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Business Characteristics thatcall for ALM

Profits mostly on spreadCash flows to reinvestLiabilities payable on pre-set datesDifficult to find assets to match liability flowsEmbedded options

Investment performance guaranteesPotential reinsurance settlement time lagsClaims volatility



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Benefits of ALM ProgramPromotes identification and control of risksImproves capital and liquidity managementEnhances internal and externalcommunication



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Liabilities - New InsuranceProducts were Introduced

Investment or lump-sum policies A small amount of the premiums towards life insurance,with the majority for investmentProjected to yield rates of return similar to, or higher thanthose offered by commercial banks or other financialinstitutionsSome offered guarantees of 12% to 24%

Clients were allowed to make withdrawals with little or nopenaltyIncome earned on investments not subject to withholdingtax



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Assets - Economic Climate of the late 1980s to early 1990s

High inflation rates and relatively lowinterest rates of late 1980s causedincreases in asset prices

As way of maximizing nominal returnsfinancial institutions broadened assetbases to include long-term, illiquid assets(real estate and stocks)



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Change in Economic ConditionsCurrency depreciation and strong money supplygrowth led to high inflation rates (up to 80%) by

19921993 - a tight monetary policy stance to stabilizethe exchange rate and inflation

As real interest rates increased, asset prices fellSluggish G DP growth, which increased theincidence of non-performing assets



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Results of Uncoordinated Assets & Liabilities (I)

Withdrawals and surrenders increasedsignificantly

Clients funds were tied up in long terminvestments and poorly performing fundsInsurers tried to take out loans (at high interestrates) or sell more policies, which deepened theproblemIlliquidity led to insolvency



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

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

Argentina (1980) Indonesia (1997) Jamaica (1996) Chile (1981) Thailand (1997) Uruguary (1


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Financial Sector ReformRecognition of the importance of ALM andcapital adequacy requirements

Actuary is required to discuss andcomment on the insurers ALM practices inthe annual report to the FSC



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Current ALM Practices of the

Insurers Vary ConsiderablyHighly developed comprehensive ALM programsLimited program as part of Investment PolicyDoing something, but not structuredJust getting startedSome are driven by the group while others are

leading their group

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ALM RegulationResults of assessment revealed the needto go further Develop a regulation to which the FSC canensure they are adheringDraft circulated for consultation in April2009www.fscjamaica.org



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Asset Liability Management

Thank you,

Questions?

day 4 pres 2 asset liability management fsc jamaica angela beckford

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