Edward Seaga
This is an appropriate stage to introduce the main theme of this presentation: The enhancement of life insurance sales in order to mobilise greater national savings for greater investment and economic growth.
When I held the position of Minister of Finance, from 1967-1972, there were two features of great importance to the financial sector. The first was an allowance given as a tax relief on the purchase of life insurance which could be written off as an expense in the account of the taxpayer. This non-taxable amount of £300 may seem small today but was quite generous then. All taxpayers were allowed to write off the £300 allowance against taxable income for the purchase of life insurance. It is time now to review the resumption of an appropriate allowance as an incentive for the purchase of whole life policies and their derivatives.
I am not one to urge the giving up of revenue easily, bearing in mind that the revenue of the country is already under pressure to deal with servicing one of the highest debt ratios in the world. But an incentive that promotes savings which in turn creates investment and generates growth can be justified. What is given up as revenue eventually creates greater revenue from the investment cycle which it generates. The allowance should be seen as an investment by the Government to create greater revenue, a welcome addition to boost, rather than reduce, the revenue.
Degree of foreign ownership
The 1960s had one other feature which was of paramount importance. My term as Minister of Finance began in 1967. By 1968, I was questioning the degree of foreign ownership in the financial sector; both insurance companies and banks, with very few exceptions, were foreign-owned.
Jamaica had recently attained its independence. But there could be no true independence if ownership of the means by which the economy progressed was dominantly controlled by external financial managers. The question was how to reverse the level of ownership of insurance companies and banks so that the mix of equity would be predominantly Jamaican. I was seeking participation in equity, not full equity. To deal with this overwhelming task I used a direct approach. I advised the owners of all foreign-owned financial companies that the Government wished a partnership with a mix of foreign and local shareholding. There was no compulsion, no threats, just moral suasion.
Practically all the foreign banks readily agreed to set up subsidiaries in Jamaica to be listed on the Jamaica Stock Exchange so that shares could be offered to the Jamaican public to create a Jamaican shareholding. The insurance companies at a meeting with me in Canada, after some objections, preferred to go the route of full transfer of ownership in respect of those companies wishing to make the change. The more prominent companies made the change, mostly in 1971. The negotiations reshaped the ownership landscape of the life insurance industry in Jamaica dramatically. The way was led with the formation of Life of Jamaica Limited, initiated by that far-sighted pioneer, Danny Williams. This set the stage for the new LOJ to take over the Canadian-owned North American Life Insurance Company, in 1970. The new ownership panel then read as follows:
Life of Jamaica took over the business of North American Life Insurance Company in 1970.
Island Life Insurance Company was established in 1971 and acquired the portfolio of Manufacturers Life.
Jamaica Mutual Life Assurance Society took over the Standard Life Assurance Company portfolio in 1971.
Life of Jamaica acquired the portfolio of Confederation Life Insurance Company in the 1970s and Empire Life in 1971.
Island Life acquired Dominion Life in 1978.
Jamaica Mutual acquired Imperial Life's portfolio in 1978.
Jamaicanisation programme
This was the result of the Jamaicanisation programme which I launched in 1969 to undertake an epic transformation of ownership of the financial sector to substantially provide for Jamaican ownership.
Thereafter, the life insurance industry grew buoyantly despite a rough passage in the 1970s. This continued until the meltdown of the financial sector in the mid-1990s which caused the most prominent companies to collapse. Some were bailed out and still others salvaged by new owners from Trinidad and Barbados who have now restored, in good part, their financial health. The transformation of ownership precipitated by the catastrophe of the mid-1990s so changed the pattern of ownership that, by 2004, all six life insurance companies were foreign owned, some by CARICOM partners.
Recovery is under way, but the number of ordinary life policies in force is still 163,953 or 22 per cent less than the total which existed in 1995 preceding the meltdown. Recovery is, therefore, incomplete. It is a work in progress.
Insurance industry
The general insurance industry is not to be considered a poor cousin of the life counterpart. While general insurance does not cover the vicissitudes of life, it is responsible for all property cover, which indirectly affects life. Without such cover, imagine what would happen in a catastrophe without insurance cover for homes and business. In a catastrophic situation life could be set back to near irrecoverable levels.
It almost came to that with Hurricane Katrina which last year demolished New Orleans and Hurricane Ivan which virtually blew The Cayman Islands away. The victims in New Orleans were generally poor workers who would not have been the type to cover their assets adequately. The sad stories portrayed on television spoke to wholesale destruction. In addition to 'Katrina' last year, there was also 'Rita' and 'Wilma'. While destruction was especially intense in 2005, the year before was also active. It is true to say to those who live in this region that catastrophe could be just around the corner.
There are other types of unpredictable events which cause general apprehension such as vehicular accidents. This has already become an area of deep concern and rightfully so, for many good reasons:
The number of cars on the road has dramatically increased, a great many of them unlicensed and uninsured;
widespread fraud exists in obtaining drivers licences;
motor vehicle theft is rampant, with losses reaching $1.5 billion per annum.
Taken together, the annual loss sustained from these events has produced a negative bottom line for the industry as a whole of some $600 million.
These may be considered risk losses which every business must take. But they are substantial enough to warrant a likely significant increase in reinsurance rates, which is the benchmark to set the retail rates for individual asset owners (home, factory, car, etc.). It appears that the expected increase in rates could be 25 -30 per cent over present cost. The likely result could be an increase in self-insured owners, that is, the owner bearing the full risk for losses, or underinsured assets.
This is not an encouraging picture at all. But it gets worse.
Withdrawal of reserves
Despite the heavier burden of additional costs likely to come, government regulations are requiring the withdrawal of reserves built up to be used in the event of catastrophes. These funds, the new regulations say, should be treated as surplus income to be taxed.
There is still one further burden to be carried. A compensation fund is to be established as a requirement for the industry to protect clients from insolvency.
These new regulations might be imposing just that extra burden which could be the tipping point, necessitating a restructuring of the industry on a much reduced scale. That much-reduced scale is part of a fearful future.
It seems that a government which in the 1990s pushed the envelope so far that it created a catastrophe for property and finance ought not to go that route again. It is time to heed advice and think this out before the winds start to blow and the waters swell to floods. Jamaica cannot stand another wipe-out of the man-made variety.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the University of the West Indies. Email: odf@uwimona.edu.jm.
