Wilberne Persaud, Financial Gleaner Columnist

Persaud

Should I write this piece on the financial sector meltdown with apologies? Should I write this piece at all? Is the subject of any material import or interest at this time? Have we learnt our lessons?

Perhaps I should, particularly because of continuing efforts to avoid culpability in the demise of the indigenous financial services sector in the mid 1990s.

Here is some feedback on previous articles.

My lawyer friend's email takes the cake: "I do not read your article because I do not find it balanced. You try to justify the erroneous action of Omar Davies. His actions destroyed the lives of so many Jamaicans and put the economy back 20 years. Then he sold Jamaica not to first world coloniser but to third world coloniser. Look back on the companies he destroyed."

As judge to defendant in the dock: "I refuse to read, hear your testimony. I hereby sentence you."

This sentiment, entirely contrary to the facts is still tenaciously believed by many. But another reader sees it differently. He gave permission to use his email without mention of his former company's name. He says:

"I read your article in the Sunday Gleaner of September 23, 2007 rebutting Paul Chen-Young's rationale for the financial meltdown during the mid 90s. Chen Young is clearly attempting to shift the responsibility for that situation because he was part of the reason. I was at the time the general manager of a life insurance company that had been doing business in Jamaica for nearly 40 years.

Sell to the highest bidder

I can tell you that we could not cope with the competition for the very reason that our returns paled into insignificance compared to that of LOJ, Mutual Life, Island Life, Eagle and even First Life. The result is that [my company] had to sell to the highest bidder and flee the country. Those companies drove wages to levels that could not be sustained.

A strike by employees (after comparing salaries across insurance companies) resulted in an Industrial Court award of 30 per cent increase when the company had made a loss that year. Why was it making a loss? The policy of [my company's head office] was that an insurance company must make an underwriting profit. Depending on investment income alone on which to pay all one's expenses was regarded as bad financial practice because that situation could reverse on you quickly leaving you with all your expenses intact.

Making an underwriting profit is not all that difficult for an insurance company. Policies are priced to accommodate a reasonable level of expenses, and are based on actuarially assumed levels of mortality (rarely incorrect unless ignored in underwriting practices). The premium is then adjusted to recognise the fact that it will earn a minimum interest rate. If (1) the actual incidence of mortality of the portfolio is equal to or less than the assumed mortality in the product pricing, and (2) the expenses of the company can be contained within those assumed in the product; and (3) investment earnings are equal to or more than the assumed minimum rate, the insurance company makes an underwriting profit.

Actual profits

It was the failure of all the insurance companies to observe these very simple and basic financial precepts that led them all into trouble in the '90s. The lure of the attractive real estate boom led them all to invest vast sums in real estate and to treat unrealised appreciation as actual profits. With oodles of unrealised profits on their books they proceeded to spend lavishly on luxury cars for all managers and trips for the top cadres not to mention hefty salary increases for staff.

Underwriting was thrown to the winds and all products became 'investment products' instead of insurance products. When investment income fell to more realistic rates and the real estate boom came to an end through saturation, all the insurance companies were left with were their expenses. By this time [my company] had thrown in the towel and left. Banks that had put out money in the real estate boom were left with albatrosses around their necks.

"I recall that on one occasion when the Chairman of [my company] was visiting Jamaica I arranged for him to meet, over lunch, all the heads of the insurance and banking community.

They regaled him on the necessity of investing in real estate where all the action was. Investing in real estate was projected as a patriotic requirement. They projected an appreciation rate of more than 20 per cent per annum for the indefinite future. He calmly posed the hypothetical that if Jamaica grew at the rate of 20 per cent per annum it would be the richest country in the world within 10 years. '

Sold and left

Two books have been written about aspects of the 1990s financial sector crash: Paul Chen Young's 'The Entrepreneurial Journey in Jamaica' and Wilberne Persaud's descriptive 'Jamaica Meltdown'. - File photos

Do you think that this is possible gentlemen?' Silence! He knew that they were all headed for the high jump. Shortly thereafter [my company] sold its operations to LOJ and left.

"I am surprised but agreeable so to learn that this matter is still being debated in Jamaica and was not buried under the debris of all the failed insurance companies and banks. Your article was a refreshing reminder that euphoria is not a basis for management. But do you think anyone could have told the Oliver Jones' and Paul Chen-Youngs this in the 90s? Dem hooda laugh after you bwoy."

Interesting, I thought.

wilbe65@yahoo.com