INSURANCE companies and securities dealers would have to prepare for financial crises before they happen, test their response plans annually and alert the Financial Services Commission (FSC) within three business days when specified signs of distress emerge.

Under a proposed regulatory framework, firms would identify in advance how they could rebuild capital, secure cash and protect policyholders, investors and client assets after a severe shock. Their options could include raising capital, restricting dividends, selling investments or business lines and transferring client accounts to another provider.

The measures would apply to prescribed financial institutions and financial holding companies in the insurance and securities sectors.

Jamaica divides oversight of its financial system between two regulators. The Bank of Jamaica supervises deposit-taking institutions, while the FSC regulates non-deposit-taking sectors, including insurance, securities and private pensions. The proposed rules cover specified insurance and securities entities, not banks and other deposit-taking institutions.

The FSC says the regime is intended to detect financial problems earlier, preserve critical services and reduce the risk of a disorderly institutional failure or the need for extraordinary public financial support.

The draft recovery-planning guidelines were published on August 19 under a stakeholder letter dated August 17. Public comments are being accepted until September 16.

A key feature is an early-warning system aimed at giving firms and the regulator time to respond before financial conditions deteriorate further.

Each company would set quantitative and qualitative indicators, with thresholds ranging from early-warning levels to recovery triggers.

The FSC says those triggers should sit above regulatory minimums. Waiting until capital or other requirements are breached could leave management with too little time to take effective corrective action.

Insurers would monitor capital and solvency, liquidity, asset quality, claims performance, earnings and operational risks.

Securities firms would track capital, liquidity, asset quality and profitability, along with the protection of client assets, exposure to market movements and concentrations involving counterparties or major clients.

Crossing a recovery trigger would not automatically force a company to take a particular step. It would instead start an escalation process involving senior management or the board.

The company would also have to notify the FSC within three business days, unless the regulator sets a different deadline.

That requirement would apply when a recovery trigger is breached, a recovery measure is activated or an event materially weakens the company’s ability to carry out its plan. The FSC would also have to be informed of a significant change in the company’s financial condition that affects assumptions underpinning the plan.

Once a recovery plan is activated, the company would have to explain what prompted the decision, what management has done and what further action it intends to take.

Planning before trouble starts

The guidelines require more than a list of emergency measures. Firms would have to show how each option could work under pressure.

Possible responses include issuing new shares or subordinated debt, restricting dividends, selling investments, reducing expenses and suspending new business in selected areas.

The FSC also wants firms to consider more difficult measures, including selling subsidiaries or business lines, transferring portfolios or client accounts and substantially restructuring their balance sheets.

Insurers could seek additional reinsurance coverage. Other firms could draw on committed credit facilities, outsource non-critical functions or restructure operations.

For each option, companies would assess the likely effect on capital and liquidity, the time needed to put it into effect and any barriers that could prevent it from working. They would also examine possible consequences for policyholders, investors, counterparties and the wider financial system.

Firms would have to demonstrate that their combined options could withstand the scenarios examined in their plans.

Annual crisis exercises

The FSC wants the plans tested against shocks substantially worse than those used in ordinary business forecasting and risk management.

Each plan would include at least three scenarios: one affecting the company, another hitting the broader economy or financial system and a third combining both types of shock.

The regulator’s examples include major investment losses, a cyberattack, the loss of a critical reinsurance arrangement, the departure of key executives, a regional recession, a global financial-market crisis, a pandemic or a natural catastrophe with wider financial consequences.

At least one scenario would test a sudden and substantial deterioration in capital adequacy. Another would examine severe liquidity pressure.

The exercises would go beyond financial modelling. At least once a year, firms could be required to conduct boardroom simulations, operational dry runs and “fire drills” covering high-priority areas such as information technology, liquidity management and communications.

Boards would carry ultimate responsibility for the process. They would approve the initial plan and major revisions, allocate the necessary resources and determine whether the proposed measures could realistically be carried out during a crisis.

Financial groups would generally prepare one consolidated plan covering each prescribed institution within the group. It would take account of relevant local and overseas operations, subsidiaries and branches based on their importance to the group and the financial system.

Internal audit or a qualified external party would independently review each plan. The FSC would then assess whether it is complete, credible and practical.

The regulator could order companies to correct material deficiencies and take further supervisory action if the problems are not addressed promptly.

The guidelines are not yet final and could change after consultation. If adopted, they would take effect when the final instrument is issued.

Affected institutions would then have 12 months to prepare their plans, obtain board approval and submit them to the FSC.