THE Financial Services Commission (FSC) has described as flawed a Caribbean Business Report story on the ability of Jamaican insurance firms to pay out claims in the event of a major natural disaster, and has assured clients that the firms are, by law, adequately covered by reinsurance.

The FSC’s executive director, Rohan Barnett, was responding to the April 16 article which reported that six of the island’s general insurance companies were unable to meet the minimum requirement of the all-important Minimum Asset Test (MAT), which is set at 135 per cent, and as such would be unable to meet claims in the event of a major natural disaster.

The information was contained in the companies’ financial statements.

However, the FSC said that while the companies did not achieve the threshold of 135 per cent, the MAT results “nonetheless provide a relatively strong cushion and protection for the companies and their policyholders and the companies should face no difficulties in meeting their normal claims obligation”.

At 100 per cent firms are legaly solvent.

“In the opinion of the FSC, the insurance companies have adequate catastrophe reinsurance cover to overcome an event similar to Hurricane Gilbert,” said Barnett. “The Insurance Act requires insurance companies, as a condition of registration, to make adequate arrangements for reinsurance. This means that the insurance companies cannot rely solely on their capital to cover their insurance liabilities but are required by law to mitigate these risks by ceding portions to reinsurers in order to ensure that the insurance risks assumed can be adequately managed.”

Added Barnett: “Reinsurers bear the greater portion (close to 90 per cent) of the property insurance risk, in addition to significant risks for motor vehicle and other classes of insurance.”

Reinsurance firms, which are located overseas, have assets and capital which by far exceed the firms in Jamaica.

He said that if, by major natural disaster, the author of the article was referring to catastrophes similar in intensity and strength of events that have hit Jamaica since 1988, “then the conclusion is flawed and certainly not supported by the evidence provided by the MAT results or the published financial statements”.

The MAT, Barnett explained, is a conservative solvency test that compares the Available Assets of an insurance company with its Required Assets for test purposes. Available Assets represent assets that are admissible for the purpose of solvency; illiquid assets such as certain items of furniture and fixtures and intangible assets are omitted.

“Required Assets represent all liabilities plus margins added for outstanding claims and unearned premiums. The test, therefore, recognises only assets that are capable of being converted into liquid form in the short term, while at the same time adding margins to certain estimated liabilities,” Barnett added.

“For the year 2009, the standard was 135 per cent, which means that Available Capital must exceed Required Capital by at least 35 per cent. The base MAT standard is 100 per cent,” said Barnett.

The FSC, he added, has been in dialogue with the companies on the issue of the MAT and has decided to exercise forbearance in light of the global economic crisis which resulted in significant impairment in the fair values of certain investment assets of some companies.