Former insurance executive, Rev Ralph "Jim" Parkes, told the Commission of Enquiry into the 1990s financial meltdown on Tuesday March 29 that he is still unable to fathom why the Financial Sector Adjustment Company (FINSAC) failed to fulfill its mandate.
“I left the industry in 1998, and I still can’t figure out why,” Mr. Parkes, who joined the priesthood after leaving the insurance sector as president of Jamaica Mutual Life Assurance Society (Mutual Life) and now ministers at Christ Church, Vineyard Town, Kingston, told the enquiry.
He said that his recollection was that FINSAC was created to rehabilitate the locally owned companies suffering from the effects of the Government’s high interest rate regime. However, he said all but two of those companies – National Commercial Bank (NCB) and Life of Jamaica (LOJ) – went under. NCB and LOJ survived, he said, because they benefited from “massive injections” of cash from FINSAC, while the others were left to die.
“I don’t know if anybody has taken the time to look at that,” Mr. Parkes suggested.
He said that the general problem facing the companies was the high interest rates, inadequate financing, and the lack of cash flow as customers withdrew their monies and invested in shorter term investments yielding greater returns.
He recalled that in 1991, inflation peaked at 80 percent, while averaging approximately 40 percent over the previous 5-year period. This was a recipe for the destruction and decimation of life insurance businesses where, once a premium is fixed, it remains for the life of the policy.
“If this situation of high inflation fuelling higher and higher short term interest rates is a one-off or occasional occurrence, then the life insurance business can accommodate it over the long term. However, where this policy of high interest rates persists for any length of time, it must have a deleterious effect on the life insurance product. Unfortunately for all concerned, this is exactly what took place in Jamaica during the 10-year period from 1989 to 1998,” Mr. Parkes explained.
“The fact that all these companies ‘went under’ at the same time, must indicate that the cause must be due to something external to these companies,” he added.
He insisted that no one with knowledge of the economic conditions prevailing in Jamaica, during the 1990s, could “truthfully and honestly” conclude that the common factors in all the failed companies was incompetent management and failure to contain costs?
He noted that the life insurance industry had “almost single-handedly” supported the Government’s divestment of its hotel stock from National Hotels and Properties (NHP).
“If the industry was being run in an incompetent and cavalier manner, how could it have contributed so significantly to the development of Jamaica for decades?” He asked.
Asked by chairman of the commission, Worrick Bogle, why he felt that there was still hope for Mutual Life in 1998, Mr. Parkes explained that the company had made projections for a return to profitability in five years, with an injection of funds from FINSAC which would be paid back.
He noted that Mutual Life, which was 154 years old at the time it, was sold to Guardian Life of Trinidad and Tobago and rebounded quickly to make “huge profits” for its new owners.
He said that Mutual Life had considered halting construction of the second tower at its Oxford Road Complex (which now houses the Ministry of National Security and the Ministry of Justice), as well as to cease writing of new business, operating a “closed portfolio” and sending home approximately 800-1,000 employees. But, he said, such drastic actions would only have exacerbated the economic conditions at the time.
“After the most careful and exhaustive analysis, we felt that such drastic moves would not have been in the best interest of the country, as it would send a clear message that, ‘if Mutual Life could not survive then who could?”
The enquiry continues on Thursday, March 31 at the Jamaica Pegasus Hotel, New Kingston.
By BALFORD HENRY, JIS Reporter & Editor