The Bid Process
Following acceptance of the Memoranda of Understanding (MOU) by FINSAC, bidders were informed of the bid process, related requirements and the deadlines governing the process. They could submit bids for all or part of the portfolios and could make their bids contingent on a successful tender for other segments of the business. This design allowed FINSAC to award the portfolios to one company or a combination of companies.
Bidders were not allowed to tender for the portfolio of any one of the failed companies, given a policy decision to combine like portfolios across the three companies and offer lines of business.
Final bids were awarded points based on how well they measured up against a set of previously established criteria, with bidders with the highest point standing emerging the winners.
An important aspect of the process was the actuarial valuation of the portfolios.
The valuation was conducted in three stages: group business - health and life; the pension business and the individual life business. At the end of each actuarial evaluation, a report was sent to the bidders and they were required to submit a bid for that particular portfolio. The valuation was based on the policy and experience data provided by the three insurance companies as at 31 December 1998.
The first challenge of the valuation process is that there was no standard accounting or actuarial practice governing the insurance industry. However, the decision was taken to use the Policy Premium Method (PPM) for valuation, and the related Minimum Continuing Capital and Surplus Requirements (MCCSR) to establish the financial strength of the bidding companies.
The decision was based primarily on two factors:
Policy Premium Method
The Policy Premium Method is a means of calculating the actuarial liabilities of insurance companies and as such indicates the minimum reserves respective companies should hold to meet obligations to policyholders. In deriving the liabilities, the PPM takes into consideration assumptions about the future impact of mortality, lapse rates, administration expenses and interest rates, among other factors, for each policy type.
The FINSAC valuations took into account the experience of each company as well as assumptions appropriate to the Jamaica economy.
Minimum Continuing Capital and Surplus Requirements (MCCSR)
The Minimum Continuing Capital and Surplus Requirements (MCCSR) uses the actuarial liabilities and asset mix to measure an insurer's capital adequacy to meet its obligations to policyholders. The MCCSR ratio is expressed as a percentage of the minimum requirement. In other words, a MCCSR of 100% means that a company has adequate capital to met its obligations to policyholders.
The automatic disqualifiers established the potential owners ability to meet the divestment committee's minimum requirements, including fit and proper considerations.
Once the bidder passed the above phase, their bids were evaluated as under:
The potential owner must have the financial capacity to acquire and operate the business. An MCCSR ratio of 100% for the consolidated entity being a passing score.
The MCCSR ratio after acquisition were ranked in the following bands:
Adequacy of liquidity to support the acquisition in a balance sheet review was also established here.
Assessment of Historical Performance and Future Plans
Historical performance and business plans submitted must show managerial capability specific to the industry.
The bid price is ranked against other qualified bidders here. Ranking is performed on the final bid for the entire portfolio. Where a company does not bid on the entire portfolio, it will first be ranked within its group then the bidder with the highest point value will be grouped with a suitable partner or partners and ranked for the entire portfolio. The highest bid gets maximum points with one point deducted for every $10 million below the maximum.
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