Ennia case teaches: "Structural problems require structural solutions"

WILLEMSTAD - The issues surrounding Ennia, which concern both Curaçao and the Netherlands, have sparked discussions and considerations about potential solutions and their consequences. According to econometricians Servaas Houben and Ronald Ketellapper, the main problem lies in the inadequate provisions and low capital buffers of Ennia Leven, resulting in the acute danger of pensions for approximately 30,000 residents of Curaçao shrinking to twenty percent if the troubled insurer is not assisted with a substantial capital injection. However, the problem surpasses Curaçao's capacity to resolve independently and raises new dilemmas. 


In contrast to the understandable widespread attention to the current issues in Curaçao's financial sector, the two econometricians believe that there is a lack of a more fundamental analysis explaining how these problems have arisen and how future debacles can be prevented. What structural changes are needed in supervision to prevent an ENNIA or Girobank scenario in the future? 


Servaas Houben works as a manager in the insurance sector in Belgium. He studied econometrics in the Netherlands and worked in Dublin, London, and Curaçao. Ronald Ketellapper studied econometrics in Groningen and held various positions, including being a director at Guardian Group Fatum in Curaçao, where he was responsible for life, pension, and health insurance until March 2019. 


Good Governance and Supervision 


"The Ennia problem starts with the governance of the entities within which Ennia Leven is positioned," says Houben. "This governance has delivered underperformance and may have even committed criminal offenses. This applies to both the internal supervisor, the Board of Commissioners, and the management of the companies." 


"For financial institutions and, in fact, all institutions, it is crucial that the governance is in order in terms of quality and quantity," adds Ketellapper. "Directors and internal supervisors must be of good character and possess sufficient expertise. The same applies to regulators, with the Board of Commissioners being able to operate independently of the management." 


"This is well regulated by law in Curaçao," says Houben. "But there is a lack of enforcement of the legal rules. This brings us to a second cause of the problems, which is inadequate supervision of financial institutions." 


"Good supervision encompasses both supervision of the financial stability of financial institutions and behavioral supervision," says Ketellapper. 


Failed Behavioral Supervision


According to both econometricians, the fact that behavioral supervision at Ennia has failed is evident. "The Board of Commissioners yielded to pressure from the shareholder to disregard the interests of policyholders and enrich the shareholder. The board did not act independently and acted against the interests of policyholders and the entity Ennia Leven," says Ketellapper. 


"The management also acted against the interests of the company and policyholders. The regulators of the Central Bank of Curaçao and Sint Maarten intervened far too late, namely when the problems were already irreversible," says Houben. 


According to the two experts, it is questionable whether the Central Bank had identified Ennia's failing governance earlier. "Adequate behavioral supervision requires effective monitoring of the management of the financial institution and immediate intervention in case of integrity violations and conflicts of interest. This went wrong at Ennia Leven," says Ketellapper. 


Stronger Prudential Supervision 


Prudential supervision includes rules on how insurers quantify their obligations to policyholders and how they are recorded on their balance sheets. Especially in the case of life and pension insurance, such as with Ennia Leven, these are obligations that extend far into the future. 


"Think 80 years," says Houben. "The assumptions that the insurer is allowed to make regarding investments are crucial here. This also applies to assumptions about mortality rates: how long will a baby born today on average live? Or someone who is 65 years old now?" 


According to Ketellapper, prudential supervision also imposes rules and restrictions on an insurer's investments. "These must be structured in such a way that the obligations can be met with a high degree of certainty. And individual investments, such as in companies or real estate, must be well-diversified so that the entire value of the investment portfolio does not collapse in case of bankruptcy." 


"At Ennia Leven, this essential diversification criterion was violated, creating a concentration risk," says Houben. "The investment in Mullet Bay represents far too large a share of the investment portfolio: a conclusion that the regulator should have drawn immediately from the submitted reports." 


According to Ketellapper, this is essentially unrelated to the perceived value of this investment. Whether it's 50 million or 500 million guilders, in both cases, it's too much due to insufficient diversification. 


"Prudential supervision also includes regulations on the buffer capital, the equity, that the institution must maintain at a minimum to absorb setbacks. The provision is calculated prudently but may still prove to be insufficient," says Ketellapper. 




Both believe that prudential supervision must meet several requirements, referring to their previous publications. 


"Firstly, the so-called Rules-based regulations. The current rules have too many open norms, where the institution has broad choices regarding assumed investment results and mortality assumptions. Prescribed rules are also easier to monitor," according to Houben. 


"Secondly, there must be relevant and timely reporting. The Central Bank should not allow reports and annual reports to be submitted later than the legal deadlines," says Houben. "A zero tolerance policy is needed." The Central Bank of Aruba can serve as an example in this regard, according to Houben and Ketellapper. 


As a third point, both econometricians believe that there should be standardized financial reporting to the public. "The mandatory reports in the newspapers by financial institutions must be easily interpretable, both regarding the profit and loss statement and the balance sheet," says Ketellapper. "This may also mean that explanations of data are provided. We know of an example of a balance sheet that shows negative equity without this item being explained," says Ketellapper. 


"There must be Risk-based regulations: the regulations for the calculation of provisions and minimum required equity must take into account the risks to which the institution is inevitably exposed," according to Houben. "Important risks include disappointing investment results and longevity risk: people live longer than assumed when calculating provisions. Financial institutions must hold higher buffers as they take on more risk," says Ketellapper. 


Explicit ownership of supervision is another point that both econometricians distinguish. "Within the management, someone must become the problem owner of the supervision file. It is currently unclear which member of the board is accountable." 


Finally, there must be mandatory communication in case of unforeseen solvency problems, known as stewardship. "The current policyholders of Ennia Leven are only informed through the general media. The last annual report dates back to 2016, and the ENNIA website also does not provide insight into the current financial situation," says Houben. 


"Despite an institution being under curatele, this does not exempt the management from stewardship in which transparency and communication with policyholders are central," adds Ketellapper. 




According to both gentlemen, the issues with Girobank and ENNIA are not isolated incidents but the result of structural problems, including inadequate and inefficient supervision. 


"Due to all the fuss about lawsuits, loans or gifts from the Netherlands, and liability, these structural problems have been pushed into the background," says Houben. "The risk now is that short-term solutions will be implemented that will not help us with future problems." 


Ketellapper supports this with a concrete and recent example. "The coverage ratio of Curacao's largest pension fund, APC, dropped from 111.5% to 103.7% in just one year. Such a drop can only occur if there is a significant mismatch between investments and obligations, indicating deficiencies in risk management." 


"But the media communication did not go much further than stating that global investments had a bad year. Also, the communication lacked information on the steps to be taken in terms of risk management to control the volatility of the coverage ratio. Without standardization of reporting and transparency towards pension participants, stewardship, pension participants remain uncertain about the security of their pensions," says Ketellapper. 


According to the two econometricians, media, political, and regulatory reporting should therefore be more balanced, focusing on both short-term and long-term problems. 


"We encourage regulators and politicians to actively come forward with structural solutions to ensure the stability and reliability of the financial sector in Curacao in the long term."