Insurance is a process by which risk is transferred for a price. But this description is far too simple to describe such a complex business. This is especially true when referring to the global marketplace, in which only those who are willing to learn, adjust and cohabit with local particularities have any chance at success. For many insurers, this is an effort well worth undertaking to position their companies in the rapidly-growing Latin American region.
Argentina is arguably one of the most challenging markets in Latin America today. Inflation, currency exchange rate issues, interest rate issues, limited investment opportunities (although potentially attractive), political unrest and constant regulatory changes are just a few of the difficulties. In view of recent developments, It is no wonder concerns begin to mount in a country which has defaulted five times since 1950 (1951, 1956 1982, 1989, and 2001) and fairly recently underwent four years of hyperinflation (1981-82, 1989, and 2001). Many ask themselves if the country is on the brink of another serious crisis such as the ones just mentioned. We believe it wouldn’t hurt to be prepared.
Today the Instituto Nacional de Estadistica y Censos (INDEC), a governmental entity which is Argentina’s official source of publicly available statistics, acknowledges a yearly inflation rate of about 10.5 per cent. But the INDEC has been discredited to the point that last year the IMF warned Argentina to improve the quality of its economic data or face possible sanctions. Independent sources offer a yearly inflation estimation of between 25 per cent to 30 per cent, which seems to be closer to the general perception.
For insurers, interest rates have been fairly stable in the past five years at between 18 per cent and 20 per cent, while becoming increasingly low compared to inflation. Interest rates which do not keep up with inflation – negative interest rates- are a problem, as premiums left in the bank at 18 per cent interest will lose value against the insurer’s exposure to loss – which increases by 25 per cent to 30 per cent per year as inflation affects goods and services. Very basic math is all that is needed to conclude that Insurer’s principal liquid investment is currently a losing card.
On the other hand, foreign currency exchange rates have fluctuated dramatically: the current exchange rate for the US dollar is now about eight Argentine pesos per dollar, while just a year ago it was about five pesos per dollar. Since dollars are very hard or impossible to acquire locally, a black market reflecting the true balance between offer and demand has developed in which buying a dollar will cost about 12 pesos. Very recently the government announced changes affecting the foreign currency exchange policy, but for now these seem miniscule and are not bound to affect the insurance business as currently formulated.
Regulatory and legal framework has and is continuing to change quickly. Local Insurers have to abide by statute #20.091, which regulates all aspects of the business. This law was enacted in 1973, and has since been amended by no less than 113 resolutions, decrees and other laws. In 1992, the regulator SSN issued resolution #21,523, which is a set of rules designed to supplement the statute. This set of rules, called the “Reglamento General de la Actividad Aseguradora” (General Rules for Insurance Activity), has itself been modified by the SSN on 135 occasions in the past two decades as it constitutes the means by which the local regulatory authority has quickly imposed policy changes. It is easier to amend secondary legislation than to get Congress to amend existing laws or pass a new statute.
All of these situations make the job of running an insurance company very difficult, given that the regulatory environment, industry policies, political and economic situations tend to change very rapidly and demand constant adjustments.
Economic instability undermines the ability to accurately estimate insurable interest values –especially in regards to complex industrial or commercial risks. Once adequate sums insured have been established, there will be immediate deviations as the value of insured property rises due to inflation.
Depending on the basis of indemnity agreed for the adjustment of claims, these distortions may leave clients involuntarily un-protected for a given portion of the loss if the peril insured-against occurs. Especially if the loss occurs towards the end of the policy period when more time has passed and it is more likely that asset values may have reached or gone beyond the sum insured.
Having clients collect less than what is needed to repair or replace damaged property is commercially unappealing. But equally important, insurers are aware that in this scenario they are missing the opportunity of extending coverage and collecting premiums for the climbing values of insurable interests, thus increasing sales and keeping business in pace with market.
Local insurance agents have even relied on padding insured sums (that is, buying more insurance than is initially needed in sight of having enough towards the end of the policy period), especially in regards to risks with more affordable rates. A sounder strategy has involved monitoring and boosting insured values each semester, quarterly or as required. But this is risky, as mistakes can easily occur while the agent manages a business portfolio with clients who have different needs and views towards insurance.
Local insurers have looked at ways of dealing with this problem also. There are “traditional” methods by which the insured is expected to make quarterly declarations relating to insured goods –and if variances are over 10 per cent, adjustments would be made which will entail payment of additional premiums or premium returns. But this is not practical in all types of lines of business.
In especially troubled times, some companies have had the initiative of massively adjusting sums insured on their own account, issuing endorsements to this effect in policies pertaining to a whole line of business such as Auto. Today, there is a local tendency to issue quarterly or even monthly policies, containing a new adjusted sum insured (and, therefore, additional premium) per issuance. These policies have been designed to renew automatically, for example, every month for one year. This solution has been more widely implemented in regards to automobile coverage, which accounts for roughly half of the market’s premiums (excluding life and associated coverage’s).
Argentines have been traditionally reliant on acquiring dollars to hedge against inflation. So it is no surprise that a common local practice has been to issue policies in dollars or other currencies (in the past, even in government bonds) in an attempt to protect against inflation or local monetary erosion. This also makes sense when insuring imported property, or industries which rely heavily on imported components –which are not just a few. Originally, claims were adjusted under a specific policy provision by which the loss would be valued using the foreign currency exchange rate in force on the date of loss. This way, even as the adjustment and final indemnity payment took time, the insured would nevertheless be protected by the policy currency. With time the currency clause became scarce but the practice of adjusting claims in this fashion when the policy was in a foreign currency continued. We have noted that, while reinsurance polices may have included “currency clauses”, these do not address the adjustment but rather provide rules related to the reinsurance payment.
In the midst of soaring inflation, in the late 1980s the SSN issued resolution #19767 by which the “Unidad de Cuenta del Seguro” (UCS) replaced the local currency –at that time, the austral- for insurance transactions. The exchange rate between the UCS (later replaced by the UPR) and the peso was adjusted to inflation on a daily basis so that its value would remain constant (much like the “Unidad de Fomento” is used in Chile today). It is hard to tell if this long-gone solution has any chance of returning.
Reserving in such an environment as described is certainly also an issue worth comment. The objective is to post an estimation which will reflect the future claim payment as accurately as possible –and this is difficult enough as it is considering the many technical issues that typically come into play. But as an additional challenge reserves must keep in pace with inflation and currency fluctuations, or even other parameters such as variations of special judicially-applied interest rates for example.
Article 33 of statute #20.091 obliges insurers who have obligations payable in foreign currency to post reserves (technical reserves) in that currency. In the early 1990s some companies had such a wide spread of reserves in various currencies that behaved diversely in comparison with coverage liabilities that different correction coefficients had to be calculated and applied to each as a way of fighting those distortions.
Many coverages generate claims which are advised and paid in a relatively short period of time -and those are not the main problem. Complex cases which drag on through time, and especially third party liability claims being negotiated or in suit are those which will require insurers to be on their toes. Strategies involving “automated” solutions have been implemented, such as automatic average reserves posted by company systems by line and risk code when a new claim is advised, or the possibility of massively adjusting reserves for certain lines and risk codes as needed.
To complicate things, compliance with the various regulatory requirements in relation to reserves can be a tall burden. Reserving valuation criteria have been meticulously spelled-out in the “Reglamento General de la Actividad Aseguradora”. Section 39 of the Reglamento differentiates between cases in suit and those which are not, or if the case is in the pre-trial mediation stage. Reserving directives also depend on the specific line of business, or if the claimant has expressed a claimed value or not, or if there has been expert witness testimony or a first instance judgment. The rules are complicated, and this makes it difficult to summarize but in general we can say that the system obliges insurers to reserve cases in accordance to past case experience by line.
Reserves for mediations deserve special comment because the rules can be particularly damaging, and local insurers have had to rely on their ingenuity to get around the situation:
Undergoing mediation has been a pre-requisite in the city of Buenos Aires -where about 80 per cent of the cases are heard- since statute #24,573 referring to this process was enacted in late 1995. Mediation is a funnel through which almost all claims that are later filed as formal lawsuits pass. Hopefully, this is a process by which rightful claims can be analyzed and settled. But it has also been used by some attorneys as a means to fish for an advantageous result in unfounded claims. Losing cases will go to mediation, or even many cases that will never make it to court. Whatever happens is up to the claiming party, who may or may not choose to sue after the mediation process is over. In fact, concluding that mediation proceedings are over is a task in itself as because of procedural –and even cultural- informalities which operate to cast doubt on the plaintiff’s right to continue whilst within the 3-year time bar.
According to art. 126.96.36.199.4 of the Reglamento General (the General Rules), reserves posted in relation to claims in mediation have to be maintained in full for one year. Assuming that the matter has not settled or moved-on to litigation, the reserve can then be reduced by 25 per cent during the second year, and by 75 per cent the third year – after which the case can be closed. It will take three years for a reserve on a case that has ultimately not gone to suit to completely disappear, regardless of its merits. Reserving rules for mediation claims are particularly difficult for insurers because of the way in which the obligatory reserve is calculated, especially in regards to cases in which de claiming party has chosen not to express the amount claimed so as not to cap a future court presentation.
If the plaintiff does not mention the amount claimed during mediation to avoid limiting possibilities of claim in suit, then the average payment is applied and the insurer loses the possibility to set the reserve at a smaller amount to match the claim. To avoid this and other very destructive distortions as reserving rules are applied, insurers have carefully instructed their own legal counsel on how to proceed, for instance to report exactly what the claimed amount is and the date on which the claim was valued. Insurers have even come up with special programs to capture claims in the hands of plaintiff attorneys before mediation processes are ever initiated, instructing defense counsel to contact recurrent adverse attorneys and to invite them to present claims under a separate “fast track” system, where they may address the insurer’s attorney (many attorneys prefer to speak to colleagues) and achieve rapid consideration of the claim in return for not filing formal mediation proceedings. These insurer-sponsored programs, which aim at avoiding formal mediations altogether, even have catchy names such as “mediacion express”.
These are just a few of the most relevant developments taking place in the Argentine market at present. It appears as if Argentina is rapidly being driven to a fork in the road. With notable exceptions, the willingness to meet difficult challenges and to adapt to changing conditions is essential to doing business in Latin America, and Argentina is a very good example of this.
DANIEL BARÓN Associate Kennedys Latin America & Caribbean
Daniel Baron qualified as a lawyer in Argentina in 1988, and has been working in the insurance industry for about 25 years. His career started at a top-level international insurance company in Argentina, where he worked for 6 years and became Assistant Claims Manager. Later, Daniel started his own legal practice specializing in insurance-related matters, where he has accumulated ample experience as a litigating attorney, pre-trial mediation and out of court negotiator for insurers. He has also been frequently consulted on coverage issues. Daniel’s experience relates mainly to GL, Professional Liability, Products Liability and D&O claims. Daniel has worked throughout the Latin American region, including Argentina, Paraguay, Uruguay, Colombia, Mexico and Ecuador. He is now an associate at Kennedys, where he continues his work in the region for insurers and reinsurers. Daniel is equally fluent in both Spanish and English.
ALEX GUILLAMONT Kennedys Director of Miami office for Latin America & Caribbean
Alex Guillamont is the director of Kennedys Latin America and leads the Latin American and Caribbean practice at Kennedys Law. He handles disputes on behalf of leading international insurers and reinsurers, having represented clients across the region. With 15 years of experience, Alex is an acknowledged leading expert on insurance and reinsurance matters in in the region. After serving the market with claims in Iberia from our London and Madrid offices, he relocated permanently to Miami in June 2010. He has been nominated as LATAMIR Power 50, Latin American insurance sector most influential professionals and his Miami office has been awarded the 2013 Reactions Latin America Awards as Latin America Insurance and Reinsurance Law Firm.
Alex is involved in complex losses on major environmental and natural disasters, contractors all risk, financial institutions and D&O, energy claims, environmental claims, regulatory compliance and third party administration schemes, political risk etc. in the entire region—most recently in Argentina, Bolivia, Bahamas, Brazil, Chile, Central America, Colombia, Costa Rica, Ecuador, Haiti, Mexico, Panama, Peru and Venezuela. He and his team advise carriers on regulatory issues and strategic deployment of offices, wordings and claims handling procedures, and audits of ceding companies.
He is fluent in English, Spanish and Portuguese and has conversational French. Alex s is author of The Guide of insurance and reinsurance law in Latin America, Caribbean and Iberia and is finalising its 3rd edition. He is also a regular contributor to insurance press like Financier Worldwide, Insurance Day Magazine, Intelligent insurer, Latin Lawyer, Latino Insurance, etc.