The Argentine premium paradox

This article discusses the reasons behind why reinsurers abroad have been faced with premium payment delays from their Argentine cedants and how these delays have become a great risk for reinsurers.

Background

In 2011 the Argentine government initiated its exchange rate restriction policies and, from then on, over two dozen relevant measures have been enacted to further restrict access to foreign currency.

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In an attempt to control national reserves, the Argentine Central Bank (BCRA) passed regulations obliging banks and exchange brokers to report all foreign US dollar transfers for payment of obligations, which are then submitted for prior approval. Since then, access to the official exchange rate market has become the formal obstacle to surpass in order to make any money transfers abroad. In September 2012, the BCRA passed a regulation called “Communication A-5295”. Clause 3.3 of this regulation refers specifically to payment of reinsurance premiums. This clause provides that, prior to the payment of a reinsurance premium, the local regulatory authority (Superintendencia de Seguros de la Nación) must issue a certificate containing the reason and the amount of the wire transfer.

The impact on the insurance market

For insurers and reinsurers these measures impose a heavy burden as all transactions made for the payment of premiums to international reinsurers are entangled in bureaucratic procedures until they are approved by the government and released. In practice, simple wire transfers for premium payments to reinsurers can take time. Some have reported delays of up to six to eight months. These delays are far from perfect, but even more concerning is that the funds, which are deposited in Argentine Pesos and converted to US dollars as of when the transaction is approved and performed, are affected by currency devaluation over time.

Effectively, for some time now the Argentine Peso has steadily lost value against the US dollar. On 31 December 2013 the official dollar equivalency was of 6.5 Argentine Pesos to USD1, and in less than a year, as of November of 2014, the official dollar equivalency had climbed to 8.5 Argentine Pesos to USD1. As an example, reinsurance premiums of ARS$1,000,000 paid on 31 December 2013 amounted to USD153,846. However, if such a payment was approved by the Central Bank of Argentina and finally implemented in November 2014, it would have been exchanged for the amount of USD117,647. This is a loss of USD36,199 in those few months, which is equivalent to 23.50% less than originally intended.

In Argentina 13.6% of the total insurance premiums paid in the country, which amount to approximately US$1,154 million, go to foreign reinsurers. How many of these dollars actually get to their recipients in Europe and other countries is unknown. A solution to this is to set the premium payments in dollars, thus transferring the risk of currency devaluation losses to the local insurer. But government policy and shortage of Dollars have made payment of premiums in dollars very difficult to implement and sustain.

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Very recently, in September 2014, the Superintendente de Seguros de la Nacion issued Resolution 38.595 relating to payment of premiums abroad. This new regulation explains in detail the many requisites that local insurers need to fulfill to transfer the funds. Amongst the most important of these is a detailed auditor’s report which is to touch upon various key aspects of the premium payment such as verification that the beneficiary is a party to the reinsurance contract, the actual existence of reinsurance and corresponding insurance coverage, that all of these operations have been duly annotated in the various books that insurers are to keep –and this is just to name a few requisites contained in a list of nine itemized paragraphs under art. 4 of the resolution.

Comment

As may be perceived, recent regulation specific to the insurance market is much in tone with the general scheme applicable to other local industries. It seems that Argentina is not on the path of simplifying trans-border money transfers related to reinsurance anytime soon. Argentina is still an important player in the Latin American insurance game, and even more so considering the country’s potential. As pressure on local markets and general unrest is seemingly reaching an unbearable peak, many are hoping for change after presidential elections, which are scheduled to take place in late 2015. Time will tell.

 

Alex Guillamont, Kennedys Latin America Director

Alex Guillamont, Kennedys Latin America Director

Alex Guillamont is the director of Kennedys Latin America and leads the Latin American and Caribbean practice at Kennedys. 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 regionally. After serving the market with claims in Iberia from our London and Madrid offices, he relocated permanently to Miami in June 2010. The industry has voted him year on year into the LATAMIR Power 50 list, Latin American insurance sector most influential professionals. His team in Miami has been awarded the 2013 and 2014 Reactions Latin America Awards for best Law Firm.

Jorge Mere B

Jorge Mere. Associate Kennedys Latin America

Jorge Mere is a Lawyer qualified in Peru with 8 years of experience in civil litigation and insurance law. He has successfully earned his masters degree in U.S. and Transnational law from the University of Miami and he has worked as a litigator for a top tier Peruvian law firm, as a member of their civil litigation team. While working as Peruvian counsel for different US law firms and as an adjuster for one of the largest insurance companies in the world, he has gained substantial experience in policy analysis, negotiations, dispute resolutions, and insurance law.

He is currently handling reinsurance disputes in respect of product liability, architect + engineers professional indemnity and property/mining disputes. Jorge is also working on qualifying as a US lawyer. Jorge is a native Spanish speaker and is fluent in English.

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Daniel Barón. Associate Kennedys Latin America.

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.

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Kennedys’ Latin America and Caribbean office is based in Miami to help international insurers and reinsurers manage claims and non-contentious issues across the region. Our dedicated multilingual team is well placed to support our clients, and we also draw on the skills and experience of Kennedys globally.

The Miami team works with our network of Latin American and Caribbean law firms. Kennedys have associated offices in Brazil, Chile, Colombia, Chile and Mexico and long-standing relationships with leading insurance and reinsurance law firms in the rest of the region.

Our lawyers in Miami are also supported by our international insurance team, including the London Market division and other offices around the world who handle some of the most significant insurance and reinsurance matters worldwide.

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After being recognized as the market’s choice in 2013, Kennedys Latin America has once again been voted by industry leaders as Best Latin America (re) insurance law firm for 2014 by Reactions Magazine.

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