As stated by Lloyd’s country profile on Peru, the size of the Peruvian economy will have tripled its size between 2006 and 2018 and the wealth per capita will have doubled in that period.^[1]

The economic growth has led to more jobs and thus the growth of the middle class. It is expected that insurance and reinsurance will continue to grow along with the middle classes. To put Peru in context, while Chile, Argentina, and Brazil’s insurance premiums in 2013 amounted to approximately twelve, fifteen, and thirty billion dollars respectively; Peru’s premiums only amounted to approximately six billion dollars. Thus, coupled with expected sustained economic growth and legal and (it is hoped) political stability, Peru is an interesting target for international carriers.

[1] Peru will be the fastest growing economy amongst the principal countries in the region until 2018. “Latinfocus Consensus” forecasted that Peruvian economic growth is expected to gradually accelerate up to 6% by 2018. It is expected that this growth will exceed the average economic growth of Latin America, Mercosur, and the Andean Community.

Insurance Penetration in Peru

Insurance industry experts claim that Peru is in need of more competition in order to open the insurance market truly and bring more sophistication to it. Currently just two carriers, Rimac and Pacifico, control 65% of the non-life market, followed by La Positiva with 18%.

It can be complicated for a multinational company to enter the Peruvian market because of the high degree of control that the two leading carriers have over accessibility to the insurance market. It is no secret that both Rimac and Pacifico are linked to large financial groups and therefore their presence in the market comes with a more complete offering of financial services. These large financial groups offer integrated financial packages, which include insurance coverage, pension plans, and banking services. This makes it hard for companies that only focus on insurance solutions to compete directly with these corporations. This is not unique to Peru.   We have encountered similar issues with some cedants in Brazil and Mexico, for instance, which can affect the handling of large losses.

However, there have been major advances to promote the insurance industry through the country’s public institutions such as the Ministry of Economy, Ministry of Agriculture, Ministry of Environment, and the Office of the Superintendent of Banking, Insurance, and Private Pension Funds (Superintendencia de Banca, Seguros y AFPs), in coordination with the private sector. For instance, there have been proposals for bringing climate change insurance into the market.

The numbers of natural catastrophes in the region have tripled since the nineteen sixties, and statistics show that there is a huge gap between total economic losses and insured losses in Peru. The new financial instruments such as insurance policies that protect production, infrastructure, and transportation investments, have helped develop economic protection strategies against natural disasters but there is still ample room and a need for more carriers to penetrate the market.

Besides encouraging overall macro-economic indicators, there is plenty of scope for increased penetration of the insurance market by expanding beyond the traditional areas. The policy of social inclusion of the new government elected in June 2011 is widely expected to encourage development of micro insurance, and companies have strategic plans to expand in the provinces which are benefiting from economic development.

Reinsurance penetration and current legislation

By way of illustration, in light of the evident Peruvian economic growth and the increasing need for risk transfer instruments, AGCS Re Brazil launched Peru Reinsurance. Arthur Moossmann, chief regions and markets officer of AGCS RE stated that they see significant demand for their specialist expertise in Peru so this initiative is a logical step for AGCS globally, as they continue to build their network of services into fast developing markets.

Also, a year after its arrival in Peru, Allianz Global expects to grow at double-digit rates and will launch new re-insurance products focused on the local market. The firm is largely focused on engineering projects but it cannot rule out its expansion into other six segments, namely aeronautics, transport, oil, financial services, civil responsibility and property risk, according to its CEO Angelo Colombos.

Insurance Law only contemplates two articles referred to reinsurance. These articles are very basic and they were already regulated in the Peruvian legislation. The law indicates that by the reinsurance contract, the reinsurer binds itself to pay, within the agreed limits, the debt that arises in the reinsurer’s assets as a result of the obligation assumed by the insurer by an insurance contract.

The law provides that a reinsurance contract does not subordinate the relations that arise from the insurance contract. Therefore, the indemnity paid for a loss under the terms of the insurance contract cannot be conditioned to the existing contractual relationship between the insurer and the reinsurer. Under Peruvian law there is no privity of contract between the reinsurer and the original insured. The reinsurer, however, is free to include a cut through provision in the reinsurance agreement providing for direct payment to the original insured. Payment of reinsurance proceeds directly to the original insured or a third party beneficiary, if provided for in the Reinsurance Agreement and accepted by the insurance company, would constitute valid payment and relieve the reinsurer from any further payment obligation.

However, whether the cedant had any retention or were a pure fronting insurer does not give the original insured legal capacity to act against the reinsurer because there is no contractual relationship between the insured and the reinsurer. Consequently, regardless of the participation of the reinsurer or the retention of the cedant (even in case of frontings or 100% reinsurance participation in facultative reinsurance contracts) the original insured has no action against the reinsurer. The only way to have an action is when the aforementioned cut through provision is agreed –only in case of bankruptcy of the insurer- or if the recovery rights from the reinsurer are assigned by the insurer to the original insured.

As mentioned before, the SBSA is the body responsible for regulating the insurance sector in Peru. Said authority is also responsible for controlling all activities in connection with insurance and reinsurance business. Although the general rule is that all insurers should be licensed locally, in accordance with article 10 of the Insurance Contract Law, Peruvian residents are able to contract insurance policies from carriers registered elsewhere if done so abroad.

However, the system is quite flexible—Peruvian insurers are able to write reinsurance in Peru and abroad, and in order to trade as a reinsurer in the Peruvian market it is not necessary to obtain registration before the SBSA. The only necessary requisite is to have a BBB- S&P or similar rating.

Whilst the demand for reinsurance product continues to grow, the information on Peru’s insurance law and trends is still difficult to find. In part II of this article we will analyse the new insurance law’s issues that are most relevant to insurers/reinsurers (i.e. statutory periods for insurers/reinsurers to issue a coverage decision and to pay the indemnity, and the rights of insurers/reinsurers to require the insured/reinsured’s cooperation).

Jorge Mere. Associate Kennedys Latin America. Qualified in Peru.

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.

Alex Guillamont, Kennedys Latin America Director

ALEX GUILLAMONT. Director at Kennedys Latin America & Caribbean

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.

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.

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.