Although all of the Latin American jurisdictions had notable regulatory and market developments in 2008, Costa Rica stands out as particularly significant given the the fundamental nature of the developments seen there in the past year.
Opportunity and Risk in a “New” Market
While relatively small in comparison to the major Latin American insurance markets, Costa Rica is the largest insurance market in Central America (excluding Panama). The country also has a uniquely diversified economy for the region, has experienced rapid annual growth in the insurance market (between 15% and 46% annual growth in recent years) and still has a relatively low insurance penetration rate (2.6%). Prior to 2008, however, the country had maintained a government monopoly over the insurance market through the Instituto Nacional de Seguros (“INS”).
In August 2008, however, new legislation was passed in Costa Rica and signed into law by president Dr. Oscar Arias Sanchez that ended the more than eighty-year-old state-sponsored monopoly over the Costa Rican insurance business. While the new Ley Reguladora del Mercado de Seguros opens the insurance market to private competition from domestic companies and foreign companies with local branches, it also contains prohibitions and increased penalties that may come as a surprise to any foreign insurers that do not carefully review their activities in connection with any Costa Rican risks.
1. A New Opportunity
Under the new law, the Consejo Nacional de Supervision del Sistema Financiero (CONASSIF) was charged with establishing an insurance regulatory authority and implementing the other mandates of the new law. While CONASSIF initially indicated that the market should be open to competition and the regulator should be prepared to accept applications for insurance business by the end of September 2008 at the latest, certain regulations governing the market have still not been finalized as of the time of this writing.
The basic tenets of the regulatory structure, however, are already in place in the form of the statute itself and two sets of regulations issued recently governing authorization and solvency requirements. Companies seeking to sell personal lines insurance will be required to have minimum operating capital of $3 million, while companies wishing to operate as reinsurers will be required to have minimum capital of $10 million. While the minimum capital requirements contained in the new law are far lower than those contemplated in earlier drafts, which ranged from $10 million to $40 million, they remain fairly high in comparison to many other developing and established insurance markets.
The new law also grants certain new freedoms to the INS, including the ability to expand its operations into foreign markets.
2. New Risks
In addition to opening the Costa Rican insurance market to private competition, however, the new statute and regulations also established new prohibitions against “insurance activities” in the jurisdiction by non-registered foreign insurers and reinsurers and created a new framework of far more serious penalties for violations of these prohibitions. Given these new provisions, and the newly created incentives for the INS to report and the regulators to investigate any violations, the risk of adverse enforcement actions has risen significantly with the new legislation.
For example, in November 2008, the new Superintendencia General de Seguros (Sugese) announced that it was investigating 15 persons concerning allegations by the INS of illegal sales of foreign insurance policies. Potential fines for illegal sales of foreign insurance (the definition of which includes marketing of foreign policies by phone, email or facsimile) appear to range as high as $360,000 under the new insurance laws. As to its role in the investigation, an INS representative reportedly stated that the INS became aware of the illegal activity based upon reports from consumers and further stated that the INS intends to file complaints against additional persons. The INS representative also reportedly commented that, although the INS has always been aware of illegal insurance sales activity, difficulties in making complaints and minor penalties provided no incentive to report such activities under the prior laws.
In this regard, it should be noted that, while the old law was essentially a non-solicitation statute, the new law’s definition of “insurance activities” that non-registered insurers and reinsurers are prohibited from undertaking in the jurisdiction is not limited to sales solicitation. To the contrary, the definition appears broad enough to implicate any sort of claim investigation or adjusting activities, whether conducted directly or through a local agent. Therefore, while the statute does not prohibit Costa Rican entities from seeking insurance outside of the jurisdiction, an insurer holding such a policy would be left with little ability to investigate or adjust any potential loss.
Therefore, even for companies that opt to wait and see as to the development of the Costa Rican insurance market, it is imperative to reevaluate underwriting activities regarding risks related to Costa Rica.
3. Market Reaction: The INS Prepares and The Market Waits
While a number of insurance companies based in Central America and Mexico have indicated interest in entering the Costa Rican market, no company has to date officially sought authorization.
In the meantime, the INS has moved forward with plans to strengthen its position domestically and to expand into the other Central American markets in an effort to restructure, retain customers and grow its business in the face of new competition. First, the INS reorganized its operations by creating four new insurance entities: INS Internacional, INS Servicios, INS Vida and INS Comercializadora. INS Internacional will manage the company’s overseas operations, while INS Servicios will serve an auxiliary function, enabling INS to restructure areas such as auto/motor insurance. Efficiency savings achieved through INS Servicios will be fed back to customers through reduced policy premiums, according to local press reports. INS Vida will focus on the life insurance sector, which had been largely neglected during INS’ time as the monopoly provider. Finally, INS Comercializadora will be the sales arm of INS, offering its range of products to the market. INS has also stated that it may enter the catastrophe risk market, offering insurance on state-owned assets at first.
The INS subsequently announced the launching of 17 new insurance products that it anticipated would be offered in the future by its competitors. The new products, to be marketed and sold through public and private banks, include various personal lines policies, such as a family protection policy and a cancer coverage policy. The family protection policy offers coverage for food, housing, education and transport for surviving family members, while the cancer policy provides coverage for diagnostics, funeral expenses and hospitalization. HSBC Bank, which has 38 branches and 200,000 accounts nationwide, reportedly began selling the policies on January 2, 2009.
Conclusion: Cautious Optimism
Trends in the Latin American economies generally and insurance markets specifically indicate that insurance and reinsurance companies with a dedicated strategy and experienced advisors can take advantage of tremendous opportunities in the region. On the other hand, however, the undertaking of activities in the region without a coherent plan or full understanding of the local regulations and markets can lead to unprofitable operations and significant potential enforcement issues with local regulators.
Given the sorts of local idiosyncrasies that exist in many of the Latin American markets, and the frequent fundamental changes such as those seen in the past year in regulatory requirements, failure to understand and closely monitor market and regulatory developments can impact both a company’s profitability and its continuing right to conduct business in the region’s jurisdictions. It is therefore imperative that insurance and reinsurance companies operating or considering expansion into the region obtain the assistance of experienced and knowledgeable advisors.