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Reinsurance in Latin America comes full circle.

THE ULTIMATE demise of Argentina's Instituto Nacional de Reaseguros (INdeR) in April 1992 marks the end of 40 years of reinsurance monopoly held by an official organization whose collapse began in the early 1980s. INdeR was one of the last of a long tradition of state reinsurance monopolies that prevailed throughout much of Latin America during the post-World War II period, yet have fallen by the wayside this past decade.

Today, only the Brazilian reinsurer, Instituto de Resseguros do Brasil (IRB) is still operating a de facto monopoly in the region - 50 percent of the IRB's capital has always been in government hands; Caja Reaseguradora de Chile, which was privatized in the early 1980s when it was still strong and respected, was later bought out by the Mapfre Group (Spain); Reaseguradora Peruana was liquidated several years ago; and INdeR continued with its activities until April 1992. Though somewhat of an exception, the IRB today is undergoing major in-house changes to streamline its procedures and operations, and some of the most powerful insurers think it is time to divest it of its monopolistic privileges to compete with international underwriters.

In the wake of an overall trend towards privatization of state-owned enterprises and the opening up of domestic markets to foreign competition, Latin America has borne witness to various attempts to create regional trading blocs. Any initiatives to date have not yet shown a major impact on the way the insurance industry conducts its business, nor are there any visible signs that it may impact it in the near future. Except for a few agreements between individual companies to cooperate in the settlement of motor and land cargo transportation insurances, neither insurers nor reinsurers seem to feel the actual need to function on a regional level, in spite of the many efforts made in that vein by both the United Nations Conference on Trade and Development and ARELA (Latin American Reinsurance).

Genesis of a Monopoly

IMMEDIATELY BEFORE and after World War II, a number of Latin American countries developed highly nationalistic economic policies. Many governments, eager to nationalize their countries' productive areas, found that this was easier to achieve in the services sector. Areas such as transportation, communications, banking, and utilities were transferred to the state within a relatively short period.

Like these essential services and industries, insurance was viewed as a strategic resource that had to be protected against presumably hostile foreign interests. At the same time, it was assumed that foreign currency was "saved" because many risks remained at home instead of going to overseas markets. In some cases, this protection was enacted through a state insurance monopoly as in Uruguay, Costa Rica and Cuba, while in others it was done through reinsurance. Thus Caja Reaseguradora de Chile, Reaseguradora Peruana SA, the IRB and INdeR appeared over a short span of time, mostly immediately before or after World War II.

How did this affect risk managers? If they were employed with a purely local Latin American corporation, they were burdened with an additional worry. Not only did they have to assess the quality of their insurers' security, but also with whom and how they reinsured. In the case of foreign risk managers whose companies had operations established in Latin America, this may have been less traumatic because they could ask domestic insurers to place the business with reinsurers of the nsk managers' choice or, sometimes, with captive companies in the same group.

The Argentine Case

THE APPEARANCE and 40-year development of INdeR in Argentina was similar in a number of ways to that of other insurance and reinsurance organizations in Latin America. But with INdeR now part of the history books, the insurance market will need some time to adjust to new rules in a highly decentralized atmosphere. For instance, all insurance premiums are now taxed on an average of 7 percent to 8 percent. Furthermore, insurance and reinsurance premiums are subject to an 18 percent value added tax.

During 1990 and 1991, Argentine reinsurers could place up to 40 percent of their reinsurance requirements outside of INdeR. Since April 1992, when INdeR was put into liquidation, Argentine reinsurers have been free to place their reinsurances where they see fit.

While the insurance industry may have taken a strong leap into the 1990s, professional risk managers in Argentina are relatively few and far between. In the past, as is still the case, only major industries and business groups felt they needed professional in-house advice on how to run their insurance programs; for the rest, brokers offered adequate assistance.

Perhaps partly as a consequence of this attitude, insurance brokers had (and still have) a great deal of influence, not only in the placement of major risks but also in the mediumsized and mass risks areas, such as general property, multi-line and casualty business. This is because their clients relied heavily on their advice when selecting an insurer. Risk managers worked in an almost suffocatingly regulated environment where major decisions were made by a single reinsurer.

This did not mean that Argentina was isolated from the world. On the contrary, a number of international brokers and reinsurers have been visiting the market regularly, even if there was very little that could be done outside INdeR. Some of these firms have had local offices or panners for decades. Besides, every now and then draft legislation was proposed by different sectors intending to limit or suppress INdeR's monopoly, although none of them succeeded until late 1989.

That was one of the reasons why, as soon as INdeR's absolute monopoly was slashed to 60 percent as of January 1990, a selected group of companies immediately received support from the best markets in the world. Many Argentine insurers actually placed outside INdeR much more than the 40 percent permissible by law. But no one seemed to care because for all practical purposes INdeR was bankrupt, and the Argentine government had already stated that it would not dump any more money into it. In other cases, formalities were complied with through fronting arrangements where INdeR fully retroceded specific pieces of business to retrocessionaries and through brokers chosen by its insurance clients, sometimes even with cut-through clauses that totally bypassed the state insurer both in the payment of premiums and losses.

However, only one foreign reinsurer, General Reinsurance Corp., has set up a local full subsidiary in Argentina (the minimum capital required under current legislation is $5 million); many others prefer to write Argentine business either through brokers or directly. In the latter case, reinsurers are required to apply for a license and show that they own no less than $30 million. If they choose to do business through brokers only, there are no special requirements for reinsurers, but all brokers must get a license which, among other not too strict regulations, requires an errors and omissions policy for no less than $1 million.

Some 220 insurers stand to share an estimated premium income of $2.8 billion to $3.0 billion this year. Over 60 percent of this amount is expected to come from motor (nearly 50 percent) and workers' compensation. Under INdeR's system there was no end to "horizontal" reinsurance supply (annual limits to aggregate losses or reinstatements), irrespective of how much money it lost or won with each company, and reinsurance terms were generally equal for all insurers.

Today, most Argentine insurers find relatively little trouble in placing their reinsurances ... at a price. How many of those insurers will still be around to renew their treaties in three or four years? This is one of the million dollar questions for which there is no easy answer, but it can be safely assmed that quite a few companies will disappear or shall be forced to sell or merge.

Mauricio Simaes is a correspondent based in Buenos Aires, Argentina.
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Title Annotation:Argentina
Author:Simares, Mauricio
Publication:Risk Management
Date:Sep 1, 1992
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