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Today's Market is Significantly More Solvent

We have interviewed Roberto Sollitto, President of the Asociación Argentina de Compañías de Seguros (AACS) (Argentine Insurers' Association) to gain his insight into the Argentine market and the Latin American scenario. During our meeting he discussed market evolution and recent developments in Argentina in the past few years, and gave us his opinion on what the future will bring.

The insurance industry accounts for 2% of Argentina's Gross Domestic Product (GDP). This is not a minor sector, and even though growth is not up to expectations, it is also true that companies that meet solvency margins and comply with capital requirements and current regulations have managed to maintain their position throughout time. Meanwhile, there still is foreign capital inflow in a concentration-prone market.
When asked about Argentina's intricate political, economic and financial scenario, Mr. Sollitto, said that the current situation does not impact the insurance business as much as other sectors: "Crises affect us later. And we react later, too".
In view of this, we may conclude that this scenario may impair the growth of the insurance business only next year. We are now in a recessive time, after the golden years when GDP rose annually 8.7% and 6%. Back then, there were twenty TV sets in any shop window. Today, there are two or three, and that's what we insure. Car makers' production has also gone down. We trust in our ability, however, to grow one or two percent above GDP if there is economic reactivation", he forecast.
"Sales have remained stable. There has been some slight growth in Life products and an even more significant increase in Annuities and Retirement income".
"However", he noted, "whenever discussing the insurance industry's present situation, we must remember our origin and where we are, as not long ago this was an excessively regulated market with a monopolistic State-run reinsurer. This changed dramatically in the '90s. Private reinsurers were allowed into the market. Foreign companies were given the same opportunities domestic carriers enjoyed in terms of premiums, commissions, collections and other regulations. But the market became saturated and, as it is the case the world over, excessive competition resulted in premium reduction. Quite soon, money was not enough to meet commitments, together with red ink and company failures. Carriers unable to comply with capital requirements could not stand this pressure, remarks Sollitto. He mentioned the convertibility law as another relevant factor. "The year 1991 was marked not only by the currency peg and the much awaited stability, but also by the rebirth of Life lines".
"Also, the Workers' Compensation Law was amended with both favorable and unfavorable consequences. Even though it provided a better framework for risk management, it deprived insurers of about 13% to 14% production at a time when some downsides of traditional workers' comp coverage had been solved. The line was beginning to render positive results. And though many companies managed to retain their portfolios, most were shifted to new single line carriers. In today's market this new system has been in force now for five years, and has significantly improved loss prevention and reduced litigation", he continued to say.
Then came widespread enforcement of VAT (21%). This seriously affected Property/Casualty companies. In addition to products becoming more expensive, companies had to bear the loss generated by the tax, as "premiums are collected in installments, while companies pay the full VAT rate when issuing the policy. There are attempts now to revert this situation by shifting from the cash basis to the accrual basis tax payment system".
The consequences of amendments to social security laws and the birth of the Administradoras de Fondos de Jubilaciones y Pensiones (AFJP) (Pension Fund Managers), Retirement Income and Annuity insurers and Pension Fund-linked life insurers, had also a major effect on the structure of the insurance market.
AACS wished these isolated events had contributed to developing a political plan to bring this sector back to life. Nevertheless, the market gained a new structure and the set of each of these measures, though not coordinate, resulted in some unexpected harmony. Sollitto assures "this is a totally improved and different market".
The "ugly duckling" was P/C insurance, which suffered from all of the above plus the consequences of the liquidation of the State-run Reinsurer (INdeR), still under way. But this situation, coupled with the tax burden, did not impact Life and Workers' Comp lines.
Worth noting is the fact that in spite of all problems, insurers seem satisfied with the market. Even more so considering the difficulty of surviving when the sole government-run reinsurer becomes insolvent and goes into liquidation.
"Solvency requirements became more stringent, the market opened up and capital requirements changed. While this requirement is 3 million for existing companies, new operators are required to put up 10 million", Sollitto explained.
In turn, he found that major foreign reinsurers entering the market (thus providing the system with additional security) and Insurance Department's supervision over reinsurers, brokers and others were two very positive events. "All conditions are there to have a more solvent market ", he stated.
As for pending issues, "much remains to be done by us insurers, especially in the field of internal restructuring and expenses, which are inconsistent with premium rates and worldwide levels. We may have good loss ratios, but with high expense levels. Percentages are 70% and 30%, respectively, in developed countries, while we are in the 65% and 40% range, with a combined ratio way in excess of 100%. We envision a future decrease, as no market may evolve appropriately with these percentages".
Regarding issues to be solved by Government, Mr. Sollitto underscored two, namely:
1- Completing INdeR's liquidation. After answering to the cut-off plan accepted by some companies, many requested a revision of informed balances arguing there were material errors. The term allowed for the reinsurer to give an opinion on cedent's request has expired, and it was extended for another 60 days early in July. Meanwhile, current authorities have said the political intent remains to complete the liquidation process by December 31. Although the liquidation schedule will not be affected - as the current Executive Decree 1220/00, which modified the previous Decree N° 1061/99, refers to the cut-off offer of INdeR's liabilities towards its cedents, but not to the time frame - the form of payment may. "More than ever, it is necessary that the bond collateralizing the Institute's liabilities be dollar-denominated. Any attempt to pay in pesos (formerly accepted) will be rejected now. That should be the only difference, he argued.
2- Releasing the tax burden, one of the heaviest in the world.
Countries generally have easily collectable taxes that often operate to the benefit of the insurance business. Some tax rates are allocated to promoting this activity or to fund fire brigades, as a means of increasing prevention.
Brazil levies approximately 4% and 6%. In Argentina, the tax burden is 23.5% (21% VAT plus 2.5% on account of excise taxes after a gradual deduction of 2% per annum).
"We hope the government keeps the promise made by José Luis Machinea, the former Minister of Economy in his Insurance Day speech in October 2000 on the VAT issue". Apparently, the current Minister has decided to stick to the method mentioned earlier, whereby VAT would be paid on actually collected premium, thus relieving the financial burden on insurance companies.
When asked about collections via banking institutions, Sollitto was not hesitant: In spite of all postponements, July 1 was the deadline to enforce the so questioned Resolution N° 429. He even remembered Domingo Cavallo's words when he said that payment through banks was a means of controlling all financial transactions. "I know this is arguable and that many believe we should not ask anything from the State, but some of the advantages offered by this payment method include standardizing a system which is working neither properly nor orderly. Money is never received on time. Don't take me wrong. I am not talking about shady activities, as this is a matter for the courts, but about companies' flexibility. They agree on ten-month terms that extend to eleven, twelve or thirteen months because customers pay with deferred checks. This must be somehow regulated.
Brazil is a clear-cut example of the efficiency of this system, which has been in place for over thirty years now, even though more than a year went by after the rule was approved before there was a smooth mechanism in place. Attention should be given, however, to those areas in the country where customers may have to travel long distances to effect payment at the bank. The truth is that insurance is purchased in installments and claims are paid cash, and no allowance is possible as payments are effected by check. Benefits for the insured include having a sound system that will ensure they collect the coverage they've purchased".
Then came the question about differences between Pension Fund Managers and the pay-as-you-go system. In this connection, Sollitto said that the nearly five billion pesos these companies receive every year are in good hands, as Government has been a "very poor administrator ". He added those who think to the contrary want that money to use it for other purposes totally alien to social security. As regards discontinuance of contributions to Pension Fund Managers for one year, proposed by the Unión Industrial Argentina (UIA) (Argentine Business Association) as a solution aimed at reactivating our economy, Sollitto found it "disastrous" . "Discontinuing a system that works well is unacceptable", he added.
"Pension Fund Managers are contributing to the system to a large extent by buying Government bonds. Today, AFJPs manage close to 22 billion dollars worth of funds. This amount left the hands of the Government-run Social Security Administration (ANSES) and is now managed by the private sector. But at least the money is there. That makes the difference. Had those funds been received by the ANSES, we would not know where they were allocated. Generation after generation were deceived by the pay-as-you-go system", he said.
Regarding amendments to Insurance Law N° 17.418 and Law N° 20.091 regulating the insurance business and its supervision, there are two bills in Congress intended to modernize the provisions on insurance and reinsurance contracts included in Law N° 17.418, while amendments to Law N° 20.091 are currently under final review and might be enacted by decree.
"But the current wording of Law N° 20.091 is very good, and amending it is not that urgent. What we need is proper enforcement", he emphasized.
In turn, regarding production by line of business in Argentina in the April 1, 2000 - March 31, 2001 period, P/C totaled 3,574.8 million; Life, $ 1,729.4 million; Workers' Comp., $ 659.5 million; Retirement Income, $ 892.1 million. Premiums issued plus charges, net of cancellations, totaled $ 6,854.8 million per annum.
The first table presents premium levels and per capita premiums for Argentina vis-à-vis other Latin American countries as of June 30, 2000.


Information on premiums as a percentage of GDP for Argentina and other countries as of 1999 is as follows.


"I believe Argentina and Latin America have a promissory future. A comparative analysis with more developed countries shows a significant potential for growth", Sollitto concluded.

Translation: Adriana Caminiti

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