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Argentina’s New Leadership and How it Affects Insurance

Insurance Law360
September 2, 2016

By Hernán Cipriotti and Daniel Baron
To read this article in PDF format, please click here.

Following last year’s elections, the political and economic landscape is changing in Argentina. Where new economic opportunities arise, (re)insurance follows. Along with new demand for commercial insurance products, the legal framework of (re)insurance is ripe for reform. Currency exchange and transfer rules have been lifted providing a degree of welcomed certainty by foreign (re)insurers involved in Argentina. Other short and medium term amendments are anticipated including updating the 50-year-old insurance statute. Argentina is a jurisdiction heading in the right direction for (re)insurers. An easier operating climate, increased demand for (re)insurance, and an improving regulatory climate make Argentina a jurisdiction to watch.

Argentina’s newly elected president, Mauricio Macri, took office in December 2015, causing yet another sharp political and economic turn for the country.

During his first week in office, President Macri appointed two supreme court justices, cut export taxes and ended a controversial agreement with Iran. He also lifted controls on currency exchange rates, letting the Argentine Peso float in a free market (losing nearly a third of its value).

Among the immediate fiscal advancements undertaken by the new administration, Argentina paid its “holdout” creditors approximately $9.3 billion — an integral part of a strategy to normalize relations with international markets. This act put an end to a bitter 15-year-old judicial dispute. Upon confirming payment, the New York court hearing the case lifted the injunction that prevented Buenos Aires from paying other creditors, which in 2014 had forced the country into default.

Unfortunately, the government’s first punch combinations will not bring immediate results, and certainly not by the second half of 2016 as President Macri had initially announced. Since the new president took office, annual inflation in Argentina has climbed to more than 40 percent, while investments have declined initiating an economic recession. Some of President Macri’s measures, like lifting the freeze on utility tariffs, have resulted in severe price increases for a restless population.

Despite the current state of the Argentine economy, international observers are expecting a significant rebound in 2017. According to the World Bank, the monetary and fiscal policies implemented by the new administration will foster economic growth of about 1.9 percent in 2017 and 3 percent in 2018. In some studies, analysts are forecasting economic growth of 4 percent for 2017.

The Argentine Ambassador to the United Kingdom, Renato Carlos Sersale, is spreading the word that “Argentina is back to international markets”. In fact, the commitment to attract investment from private investors is best evidenced by the president’s willingness to advocate for changes to local legislation, rules and practices that negatively affect businesses and make Argentina unappealing to investors.

Foreign investors have already shown their willingness to embark in a new era of investments in the region. Pan American Energy has announced a $1.4 billion investment to exploit conventional and unconventional hydrocarbons in several reservoirs around the country. Exxon plans to invest an additional $250 million in the coming months on a pilot project. If proven successful, Exxon’s CEO foresees investments topping $10 billion in the next 20 to 30 years. Volkswagen and Renault-Nissan have announced investments for $100 million and $800 million respectively.

With a renewed market openness and new legal framework in development, significant positive changes to the insurance and reinsurance markets are expected.

(Re)insurance in Argentina

Work has only just begun on the legal framework supporting the insurance business, and we believe the market will see changes in the short and mid-term.

As a start, difficulties involving currency issues in money transfers relating to reinsurance contracts (premium and/or claims payments), have disappeared due to the new exchange policies in place. As his very first measure, the new local superintendent of insurance issued a resolution repealing previous regulation forcing insurers and reinsurers to sell assets held in foreign currency — thus ending a heated discussion with many market players, who had taken the issue to the courts. Similarly, regulations restricting how insurance companies invested their assets have also been lifted.

The next big wave of regulations should be aimed at updating Argentina’s 50-year-old insurance statute. The statute lacks any mention of crucial aspects relating to reinsurance as well as certain insurance practices that are commonplace today. These changes might affect casualty and property business, which are heavily regulated by the statute and have already been affected to some degree by changes brought-about approximately a year ago by the new “Civil and Commercial Code”. There have been several proposals to enact a new insurance statute, but the initiative has simply not succeeded despite the intentions of the previous regime. Today the new authorities seem increasingly open to making changes to the existing statute, which is crucial to the way insurance operates in Argentina.

In early 2011, the previous superintendent of insurance issued resolutions 35,615 and 35,726 by which only local entities were to be able to reinsure in Argentina. Branch offices of foreign companies are also allowed to operate, but under limited conditions. The regime was later modified to some extent and large risks are often retroceded. However, serious limitations to foreign reinsurers remain. In light of the new government’s approach to open markets, local insurers and onlooking international reinsurers are expecting a gradual transition towards a free reinsurance market.

While an open insurance market is desirable, Argentina also seeks to strengthen the domestic insurance market and its infrastructure. As part of this move, the superintendent has promulgated Resolution SSN 39.957, which significantly boosts capital requirements for both local and foreign (re)insurers. For traditional insurance lines, the minimum capital requirements have been increased threefold. For reinsurers, capital requirements will double by the end of the year and increase tenfold in the next 12 months. This is likely to present a challenge for some local and foreign operators.

Another expected reform has to do with workers’ compensation. In the early 1990’s, Argentina’s workers' compensation system collapsed due to the heavy burden of increasingly expensive lawsuits, which made the risk unbearable for businesses and very unattractive for insurers. As a solution, in late 1995, law 24,557, known as the Labor Risks Law (Ley de Riesgos del Trabajo), was promulgated, creating a whole new set of rules.

The system focused on increasing safety measures at the workplace and providing medical care for those injured on the job. Monetary compensation for injuries available to workers greatly diminished under a tabulated or scheduled regime imposed by the new law. After a little over a decade, tabulated compensations began to lag behind ever-growing inflation, which greatly affected payments to workers.

In this context, the law’s compensatory payment limits were successfully challenged in court. In late 2012, this regulation was repealed causing a dramatic change. Insurers are now receiving very large uncalculated claims, and the system is again approaching collapse. This problem has caused local market players to anticipate a best-case scenario where insurers might have four more years before operating becomes impossible. A proposed solution is to include an administrative adjudication stage for claims with a view to alleviate local labor courts.

Overall, Argentina has set the stage for positive developments and growth for the insurance and reinsurance markets. From the perspective of the international observers, the difficulties may drag on until the end of this year. However, it is widely believed that new government measures will have a favorable short-term impact on the country’s economy. So far, in 2016, insurance penetration, premiums and activity have significantly increased. Considering that Argentina is the third largest insurance market in Latin America, the country’s possibilities are very significant. It looks like Argentina may be on its way to living up to its ever-promised potential.

—By Hernán N. Cipriotti, Zelle LLP and Daniel R. Baron

Hernán Cipriotti is an associate with Zelle International and Daniel Baron was formerly with Zelle’s Miami office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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