Costa Rica's insurance market: key developments and trends
Neftalí Garro
BLP Abogados
San José
Neftalí Garro (Bio)
In August of 2011 it will be three years since the opening of Costa Rica's formerly state-run insurance market to private competition with the enactment of the Insurance Market Act (Ley Reguladora del Mercado de Seguros - 'IMA'). The IMA is a direct result of Costa Rica's insurance market commitments under the Central American Free Trade Agreement (CAFTA) entered into between the US, Central America and the Dominican Republic in 2006. This article summarises the key developments and trends from regulatory perspective that would interest any potential investor in Costa Rica's insurance market.
Regulatory developments
From a regulatory standpoint, in addition to the IMA there are other important regulatory developments that affect the functioning of the insurance market. The most important of those developments are the following:
Insurance Contracts Act (Ley Reguladora del Contrato de Seguros - 'ICA')
Passed by the Legislative Assembly after its second reading on June 2 2011. This law will replace the Insurance Law of 1922 and governs all aspects of the insurance contract itself. It seeks to provide a modern framework for insurance contracts and has a significant pro-consumer tendency in some areas.
Regulations on Authorisations, Registrations and Operational Requirements for Entities Supervised by the Insurance Superintendent (SUGESE)
These regulations, also known as SUGESE Regulation 01-08 and adopted in September 2008, set forth the specific requirements to license insurers, reinsurers and intermediaries (brokers, agents).
Regulations on the Solvency of Insurers and Reinsurers
These regulations, known as SUGESE Regulation 02-08, establish the rules to set and measure insurer and reinsurer capital adequacy and relate to issues such as reserving, investments, risk-based capital requirements, treatment of reinsurance and early warning mechanisms for insurer insolvency issues.
The authorities have also adopted the necessary accounting rules specific to insurers operating in Costa Rica by amending the existing financial sector accounting rules applicable to the banking, securities and pensions sectors.
Regulations on Insurance Distribution
Known as SUGESE Regulation 03-10. These regulations govern the operations of insurance agents, insurance agencies and insurance brokerage firms, as well as those of mass-market insurance distributors not licensed as insurance intermediaries proper.
Regulations on Mandatory Insurances
Known as SUGESE Regulation 04-10. These regulations set forth the rules that will allow private insurers to offer mandatory workers compensation and third-party no fault automobile coverage. Prior to January of 2011, those coverages were still offered only by the state-owned Instituto Nacional de Seguros (INS).
Other financial sector regulations (such as those related to corporate governance, anti-money laundering/terrorism financing and risk rating agencies, and consolidated financial information for financial holding groups and conglomerates) were updated to reflect the opening of the insurance market to competition.
Developments in licensing of insurers and other market participants
To date there are ten insurance companies licensed to operate in Costa Rica, including the state-owned INS. Of these new players, two are local investment (INS and Seguros del Magisterio) and the remaining companies are wholly or majority foreign-owned: MAPFRE | Seguros Costa Rica; ALICO Costa Rica (formerly owned by American International Group and acquired in 2010 by MetLife Inc); ASSA Compañía de Seguro; Pan American Life Insurance de Costa Rica; Aseguradora del Istmo (ADISA); Seguros Bolívar Aseguradora Mixta; Quálitas Compañía de Seguros (Costa Rica); and Best Meridian Insurance Company (the latter is a branch of the US entity).
In addition to these companies that are already licensed, Atlantic Southern Insurance Company - Costa Rica Branch has received authorisation to operate, conditional upon completing the final steps of the definitive licensing process.
In terms of intermediaries, there are eight insurance brokerage firms licensed by SUGESE and two more with authorisation granted conditional upon completion of final steps of the definitive licensing process. These companies come in addition to the existing insurance agencies that operated in the pre-2008 monopoly era, which were grandfathered in the IMA and conserved their licenses.
In terms of distributors of mass-market insurance products, there are 28 active distributors registered with SUGESE, the majority of which are bank and non-bank financial institutions and all of which but two have been hired by state-owned INS.
In terms of insurance product filings and registrations (IMA requires insurer to file with SUGESE both policy forms and rate information), there are approximately 250 different products on the market, of which 170 are INS products and the remaining 80 pertain to new market participants.
What's next?
From a regulatory standpoint, SUGESE has announced that before 2011 is out it expects to hold hearings on the following proposed regulations or amendments thereto:
- Amendments to the policy form and rate filing regulations contained in SUGESE Regulation 01-08;
- Amendments to SUGESE Regulation 02-08 (insurer solvency);
- New regulations on insurance claims handling;
- New regulations affecting insurance contracts made necessary by the entry into force of ICA; and
- New regulations on information technology risks.
It is also important to note that in May of 2010 the Central American countries (including Costa Rica) concluded negotiations with the EU on the Central American Association Agreement. Once adopted by each of the signatory countries (this is expected to occur by 2013), it will permit European insurers to provide certain lines of insurance in Costa Rica on a cross-border basis (i.e., without having to establish themselves in Costa Rican through a locally-licensed and capitalised legal entity). These lines will include insurance relating to space launching of freight, maritime shipping and commercial aviation, retrocession and reinsurance, and services necessary to support global accounts (understood as master policies purchased by multinational clients outside Costa Rica the coverage of which extends to the multinational client's operations in Costa Rica).
Conclusion
Although Costa Rica's insurance market is small by most standards, it remained until 2008 one of the few that was still fully controlled by the state. Although the state-owned insurer INS continues to report nearly 99% of the market's insurance premiums, the significant number of new players and the high profile of those players (e.g., MAPFRE, AIG, MetLife) are telling of the market's potential for growth. From the regulatory standpoint, all players (both regulators and participants) must strive to achieve a regulatory environment that balances the primary objectives of regulation (insurer solvency, good corporate governance, consumer protection) and the development of healthy competition to promote entrepreneurship and growth in this market.