Volume 5, Number 25, Page 3

Insurance Market: Reopening and New Rules

Argentina’s National (NSI) Superintendency of Insurance recently adopted Resolution 25,804 implementing wide-ranging changes in various areas of insurance law. The resolution addresses minimum capital requirements, margins of solvency, failure to maintain minimum margins, authorization for the transfer of shares, and appointment and replacement of directors, officers and other representatives of insurance companies. Most importantly, the resolution provides for the reopening of the Argentine Insurance Companies Registry.

Reopening

On June 9,1977, the NSI enacted Resolution 13,828/77 closing the Insurance Companies Registry. Both local and foreign companies wishing to carry on insurance business could not secure authorization to do so. The reopening of the Registry creates opportunities for new companies to enter the Argentine insurance market.

The reopening of the Insurance Companies Registry took place on October 1, 1998. Any company wishing to carry on insurance business in Argentina may now apply for the NSI’s authorization, subject to compliance with the Insurance Companies Act (Law 20,091), its regulation (Resolution 21,523/92) and other insurance regulations enacted by the NSI.

Minimum Capital

The Resolution is a turning point. Under Argentine insurance law, no company can carry on insurance business in Argentina unless authorized to do so by the NSI pursuant to Sections 10 and 11 of Law 12,988. Any kind of insurance contract entered into with a foreign insurance company not so authorized is null and void. Intermediaries and the insured are subject to a fine equal to twenty-five times the amount of the premium collected under such insurance contracts. In accordance with Section 61 of Law 20,091, unauthorized companies that directly or indirectly offer to enter into or effect insurance contracts are subject to fines and responsible for all damages caused to the insured. Thus, companies seeking to conduct insurance business in Argentina were previously limited to purchasing stock in insurance companies authorized by the NSI. This scenario remained unaltered until October 1, 1998.

The Resolution sets complex minimum capital requirements (effective September 30, 1998). For insurance companies authorized as of September 30, 1998, the minimum requirements depend primarily on the lines of insurance offered. The minimum requirements are different for insurance companies authorized after September 30, 1998, but also depend primarily on the line of business (e.g., US$10,000,000 for motor vehicle insurance or US$5,000,000 to offer general liability, life, disability, or annuity policies). In either case, the minimum requirements may be increased based on premiums and expenses or loss experience.

As of September 30, 1998, authorized Argentine reinsurance companies and companies wishing to be authorized must have minimum capital of not less than US$10,000,000 subject to change as indicated above.

The minimum capital requirements of life insurance companies that underwrite policies with savings coverage are subject to additional rules, as are the minimum requirements for insurance companies authorized to offer annuity insurance.

Insurance companies that show premium profits associated with accepted reinsurance in an amount greater than five percent of total premiums on their insurance policies must have a minimum capital of at least US$10,000,000.

If the required minimum capital requirement is not met, an insurance company must furnish a financial reinstatement plan to the NSI. If the plan is approved, the insurance company must fulfill it under the terms and conditions approved by the NSI.

If the insurance company does not submit the plan together with quarterly or annual financial statements or fails to comply with terms and conditions approved by the NSI, or if the NSI refuses the proposed plan, the insurance company’s minimum capital requirement will be increased and full payment will be required within thirty days. If this is not done, the NSI will withdraw authorization to carry on insurance business and direct the company’s withdrawal from insurance activities.

The computation of minimum capital requirements starts with stockholders’ equity, which is reduced by capital contributions, dividends proposed to be paid in cash, and a number of identified assets (e.g., deferred charges, certain foreign-based assets, rural realty, certain stock, etc.).

Solvency

With regard to the submission of auditors’ and actuarial reports in which minimum capital, reserves and margins of solvency are shown, the NSI enacted Resolution 25,648/98 forming the Independent Auditors and Actuarial Registries. Insurance companies are to appoint registered auditors and actuaries each year. They must comply with the auditor and actuarial reports requirements set out in the resolution. The reports must provide the opinion of the auditor and of the actuary as to compliance with capital requirements and the underwriting plans submitted to and approved by the NSI.

Representatives

Together with the application for authorization to conduct insurance business, a company must present documents and provide information to the NSI as to the shareholders, members of the board of directors and supervisory committee, officers, and other representatives. When evaluating the application for authorization, the NSI considers the expertise and conduct of these individuals. Their solvency and fitness must be maintained on a permanent basis, or an offense may be deemed to have occurred. The NSI must be notified of any changes of directors, supervisors, officers or other representatives within ten days of the date of their election.

Share Transfers

For transfers of shares and capitalization of irrevocable capital contributions, the board of directors and supervisory committee of an insurance company must request prior authorization of the NSI. The seller and purchaser are also bound to do so. NSI authorization must be requested within ten days of which ever comes first:

(a) execution of the agreement or memorandum of understanding;

(b) the making of an advance payment; or

(c) effective capital contribution in the form of an irrevocable capital contribution subject to future share subscription.

Payment of the balance, delivery of shares to the purchaser, recording of the transfer of shares in the stock registry book, and capitalization of the irrevocable capital contribution subject to future share subscription are all prohibited until the NSI has evaluated the transaction. Reporting requirements also apply in the case of, e.g., share transfers, voting agreements, and stock purchases through trustees.

Rating

The NSI has not yet regulated the rating of insurance companies. The Central Bank of Argentina has, however, enacted Communication “A” 2563 which requires that all insurance companies covering mortgage loan balances be rated by companies registered with the Securities Exchange Commission.

Conclusion

There are 258 insurance companies authorized in Argentina:

(a) 138 companies offer property and liability insurance;

(b) 71 companies offer life, health, funeral, and social security related life insurance;

(c) 15 companies offer workmen’s compensation insurance; and

(d) 34 companies offer annuity insurance.

The figures suggest a great number of players in the market. However, 80 percent of the market in each line of insurance is controlled by 20 companies. Workmen’s compensation insurance is an exception where 70 percent of the market is controlled by ten companies.

Under the new rules, more concentration in the insurance market is expected, through mergers and transfers. Also, more participation of insurance companies in the domestic capital market and alliance agreements of insurance companies are forecasted.

Claudio Andres Luqui with Baker & McKenzie in Buenos Aires, Argentina