Costa Rica:
Opportunity And Risk In A "New" Insurance
Market
by M. Machua Millett, Mondaq.com
While relatively small in comparison to the
major Latin American insurance markets,
Costa Rica is the largest insurance market
in Central America (excluding Panama).
The country also has a uniquely diversified
economy for the region, has experienced
rapid annual growth in the insurance market
(between 15% and 46% annual growth in recent
years) and still has a relatively low
insurance penetration rate (2.6%).
Prior to 2008, however, the country had
maintained a government monopoly over the
insurance and reinsurance market through the
Instituto Nacional de Seguros ("INS").
In August 2008, new legislation was passed
in Costa Rica and signed into law ended the
more than eighty-year-old state-sponsored
monopoly over the Costa Rican (re)insurance
business.
While the new Ley Reguladora del Mercado de
Seguros opens the insurance market to
private competition from domestic companies
and foreign companies with local branches,
it also contains prohibitions and increased
penalties that may come as a surprise to any
foreign (re)insurers that do not carefully
review their activities in connection with
any Costa Rican risks.
Due to dependence upon the United States and
European economies, Costa Rica's insurance
market growth is expected to remain flat for
2009. This plateau is expected to be only
temporary, however, and comes on the heels
of 28% growth in 2007 and double digit
growth in the prior years. Furthermore,
Fitch predicts continued growth in both the
general economy and in the insurance market
specifically well in to the future.
Fitch based its recent opinion of the Costa
Rican economy on the nation's high per
capita income, strong governance indicators,
net external creditor position, improved
public finances and relatively diverse
economy and the full implementation of the
Dominican Republic-Central America Free
Trade Agreement (DR-CAFTA) and its
accompanying legislation, which should help
sustain these trends over the medium to
long-term. As to Costa Rica's insurance
market, Fitch expects continued premium
growth and increased market penetration as
private companies enter the market and
increase price competition.
Not surprisingly, these economic indicators
and the opening of the (re)insurance market
to private and foreign competition has led
to significant, if cautious, interest in the
past year. Seguros del Magisterio, a Costa
Rican company that formerly provided
services exclusively to the nation's
teachers under an exemption to the
government monopoly, became the first
private competitor in February 2009.
Aseguradora Mundial, a Panamanian company,
received initial authorization in July 2009.
A number of other companies, including
Qualitas of Mexico and ALICO of Panama, are
also in the process of obtaining
authorization.
Recent Regulatory Developments
Under the new law enacted in August 2008,
the interim (re)insurance regulator was
charged with establishing an insurance
regulatory authority and implementing the
other mandates of the new law. While certain
regulations governing the market have still
not been finalized as of the time of this
writing, the basic tenets of the regulatory
structure, such as authorization and
solvency requirements, are already in place
in the form of the statute itself and
several sets of regulations issued since the
opening.
Companies seeking to sell personal lines or
general insurance will be required to have
minimum operating capital of $3 million,
companies wishing to sell both will be
required to have minimum capital of $7
million and companies wishing to operate as
reinsurers will be required to have minimum
capital of $10 million. While the minimum
capital requirements contained in the new
law are far lower than those contemplated in
earlier drafts, which ranged from $10
million to $40 million, they remain fairly
high in comparison to many other developing
and established insurance markets.
In addition to opening the Costa Rican
insurance market to private competition,
however, the new statute and regulations
also established new prohibitions against
"insurance activities" in the jurisdiction
by non-registered foreign insurers and
reinsurers and created a new framework of
far more serious penalties for violations of
these prohibitions. Given these new
provisions, and the newly created incentives
for the INS to report and the regulators to
investigate any violations, the risk of
adverse enforcement actions has risen
significantly with the new legislation.
Potential fines for illegal sales of foreign
insurance (the definition of which includes
marketing of foreign policies by phone,
email or facsimile) appear to range as high
as $360,000 per violation under the new
insurance laws.
In this regard, it should be noted that,
while the old law was essentially a
non-solicitation statute, the new law's
definition of "insurance activities" that
non-registered insurers and reinsurers are
prohibited from undertaking in the
jurisdiction is not limited to sales
solicitation. To the contrary, the
definition appears broad enough to implicate
any sort of claim investigation or adjusting
activities, whether conducted directly or
through a local agent. Therefore, while the
statute does not prohibit Costa Rican person
and entities from seeking insurance outside
of the jurisdiction, an insurer holding such
a policy would be left with little ability
to investigate or adjust any potential loss.
Indeed, the interim regulator recently
issued a technical note providing further
guidance as to several regulatory issues of
significant importance to foreign (re)insurance
companies.
* The Costa Rican law applies to any person
involved in the development or realization
of any insurance activities, whether in the
nature of insurance, reinsurance,
intermediary or auxiliary services. The Law
applies to such activity whether it occurs
within the Costa Rican territory or from
abroad directed toward Costa Rica and
whether such activities are conducted
directly or through intermediaries.
* The public offering of insurance services,
which is prohibited in the absence of proper
authorization or an applicable exemption,
includes any activity that procures the sale
of an insurance policy or provides specific
or concrete information concerning a
particular insurance policy.
* Any provider of cross-border insurance
services that includes a risk within Costa
Rica must register with the Superintendency.
This requirement does not apply to providers
of cross-border reinsurance or retrocession,
reinsurance intermediary services or
auxiliary reinsurance service -- such
entities may contract with authorized Costa
Rican insurers when contacted directly by
such authorized companies.
* No company may commercialize or otherwise
market cross-border insurance services in
Costa Rica unless the policies in question
have been registered with the
Superintendency, which is only permitted if
such policies have been registered in the
company's home jurisdiction.
* The only cross-border direct insurance
services currently permitted by law in Costa
Rica are those established by the CAFTA-DR
treaty. As concerns direct insurance, said
treaty applies only to space, maritime
transport and commercial aviation insurance
and only to member countries.
* Surplus lines insurance may only be
purchased after local vetting and may not be
publicized in Costa Rica and may only be
offered through brokers.
Therefore, even for companies that opt to
wait and see as to the development of the
Costa Rican insurance market, it is
imperative to reevaluate underwriting
activities regarding risks related to Costa
Rica.
The content of this article is intended to
provide a general guide to the subject
matter. Specialist advice should be sought
about your specific circumstances.
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