Argentinian insurers hit by new law

The Argentinian insurance industry was hit in the past couple of months by a new law that created a commission, headed by top government officials, which will determine how insurers must allocate part of their portfolio. As result, experts say, it could generate liquidity problems and affect the ability of insurers to pay large claims in the future.

The sovereign rating of Argentina has also been downgraded because of the deterioration of the country’s finances, and credit agency Fitch has reduced the ratings of 12 insurers by the end of November. The outlook for the sector was modified to negative.

But the latest developments are still to be felt by the sector, said Marc Herzfeld, the CEO of independent brokers Alea. “Changes need some time to affect the market, as there are many contracts and treaties already in place,” he said. “The only change we have seen so far is in the area of workers compensation, which is driving the market a little crazy.”

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The legislation for mandatory workers compensation coverage was modified by the government in September. As it aims to put an end to an industry of legal claims that the previous law has given birth to, it could have positive effects for companies in the long run, Mr Herzfeld said.

“But the details have not been clearly explained to the market and many insurance companies still do not know what to do about it,” he pointed out.

The creation of the new commission to direct investments by the insurance sector could have the opposite effect, though. The lack of an immediate impact on the market should not obscure its possible negative effects on the industry, analysts said.

The commission, which started working in November, has been charged with the mission to define “productive” activities where insurers will be instructed to invest a share of their assets.

But Eduardo Melinsky, an actuary and consultant in Buenos Aires, warned that the mandatory allocation of assets could create liquidity concerns for insurers in the future if they have to face large claims by clients.

“The investments to be targeted may not generate problems from the point of view of credit risks, but they could be problematic in terms of liquidity,” Mr Melinsky said. “They will be easy to purchase, but to whom will insurers be able to sell those securities in the future?”

He added: “If a company has significant assets allocated in so called productive investments, and then it needs to find money to pay for losses, it will have a problem. Other assets held by insurers, like Argentine public debt, are not very liquid either.”

Mr Melinsky is also worried that, by being forced to allocate some assets to investments that they cannot actually choose, insurers will find it more difficult to achieve the returns required to meet their actuarial commitments. A problem that could prove significant is high inflation continues to affect Argentina, increasing the loss ratios of insurance firms.

Another concern is that the insurance sector is not actually represented in the committee. Formally, its views should be voiced by SSN, the insurance supervisors, which do have a seat in the body. But there is little hope that the interests of the industry will be properly supported. The committee is headed by top officials from the Ministries of Economy and Industry.

The consequence could be that insurers might end up with their portfolios filled with securities that other kinds of investors are not too keen to invest on. For example, it is expected that some of the first decisions of the committee, which has much leeway to determine what constitutes ‘productive’ activities, will involve securities issued by YPF, the oil company that was the target of a controversial nationalisation in May.

For the moment, however, widespread fears of lack of capacity have not materialised in Argentina, despite the constant change of legislation that has affected the industry. The new rules that have been implemented in the past couple of years have mostly affected the reinsurance sector, where access to global markets has been dramatically restricted. A stronger technical surplus that the companies have to meet every year has also been created, and restrictions to the purchasing of foreign currency has been an issue too.

“The main outcome so far is that the facultative insurance market has shrunk a little,” Mr Herzfeld said. “Some buyers have had to change their carriers, some companies have removed capacity from Argentina, but usually risks can still be placed in the market.”

It has been rumoured in the sector, however, that some companies involved in energy projects have been struggling to find the coverages they need to transfer large risks.