Latin America is entering a new period of political and economic transition. Targeted focus on reducing corruption and driving growth with increased transparency for a frustrated and determined population, is set to influence the region's course over the next few years. As is often the case, this new phase is led by a political shift in Brazil, but populist leaders across the region – and from both sides of the political spectrum – have seized on the cry for corruption to be wiped out.
There is also growing potential for further insurance and reinsurance penetration in response to increased demand. This will be especially pronounced if newly elected political parties can effectively implement economic and judicial reforms, and increase certainty in the region.
Each country has its own, distinct commercial and legal requirements, and it remains crucial for insurers and reinsurers to understand these factors when carrying out all functions of business, from underwriting to claims handling. This chapter considers some of the reasons behind the growth of the insurance and reinsurance markets across the region, and the international expansion of insurance and reinsurance companies. It assesses the status of regulatory developments in each of the main jurisdictions, as well as providing a snapshot of how experience of applying these regulations in practice is leading to increasingly sophisticated insurance markets.
II OVERVIEW OF THE REGION
The demand for insurance and reinsurance continues to increase across the region as the population's average per capita income rises. In particular, 2018 has shown that directors' and officers' (D&O) risks, class actions and cyber insurance cover is more important than ever, alongside the usual infrastructure and natural hazard damage provisions.
Operation Car Wash, which first hit Brazil in 2014 before expanding across the region, has led to interesting political and judicial changes for 2019, as expanding middle classes become frustrated with what they see as corrupt regimes disguised as, for the most part, leftist governments.
In particular, in March 2018, calls for impeachment for moral incapacity resulted in the resignation of Peruvian President, Pedro Pablo Kuczynski. The opposition leader, Keiko Fujimori, was placed under pretrial detention and Supreme Justice Cesar Hinostroza was the object of an arrest warrant, as the release of audio recordings highlighted corrupt practices within the Peruvian judiciary. The subsequent reform resulted in the appointment of a new attorney general, Pedro Chávarry (who himself is now the subject of a President-induced state of emergency for dismissing two lawyers accusing him of obstructing justice in the Odebrecht investigations). A preliminary investigation was also opened against the former President, Alan García, for alleged corruption crimes.
In Brazil, Sérgio Moro, who led the inquiry into Operation Car Wash, has become the new Brazilian justice minister amidst claims that he targeted left-wing politicians in his operations, resulting in the imprisonment of former president, Luiz Inácio Lula da Silva.
Petrobras settled the bribery and corruption-related securities class action lawsuit in New York in January 2018 for US$2.95 billion. Its auditors, PwC, also settled with pension fund company USS for US$50 million in February 2018, bringing the total value of the class action to approximately US$3 billion. Both Petrobras and USS deny any wrongdoing or misconduct.
Following his successful election in October 2018, with 55 per cent of the votes, Jair Bolsonaro assumed the Brazilian presidency in January 2019, marking a significant shift in the country's political and economic landscape. The far-right president has already been dubbed by the media as 'Trump of the Tropics' owing to his stance on women, homosexuality, race, gun laws, control of the media and foreign relations. However, it is hoped Bolsonaro will provide much-needed support for businesses, focusing on pensions, employment, income and fiscal balance, liberalising interstate commerce and privatising state enterprises to restore government finances and produce a united market. In principle, the new government has the majority support of Congress, but none of its leaders have yet had to test its support on hard topics. Concerns have also been expressed as to how the proposed expansion of production and reduction of protected lands will threaten the environment. Such challenges will need to be overcome to maintain the support of the Brazilian people, while providing the required economic and institutional reforms.
In July, Andrés Manuel López Obrador was triumphant in his presidential campaign in Mexico, although political violence targeted many of his supporting politicians in the process (a total of 175 politicians were assassinated between 1 September 2017 and 31 August 2018, according to consulting firm Etellekt Consultores). López Obrador is not a fan of the North American Free Trade Agreement and there is concern that both he and President Trump could reject engaging with it. López Obrador's party (the Morena party) is also small and any implementation of policy will require compromising with opposition parties. In contrast with other Latin American nations, López Obrador is the first left-wing president to have been elected in Mexico since the 1920s. His campaign promised to 'purify public life', mandating relief for the poor, eradicating corruption and continuing to strengthen currency.2
López Obrador has highlighted the increasing importance of Mexico's oil and gas industry by unveiling his National Hydrocarbons Production Plan at the end of 2018. The plan seeks to boost production to 2,624,000 barrels a day by 2024, by repairing and modernising Mexico's current refineries, expanding targeted exploitation of new reserves and reducing theft from pipelines. Parties bidding for Mexican gas resources recognise the potential for Mexico to soon generate the most demand in the world's energy landscape. At the same time, the new government has cancelled many existing infrastructure projects, including public tenders for investment in the energy sector and the half-built new airport for Mexico City. The question is whether economic growth can be sustained in the midst of sweeping changes in public policy.
Elections were also held in Colombia, with conservative Iván Duque becoming the country's youngest president. The result may lead to challenges in policymaking, owing to Duque lacking a congressional majority, and put at risk peace deals reached with the Revolutionary Armed Forces of Colombia and the National Liberation Army in 2016 and 2017. Nonetheless, economic growth and investment are anticipated to continue during 2019.
Chile is also stable under Sebastián Piñera, who was elected for a second term at the end of December 2017. Economic recovery continues to be dictated by copper prices, investment from China and rising protectionism in the region. However, growth is anticipated to remain at over 4 per cent for 2019 through focus on structural reforms, including standardisation of regulation, pension system reform and increased diversification.
Mauricio Macri will be running for re-election in Argentina in October 2019. President Macri has necessarily focused on reducing public spending in 2018 with some success. Inflation is a continuous problem for the government, with tax pressure and public spending at a record high in proportion to gross domestic product when compared to other countries in the region. For Argentina to foster sustained growth, a decrease in both of these variables is crucial. Progress now appears to be being made with public spending dropping to 39 per cent in 2018 from a high of 42.2 per cent in 2015 to 2016. However, inflation remains in double digits and is expected to be 31.7 per cent in 2019 (recorded at 24.8 per cent in December 2017) with real growth at minus 1.6 per cent. Accordingly, the economic recession continues with a currency freeze in place until June 2019. Macri has also sought to renegotiate a deal with the International Monetary Fund (IMF), sparking protests and directly impacting his own popularity with the Argentine population, which recalls previous IMF policies leading to the economic crisis of 2001.
The economic crisis in Venezuela continues with a reduction in oil exportations, failing state-owned PdVSA and ineffective currency controls, with the suggested introduction of the Petro token for the sale of oil expected in 2019. The IMF predicts that growth will fall to minus 5 per cent with inflation reaching 10,000,000 per cent in 2019. EU sanctions against Venezuela have been extended for another year, owing to the deteriorating human rights situation. Amidst this background, Nicolás Maduro was re-elected in May 2018 against a limited opposition, removing optimism of imminent change. Other Latin American nations are now directly impacted by the Venezuelan crisis with 600,000 people officially recorded as having migrated from Venezuela to Colombia, sparking concerns that instability could spread across the border. The migration issue has also reached the Supreme Court of Brazil, which has refused to close Brazilian borders to Venezuelan nationals. Such incidents may provide the opportunity for increased collaboration and dialogue between neighbouring countries.
Challenges regarding migration between Mexico and the United States also intensified during 2018, leading to the deaths of two Guatemalan minors under US detention and allegations of US security forces using tear gas against local children across the border in Mexico.
In addition to political and economic challenges, Latin America also faced multiple natural disasters during 2018, including widespread flooding and droughts.
Colombia saw multiple flooding incidents throughout the year. This included flooding on 12 May 2018 upstream and downstream of Hidroituango, Colombia's largest hydroelectric dam, which left 600 homeless and damaged local infrastructure. In February 2018, torrential rain caused flooding and landslides across Bolivia. At least six people died and approximately 10,000 families were impacted. Venezuela also saw record levels of rain in July 2018, resulting in the declaration of a state of emergency as major rivers overflowed displacing thousands. Paraguay also suffered from flooding that, by November 2018, had affected over 30,000 people evacuated to emergency facilities.
By contrast, between November 2017 and April 2018, Argentina and Uruguay suffered from the worst droughts since those of 2008 and 2009, which prompted economic recession. Some regions experienced rainfall of only 50 per cent of the usual level hindering President Macri's attempts to reduce Argentina's inflation and fiscal deficit. The droughts caused billions of dollars' worth of damage to exportable cash crops, such as soy beans and maize, and indirectly impacted associated livestock sectors increasing global food prices by 1 per cent on the Food and Agricultural Organisation's Food Price Index. In northern Argentina alone, 20,000 people were displaced.
These disparities in weather are likely caused by El Niño, which is increasing in frequency as a result of climatic change. According to the World Meteorological Organisation, 2018 saw the worst El Niño in over 15 years. Heavy rains are predicted to continue until March 2019, although the effects of El Niño have been known to last for up to 24 months.
In June 2018, Volcán de Fuego erupted in Guatemala causing the deaths of 200 people. Debris from the explosions travelled up to 40km and ash reached a height of 10,000 metres above sea level, forcing thousands to evacuate their homes and the closure of the international airport.
In September 2018, a fire destroyed the National Museum of Rio de Janeiro, Brazil and its irreplaceable archives of artefacts. Although the cause of the fire is yet to be determined, there has been widespread criticism of the government withdrawal of funding for restoration work. The museum was knowingly lacking in maintenance, unprotected from fire damage and without insurance provisions, although it is understood that funds from the national development bank had just been secured to improve conditions.
III INTERNATIONAL EXPANSION AND CONSOLIDATION
Expansion of the Latin American insurance market continued throughout 2018, owing to existing low insurance penetration rates, recovering economic growth promoting demand for insurance to an expanding middle class and a diversifying trade platform. However, insurance companies must rise to the challenge of complying with stricter regulations, increased local and foreign competition and heightened expectations from insureds to be successful in the region. Diversifying the means of promotion and access to insurance products, including through the embracement of fintech developments, will be important in increasing penetration rates in 2019 and beyond.
The Chilean market is arguably still the most sophisticated Latin American insurance market, boasting a competitive environment and innovative drive for offering tailored customer solutions. One example (now utilised in at least Chile and Mexico) is auto insurance that is based on the distance travelled by the insured. This method provides lower premiums for months of reduced car use, while simultaneously protecting the environment.
At the other end of the spectrum, Venezuela poses difficulties for the international market, owing to uncertainty surrounding the political and economic landscape. In April 2017, President Trump imposed new sanctions against Venezuela and, in December 2017, the European Union imposed the Venezuela (European Financial Sanctions) Regulations3 against specific Venezuelan individuals and entities. The lists of individuals continue to be extended. Insurers and reinsurers must now be even more careful during the process of scrutinising the ultimate beneficiaries of any reimbursements made to Venezuelan bodies, under their policies.
Like most of Latin America, Peru is underinsured owing to a traditional lack of insurance culture with respect to both business and property. Last year, for example, El Niño losses reached US$3.1 billion but only US$600 million (or 19 per cent) was insured. As a result, the Peruvian market has begun to purchase insurance for catastrophic risk. For the first time in history, the government has obtained cover for up to US$200 million of catastrophe risks for 2019.
There also remains a serious lack of awareness on the part of Peruvian insureds of the value of cyber risk insurance, despite this having been identified as a significant risk since 2012. Local populations must be made aware of the benefits available (i.e., restoring, repairing and replacing damage and loss caused by breach, as well as any operating cost overruns) if the delivery of this product, and other new products, are to be successful.
Legislative developments in Colombia are providing new opportunities for the expansion of insurance products on offer to customers. A new D&O bill is being drafted to amend the responsibilities of company executives that, among other factors, will oblige companies to reimburse any costs incurred in defending the actions of directors and officers when exercising their duties. This is expected to consequently promote the underwriting of Side B policies in the country.
Premium collections on surety bonds in Brazil increased by 8.9 per cent during 2018 (amounting to 2.44 billion reais) and are expected to continue growing, as economic growth fosters public works focused on the infrastructure and energy markets. Judicial bonds have also contributed to boosting the market since the labour reform in 2017 authorised their use as an alternative to appeal deposits. Discussions over a new Bidding Law4 and an amendment5 that provides for mandatory surety bond insurance of at least 30 per cent over the project's amount for large construction works over 100 million reais, are also expected to develop during 2019.
The Peruvian market is also expected to increase its penetration of D&O insurance as more regulation increases certainty for insurers. Currently, it appears that approximately 2 per cent of Peruvian companies take out a policy to cover their directors and officers, so there remains much opportunity for expansion.
It remains common practice across the Latin American region, for many local insurers to act as fronting operations for risks placed in international reinsurance markets, particularly in London. However, some significant international market moves into the region took place during 2018. In particular, in February, Zurich entered into an agreement to acquire the operations of QBE in Latin America, immediately becoming the leading insurer in Argentina.
Mexico's large population and low insurance penetration rates make it a popular choice for the market. While Lloyd's has been a licensed foreign reinsurer in Mexico since 1985, it was not until 2015 that Patria Re (and Pembroke) obtained Lloyd's approval to establish a special purpose syndicate, becoming the first Mexican reinsurer to write Latin American specialty risks through the Lloyd's platform. In 2018, Swiss Re began operations from Mexico City after receiving formal authorisation from local regulators, and Pioneer Underwriting launched a new regional hub with a focus on property and casualty business.
Brazil's reinsurance market continues to increase in competitiveness with multiple admitted and eventual foreign reinsurers (including Amlin Insurance Societas Europaea, MS Amlin AG, Aviva Insurance Limited and Atradius Reinsurance Designated Activity Company) accessing the market during 2018. At the same time, authorisation was withdrawn from Amlin Corporate Insurance NV and Atradius Reinsurance Limited and suspended from Hyundai Marine & Fire Insurance Company Limited, Seguros Inbursa, SA and WR Berkley Insurance (Europe) Limited.
In most Latin American countries, there are strict requirements applicable to insurance and reinsurance companies. For example, in Peru, solvency restrictions are dependent on whether a company operates in life or general risks, or insurance or reinsurance. Minimum capital limits reach almost £2.5 million for reinsurance companies, roughly £1.6 million for insurance companies and approximately £4.1 million for those operating in both markets. In all cases, it is vital that an insurer or reinsurer seeking to make an international move considers the requirements of the specific market. This is not an environment where one size fits all.
Regulation in insurance and reinsurance continues to develop in many of the main jurisdictions. A diverse group of markets, each with a distinct identity, exists after the advances of the past decade. Each regulatory regime should be considered in its own right, prior to underwriting risk in the country.
Progress has continued with targeting corruption and money laundering with the Lima Commitment for Democratic Governance Against Corruption agreed at the Eighth Summit of the Americas in April 2018 reaffirming intentions for prevention and tackling of corruption through strengthened institutions and judicial autonomy. The government of Nicaragua expressly denied its approval of the Lima Commitment owing to its non-participation in negotiations. Nicaragua appears to have the third-lowest Corruption Index rating in South America (ranked 151st out of 180 global nations), after Venezuela (169th out of 180) and ahead of Haiti (157th out of 180), despite comprehensive legislation.6 Enforcement of the region's developing regulations is therefore key in combating such issues – and to understanding the commercial environment.
Over the past two years, Peru has sought to establish provisions on the personal liabilities of specific officers in public and private entities. For example, a 2018 tax ruling provides for the personal liability of private sector officials designing, approving or executing tax planning intended for avoidance. This new liability scenario is considered an attractive opportunity for the placing of D&O policies, given the risk to which officials are exposed and the demand for cover of administrative fines and defence costs.
Also, in March 2018, Peru approved Law No. 2408, ensuring that civil damages to the state are immediately payable in corruption circumstances and preventing paralysis of public and public–private partnership works. The new law obliges offenders to establish a compliance programme and to meet international standards. The passing of this law provided that bond letters and surety bonds guaranteeing the obligations of those associated with the Odebrecht scandal to the Peruvian state would be honoured. It remains unclear whether insurers will be able to safeguard themselves from associated claims.
A new Anti-Money Laundering Regulation has also been proposed by the Brazilian Superintendency of Private Insurance (SUSEP) and is currently under public consultation. The new regulation will include increased regulation regarding the control and monitoring of operations, and establish obligations for companies and some brokers to issue annual internal assessment reports and annual audits of all clients in relation to money-laundering and terrorism-financing risks. There are also rumours about a potential merger between SUSEP, the National Superintendence for Pension Funds and the National Agency of Supplementary Health, creating a single regulator on insurance and social security matters. The idea is to reduce government size and prevent unnecessary costs. However, it seems that the new government has abandoned this project, at least for now. Expert opinions on this subject are divided, with some suggesting a merger would put the decision-making independency of each agency at risk.
Brazil approved a data protection bill in July 2018, which is strongly inspired by the General Data Protection Regulation formulated by the European Union.7 The new law is set to become effective in August 2020 but compliance procedures are anticipated during 2019. The new regulation is expected to have a double impact on the Brazilian insurance and reinsurance market, not only creating the need for data processing companies to adjust their internal controls, but also increasing demand in the cyber insurance market. In 2017, Brazil was the country with the second-highest number of cyber attacks, with more than 62 million people being victims of attacks and approximately US$22 billion of losses. According to studies by Willis Towers Watson, Jardine Lloyd Thompson and Aon, the interest in cyber insurance has more than doubled since the new law was published. This is not surprising when data breach claims concerning redress to data subjects involve defence costs and administrative fines that can reach up to 2 per cent of the company's net annual turnover, limited to 50 million reais.8
The introduction of the new Financial Market Commission (CMF) in Chile has created a specific, prosecutor-led investigation unit for financial markets resulting in the devolution of the Superintendency of Securities and Insurance on 15 January 2018. The revamped regulator is intended to enforce compliance with legislation, facilitating the operation of market agents in a manner that protects public confidence. In September 2018, the CMF proposed a draft bill for Risk-Based Supervision of Insurance Companies to the Senate to adequately manage risks and strengthen the insurance market. In November 2018, the CMF also agreed to a multilateral memorandum of understanding with the International Organisation of Securities Commissions. It is hoped that this increased regulation will serve to strengthen the credibility of the Chilean market and prompt a rise in the number of foreign market players in the years to come.
V POLICY INTERPRETATION AND DISPUTE RESOLUTION
In Latin America, laws affecting policy interpretation may be found in a variety of types of legislation, from civil codes and codes of commerce, to financial regulation and regulatory guidance. In many jurisdictions, laws on consumer protection will also be relevant. In Brazil, for example, all individuals, as well as corporate entities in some circumstances, will benefit from consumer protection, which imposes strict rules (in favour of the insured) when it comes to interpreting insurance contracts.
The interpretation of reinsurance policies is more complicated as there is often not an established body of law. Peru and Chile are two of the few jurisdictions where insurance law includes a definition of reinsurance, including recognition that reinsurance is independent of the underlying policy.
Meanwhile, whether the insurance cession provisions of the Brazilian Civil Code apply equally to reinsurance contracts as to insurance contracts remains an area of continued debate. Many Brazilian lawyers consider that the provisions in the Civil Code are limited to insurance contracts. Others consider that the Code applies to reinsurance by analogy. The latter view reflects the approach in Colombia and Argentina, and now appears to be supported by the Brazilian draft Insurance Law Bill, placed before the Federal Senate for voting. This remains an area where clarification of the law or comment by SUSEP would be welcome.
There is similar discussion in Mexico over the law applicable to reinsurance contracts. Although it is largely accepted that reinsurance contracts are subject to the general rules applicable to commercial contracts in the Civil Code, some argue that the Insurance Contract Law also applies to fill in any gaps left by the terms of the reinsurance contract. This view runs counter to allowing parties autonomy to agree to the terms and conditions of the reinsurance.
It seems that the modernisation of the insurance regime and increased sophistication of the market (particularly in Chile) have entrenched the view that reinsurance is expected to respond as an indemnity policy for the reinsured. This is in contrast to the traditional position in the law of England and Wales, which recognises reinsurance as a separate insurance of the underlying insured risk.
By way of example, Peruvian contract law defines reinsurance9 as obliging the reinsurer 'within the agreed limits' to meet 'the debt that arises in the patrimony of the reinsured as a consequence of the obligation assumed by it as the insurer under the contract of insurance'. It is difficult to reconcile this statement with the separate recognition of autonomy between insurance and reinsurance, such that the payment of an indemnity under the original policy must not be conditional on the relationship between the insurer and reinsurer.10 The simple explanation is that the aim of this provision is to prevent insurers from deferring to reinsurers as an excuse for late payment.
Consequently, it is possible that reinsurers may find themselves unable to rely on the terms of the reinsurance contract, unless they reflect the original policy. Reinsurers are also at risk of being bound to make payments, because of unauthorised actions of the reinsured (even where that reinsured retains little or none of the risk). For example, reinsurers must pay close attention to the reports issued by the independent loss adjuster appointed to manage claims in Chile and Peru.
Meanwhile, Chilean law11 provides for the need to determine the reinsurer's obligation to indemnify the reinsured in the context of the terms and limits established in the reinsurance contract. It also recognises the benefit of looking to 'international custom' when interpreting reinsurance contracts.
It is therefore helpful for all parties, whether a local insurer or an international reinsurer, to accept that there is significant uncertainty when it comes to the interpretation of wording drafted in line with common law principles, such as those emanating from the London market. The use of terms such as 'condition precedent' will usually mean nothing to a local court.
The overarching objective of Chilean insurance contract law12 is to protect the insured, regardless of its status or size. There is a general prohibition on insurers altering the wording of registered policies in any way that does not favour the insured. Although the 2013 law is not mandatory for policies with a premium above 200 unidades de fomento (UF),13 it is influential on the way risks (irrespective of their size) are written. There may also be times where a fronting operation for the facultative reinsurance of a large risk does not meet this requirement.
The Brazilian market has also traditionally been consumer-focused. The current text of the draft Insurance Law Bill (first drafted in 2004 but undergoing many changes) continues this trend, being considered highly protectionist to insureds and making no distinction between sophisticated commercial and retail consumers.
The most effective way for insurers and reinsurers to protect their position is to take active involvement in managing claims from an early stage and, where possible, to include a clause to resolve any dispute by arbitration.
At the beginning of 2017, legislation was issued in Peru that stated that institutional arbitration must be used to resolve all disputes that arise from state contracts for the purchase of services and goods.14 Chile went one step further by providing for the automatic arbitration of large disputes (above UF 10,000), as well as for arbitral awards to be filed with the regulator.15
Substantial progress has been made in Brazil in recent years, with arbitration agreements now permitted in adhesion contracts (such as insurance policies) providing that the specific clause is expressly executed by the insured to demonstrate agreement. This has resulted in a rise in the number of both domestic and international arbitration cases. However, the draft Insurance Law Bill threatens to impede foreign arbitrations by establishing that all forms of conflict resolution involving contracts entered into in Brazil, Brazilian domiciled insureds, assets located in Brazil or interests over assets relevant to Brazilian infrastructure, must be performed in Brazil with the exclusive application of Brazilian law. If the law is passed, this would represent a step backward in the reduction of protectionism demonstrated by the Brazilian state in recent years as it has sought to establish the country as a reputable and competitive arbitration centre for external, and higher-value, disputes.
Subject to new laws being issued in Venezuela, it is likely that a reinsurance contract would be considered an 'international contract', allowing for the inclusion of an arbitration clause subject to a foreign seat and law.
Meanwhile, in Colombia, arbitral awards already form part of a significant body of case law relating to the interpretation of insurance contracts. However, there is no clear rule establishing the confidentiality of arbitration awards.
The main disadvantage of the increasing popularity of arbitration in Latin America (as with other regions) is the reduction of binding judicial precedent available for consideration in court deliberations. Considering the longevity of litigation in Latin America, case law is likely to take an even longer time to develop in the future.
Another common theme to the handling of claims in Latin America is that there are strict periods for insurers to comply with their obligations.
In Peru and Chile, the loss adjuster is usually at the centre of the process. The rules in Peru16 provide for 30 days, from the delivery of complete documentation, for insurers to respond to a claim. Any request for additional information must be made within the first 20 days, even where a loss adjuster has been appointed. In Chile, insurers must make any challenge to a loss adjuster's final report within 10 days. In both countries, failure to comply with these periods will be taken as an acceptance of cover.
A similar 30-day rule in Mexico puts an insurer at risk of paying interest, or being subject to fines or sanctions. In Colombia, insurers that fail to respond to claims (in which the insured has duly accredited the occurrence and amount of the claim) within one month may face expedited judicial proceedings and interests on arrears (of approximately 30 per cent). Brazilian legislation also allows 30 days for the conclusion of a loss adjustment, counted from the date in which all of the relevant documents have been provided by the insured to the insurer. There is no specific law applying this deadline to reinsurance, which must self-determine an applicable time frame. Failure to comply with the period will result in the tacit acceptance of cover. If passed by the legislature, the draft Insurance Law Bill would interfere with the claims adjustment procedures currently regulated by SUSEP. For example, a claim would be considered covered if partial or total consideration passes between insurer and insured, or if a denial of cover fails to contain reasoning. Additionally, the deadline for a reinsurers' response to a request for cover would be stipulated as 10 days. The Brazilian Superior Court of Justice has also consolidated rules that an insurer may only deny insurance indemnity based on premium default if the insured has been previously notified of its default.17
In Argentina, it is now possible to use electronic means to comply with deadlines to deliver the policy documentation to the policyholder within 15 working days of the signing of the contract. The issue of Resolution No. 219/2018 in March 2018 provides a more reliable and cost-effective method of delivery. It also reinforces the importance of policy delivery to the policyholder.
Peru has confirmed the importance of an insurer knowing the extent of the risk it is writing at time of placement by codifying the duty to enquire into circumstances that may influence the terms of it entering into the policy.18 A policy will only be found null when there is fraud or inexcusable fault on the part of the insured. The insurer will also only have 30 days from obtaining knowledge of the inaccurate statement to dispute cover, otherwise the right to such a defence will be lost. Insurers and reinsurers must, therefore, make sure that they know the true state of the risk at the time of contracting; if necessary, tailor their questionnaires appropriately to the potential insured, and act quickly if fraud or fault is confirmed.
Colombian law recognises the right of a third-party victim to commence a direct action against the insurer in cases of third-party liability insurance. It is usual for insurers of third-party liability policies in Colombia to be the subject of a 'call into guarantee', by which they become a defendant to the proceedings brought against an insured. In a 2015 case,19 the Colombian Supreme Court confirmed that the limitation period against the third-party claimant starts to run from the date of the loss, while the limitation period for the insured to issue proceedings against the liability insurer runs from the date of the 'judicial or extrajudicial claim' made by the third-party victim.
A similar right is available in Brazil, following a 2012 court decision.20 However, a statement issued by the Superior Court of Justice on 13 March 2015, clarified that a direct action cannot be filed exclusively against an insurer by a third-party claimant; all claims against an insurer must also include the insured as a defendant.21
This is a further example of how, even though case law is non-binding across Latin America, the courts are becoming increasingly important to the development of insurance and reinsurance law.
To further illustrate this point, a 2014 decision of the Mexican Supreme Court opened the door for the incorporation of punitive damages into future judgments where it is necessary to provide a deterrent for others from engaging in harmful conduct or to the detriment of a third party.22
Meanwhile, the Mexican Federal Civil Code was amended in January 2018 to alter the measure and restatement units23 applicable for calculating compensation to victims of personal injury, with the effect of reducing the basis for such calculation to 25 per cent of that previously anticipated. These changes may mark the end of a trend in the increasing moral damages awarded by the Mexican courts, shifting from an award to punishment method of controlling undesirable actions. From an insurer perspective, this is a welcome change. Punitive damages are often excluded under an insurers' general terms and conditions, while moral damages are more likely to be governed by the expressed general liability policy provisions.
In a decision of particular relevance to the D&O and casualty markets, the Colombian Supreme Court of Justice held that an insurer cannot deny cover for defence costs on the basis that those defence costs were incurred without the prior authorisation of the insurer. The Court has also reaffirmed that the deadline for insurers to dispute a claim for defence costs remains 15 days. However, contrary to other areas of law, an insurer's silence will be interpreted as tacit acceptance of cover, provoking an interruption to the running of the limitation period from the 15th day.
The Appellate Court of São Paulo has developed its interpretation of defence costs for D&O claims where there is concrete evidence of misconduct by the insured. According to the judge, a case was dismissible, regardless of whether an arbitration clause was effective, if the cause of action was illicit. In the matter in question, one of the involved directors had confessed to acts of fraud and corruption. This decision may provide support for claims for defence costs to be denied in similar conditions.
VI DEVELOPMENT OF REINSURANCE LAW
The continued liberation of local reinsurance markets in Latin America during 2018 is a welcome development in a region that has traditionally been underserved. Asian and eastern European reinsurers are now also seeking the potential growth that the region has to offer and are increasing their exposure to Latin American risks.
It is expected that the demand for reinsurance cover for infrastructure and energy projects; life and health products; cyber and insurtech; as well as D&O, and property and casualty, will continue to grow during 2019 as per capita income of local populations increases in the medium term. Although the immediate impact of annual hurricane season is likely to spark an upturn in premium rates in South American markets, the development of new products to combat the risks posed by natural hazards is encouraging. Last year saw a record-breaking catastrophe bond of US$1.36 billion, being issued by the World Bank and structured by Aon, to provide earthquake reinsurance protection to multiple Latin American countries including Mexico, Chile, Colombia and Peru. This diversification of risks and international support for local economic development is likely to boost the confidence of foreign investors to take on more business in the involved nations.
Meanwhile, the development of Latin American regulatory systems continues. It will, however, take time before there is a clear, established body of law on the interpretation of reinsurance contracts.
Brazil terminated its requirement for a mandatory retainment of local reinsurance at the end of 2017 and established minimum preferable risk offerings to local reinsurers at 40 per cent of each contract, with the same conditions applicable to local and foreign reinsurers.24 This move demonstrates the continued relaxation of protectionist regulations and barriers to international investors going into 2018.
The year was also marked by the liberalisation of the placement of reinsurance and retrocession policies in the Brazilian market by foreign cedants, regardless of these entities' registration with SUSEP, so long as the Brazilian reinsurer only cedes business in lines for which they have SUSEP's approval to offer locally. Parties may now negotiate directly, or through local or foreign brokers, without any restrictions regarding wordings, subject to compliance with Brazilian anti-money laundering and anti-terrorism legislation, and express mention of the covered and excluded risks.25
Local Brazilian reinsurers are now also permitted to cede nuclear risks to foreign entities, when there is a lack of registered reinsurers that are specialised in nuclear risks in Brazil. For all other risks, authorisation will now depend solely on the lack of local market capacity (i.e., when the risk had been offered to all local, admitted and eventual reinsurers, and totally or partly rejected).
Argentina also relaxed its regulatory framework in 2017 regarding the local placement of reinsurance, increasing the maximum placement that local cedants can place directly with authorised 'admitted reinsurers' to 50 per cent, rising to 75 per cent by 2019.26 The overall objective of the resolution is to open up the reinsurance market in Argentina to international markets, but also to increase the minimum capital that is required in order to strengthen the solvency of local reinsurers.
These changes will cause a reduced need for local reinsurers to operate as fronting companies between the original cedants and foreign reinsurers, simplifying placements in the international market.
That said, in Peru, new rules for taking out reinsurance and coinsurance via fronting arrangements entered into force during 2018. These rules allow insurance companies to incorporate a clause into insurance and reinsurance contracts that allows the insurer to pay a loss when the reinsurer pays (i.e., 'pay when paid' provisions). This clause may only be agreed in fronting operations when the insurer transfers 100 per cent of the risk and highlights the importance of ensuring that the underlying policy is aligned with the reinsurance in back-to-back reinsurance. It is also understood that the Superintendency of Banking, Insurance and Pension Fund Administrators is preparing new reinsurance regulations regarding the accountability of insurance companies, and disability and survival insurance premiums so further changes are anticipated for 2019.
In practice, it is rare to see reinsurance contracts that are not subject to an express choice of local law and jurisdiction. The absence of any clear principles applicable to the determination of reinsurance contracts creates difficulties for reinsurers, particularly where fronting arrangements are in place. The default position under local law seems to be that reinsurers will be bound to 'follow the fortunes' of their reinsured, but this is a complex area of law at an early stage of development in Latin America.
A new wording with respect to the Control Clause in Reinsurance Contracts was agreed between the Chilean Insurance Association and Lloyd's in 2017, acknowledging the strength and credibility of the country's insurance market. Upon agreement of the clause by parties, reinsurers are now permitted to manage the adjusting process and the aftermath of the claims. This clause also provides assurance on the jurisdiction and governing law that should apply when resolving disputes arising from insurance contracts.
In Chile, there is a requirement for all insurance and reinsurance matters to be determined within Chile. Naturally, this has led to reinsurance policies being issued subject to Chilean law and jurisdiction, although it is not known how Chilean courts would react to an express preference for a different law, such as that of England and Wales.
The position is similar in Brazil, which demands the use of Brazilian law and jurisdiction with the exception of arbitrations, which may be governed by any express law.
The governing principle under Colombian law is related to the place of performance of the contract.27 There is little doubt that this means any contract with a Colombian insured or insurer must be subject to Colombian law. The position in Mexico is less clear, despite the regulator's insistence that local law and jurisdiction must be used.
It is necessary that reinsurers carefully and explicitly express any deviations from the original policy or the claims control options required, in the reinsurance policy, and in accordance with rules specific to the jurisdiction.
VII OUTLOOK AND CONCLUSIONS
This chapter has highlighted the renewed focus in Latin America on improving risk management and challenging corruption. This is necessary to support renewed economic growth and to protect against a repeat of widespread scandals, such as those uncovered by Operation Car Wash. In the previous edition of this chapter, we commented that protectionist regulation was continuing to wane in favour of growth and transparency, but that political and economic volatility could undermine the progress being made. This remains the case at the beginning of 2019, with many Latin American countries having recently elected presidents promising change.
When it comes to interpreting insurance contracts, the approach of the courts tends towards favouring the insured. There is a continuing debate over whether contracts negotiated between sophisticated commercial entities (including reinsurance contracts) merit separate treatment from consumer contracts, and the approach to be taken where there is business discrepancy between insured and insurer. There is a sense that renewed growth in the region will be accompanied by the need for risk transfer, and an opportunity for insurers and reinsurers to offer new products.
Arbitration continues to gain momentum as the new preferred dispute resolution option. At the same time, Latin American regulation is modernising, allowing insurers to include express arbitration provisions, even though protectionism still exists with regards to the associated governing law and jurisdiction clauses that may be applied.
The comments in this chapter provide an overview of the current position in the main jurisdictions. The most important message is that each market is at a different stage of development and each requires close, individual analysis. In addition to consideration of the legislative regime, it is becoming more important to review court decisions and arbitration awards (where available) in determining the response of insurance and reinsurance contracts.
The Latin American market has entered a new phase of potential growth in 2019, as political and economic changes spark optimism among populations. While emphasis will be placed on the growth of cyber insurance products, the development of traditional products for D&O and property and casualty, to keep pace with commercial demands and changing legal environments, will be crucial to enabling the success of insurers and reinsurers in the region.
1 Duncan Strachan is a partner and Kayleigh Stout is an associate at DAC Beachcroft LLP.
2 Associated Press in Mexico City, as reported by The Guardian on 2 December 2018.
3 These sanctions can be viewed in Council Regulation (EU) 2017/2063.
4 Bill No. 1,292/1995.
5 Bill No. 6,814/2017.
6 Transparency International: Corruption Perceptions Index 2017.
7 Brazilian Personal Data Protection Law (13,709/2018) from Bill 53/2018.
8 As at January 2019.
9 Article 138 of the Insurance Contract Law No. 29946.
10 Article 139.
11 Article 584.
12 Insurance Law No. 20,667 came into force on 1 December 2013.
13 Unidades de fomento is an alternative currency that varies daily based on the previous month's inflation rate.
14 Legislative Decree 1341.
15 Article 543 of the Code of Commerce.
16 Article 74 of the Insurance Contract Law.
17 Precedent No. 616 of the Superior Court of Justice.
18 Insurance Contract Law No. 29,946
19 Judgment on 14 December 2015.
20 Superior Court of Justice, Special Appeal 962230/RS, Judge Luis Felipe Salomão, 8 February 2012.
21 Súmula 529, which is a non-binding but persuasive statement to clarify the law.
22 Admivac case.
23 Unidad de Medida y Actualización.
24 CNSP Resolution 353/2017.
25 CNSP Resolution No. 363/2018.
26 SSN Resolution No. 40.422.
27 Article 869 of the Code of Commerce.