Latin America faces a critical 12 months as new regimes across the region aim to accelerate reform and avoid an escalation in the social unrest seen towards the end of 2019. Our statement in the previous edition of this text, that the region is entering a new period of political and economic transition, takes on added significance. Targeted focus on reducing corruption and driving growth with increased transparency for a frustrated and determined population remains set to influence the region's course over the next few years.
There is a sense that there needs to be a clear shift in policy to address income inequality, and pressure on governments to act is likely to be heightened further, due to the economic and social impact of the covid-19 pandemic. The outbreak in Latin America came later than in other regions. At the time of writing, it is too early to tell whether the health response will be sufficient to contain the spread, with concerns that many countries lack the healthcare systems to cope. Already, the economic forecast is gloomy, with the IMF predicting negative growth for 2020.2
A downturn in the economy would likely compound the issues already facing many countries, including the two largest economies – Brazil and Mexico, and stifle signs of a recovery. In such circumstances, the insurance market may also struggle to show a return to growth, after premiums for 2018 shrunk by 5.5 per cent.3
The insurance penetration rate remained largely unchanged in 2018, at 2.9 per cent, with the highest rate of 4.6 per cent seen in Chile. While there has been steady growth in Peru, as well as Central American countries, the direction over the coming year will be linked to whether governments can effectively implement economic and judicial reforms, and increase stability in the region. At an industry level, the rise of insurtechs and increased digitalisation may provide new solutions able to promote growth in traditional areas such as home, life and motor insurance.
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 challenges and opportunities facing the insurance and reinsurance markets across the region, as well as the international players involved in writing Latin American business. 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 an increasingly sophisticated legal landscape.
II OVERVIEW OF THE REGION
In this overview, we describe some of the major economic and political developments over the past year. We also provide an update on three key themes to understanding risk in the region: corruption, civil unrest, and major disasters (man-made and natural).
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's rights, homosexuality, race, gun laws, control of the media and foreign relations. Popularity ratings have tumbled since taking office, and Bolsonaro's leadership is set to be tested in the wake of the country's response to the covid-19 pandemic. What seems clear is that Bolsonaro may no longer be able to rely on signs of an economic upturn to support his agenda in 2020. Support for the government in Congress, where the ruling PSL party has less than 10 per cent of the seats in the lower house, is set to face its first significant test.
BHP Billiton was served with a US$5 billion claim for group litigation in the UK courts in 2019 for allegations over its role in the Samarco incident. This type of action is part of a growing trend for international corporations to be targeted in their 'home territories' in respect of acts or omissions worldwide operations, whether through joint ventures or subsidiaries. Similarly, victims of the January 2019 Brumadinho tragedy filed a criminal complaint with German authorities against Tüv Süd (the German engineering company that had certified the stability of the tailings dam) in October 2019.
The year 2019 saw continued developments in the scandal on the widespread construction perpetrated by Brazilian construction company, Odebrecht, throughout the region. Operation Car Wash, which first hit Brazil in 2014 before expanding across the region, has led to continued political and judicial change, as well as promises of a tough stance on corruption, as expanding middle classes become frustrated with what they see as corrupt regimes. What started as a small investigation into money laundering of goods and services supplied to Petrobras has unveiled probably the largest corruption scandal ever known.4
Reforms in Brazil aimed at ending the culture of corruption have followed in Peru, Colombia and other countries. At the same time, the past five years has seen a spike in the investigation of public contracts and corruption-related litigation, as well as under D&O policies and surety bonds. The need for protection offered by these products has also risen as companies come under increasing scrutiny and face up to more stringent regulation.
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.
In Peru, the government continues to suffer from the fallout of the corruption scandal that saw the impeachment and resignation of former president Pedro Pablo Kuczynski in 2018.
One of the major tasks facing the Peruvian government is to address the US$159 billion infrastructure gap across all sectors of the economy. In particular, there is a need for investment and modernisation of the oil and gas industry to allow safe and effective operation. As things stand, key provisions in laws relating to maintenance of pipelines have been suspended since 2016, in order to allow operators time to present plans for their safe operation. The Peruvian Amazon has been affected by multiple oil spillages over the past decade. In another example of how legal action is increasingly crossing national borders, Peru's indigenous communities lodged a complaint with the Organisation for Economic Co-operation and Development (OECD) against the Dutch parent company of Pluspetrol in March 2020.
In April 2019, another former president, Alan García, took his own life as police officers were preparing to arrest him on corruption charges relating to the Odebrecht scandal. In September 2019, President Martín Vizcarra unexpectedly dissolved Congress and called for parliamentary elections. His new cabinet, hastily appointed on 3 October 2019, faces the difficult task of building trust between the executive and legislative branches of government, and most importantly with the Peruvian people.
To a large extent, the underlying mistrust of government was the 'loaded gun', triggered by austerity measures and price hikes, which set off civil protests in Chile, Ecuador, Bolivia, Colombia and elsewhere in the last few months of 2019.
Some of the worst protests were seen in Chile as peaceful demonstrations turned violent and the government declared a constitutional state of emergency that lasted between 19 and 27 October 2019. Despite being one of the most stable economies in the region, Chile also has one of the highest levels of income inequality among developed nations.5 The violence forced President Piñera to reshuffle the cabinet and promise a series of referenda on constitutional change. Although the social unrest had subsided by the end of 2019, January 2020 marked a return to violence that was only interrupted by the covid-19 outbreak, with the first referendum postponed until October 2020.
In Bolivia, the return to power of Evo Morales was short-lived as his success in the October 2019 election became the subject of accusations of fraud. Morales was forced to resign amid violent protests that resulted in over 30 fatalities. There is uncertainty over how long the interim government, led by Jeanine Áñez, will be able to survive.
Although not on the same scale, mass strikes and demonstrations also hit Colombia during November and December 2019. The National Strike Committee has drawn up a list of 104 points, from dissolving the riot police to completely nationalising state-run oil company, Ecopetrol. The government led by conservative president, Iván Duque Márquez, faces a challenge to reach an agreement that will prevent further demonstrations during the coming year.
Economic problems were at the heart of the 11 days of violent protests in Ecuador in October 2019. The government was forced to backtrack on its plan to scrap fuel subsidies that have been in place for 40 years. However, the country continues to struggle to balance the demands of the IMF bailout package and protection of indigenous groups.
The fallout from the Odebrecht scandal continued through 2019, with the discovery of leaked documents by a news agency in Ecuador. The documents show that the massive corruption scheme led by the Brazilian construction company across the region extended even further than had been publicly reported, including major infrastructure projects in the Dominican Republic, Panama, Venezuela and Ecuador. Meanwhile, in January 2020, Odebrecht submitted a claim for US$184 million in alleged unpaid costs against state-owned Petroecuador in relation to the construction of the Pascuales-Cuenca pipeline.
In July 2018, Andrés Manuel López Obrador (AMLO) 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). As anticipated, AMLO has already faced obstacles to his ambitious plans for reform and to 'purify public life', mandating relief for the poor, eradicating corruption and continuing to strengthen currency.6 The opposition say that, far from making progress, the country has been paralysed by the cancellation of public infrastructure projects, such as the US$13.3 billion planned mega-airport for Mexico City.
AMLO 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. The question remains as to whether economic growth can be sustained in the midst of sweeping changes in public policy.
There was a surprise in Argentina, when incumbent president, Mauricio Macri lost power to Alberto Fernández in elections at the end of 2019, with Cristina Fernández returning to power as vice president. The new leftist government has promised higher taxes and looser monetary policy, but will also need to address inflation that hit almost 54 per cent for the year in 2019. Macri's downfall was sealed when he failed to secure the support of the International Monetary Fund (IMF) for a rescue package. With international support unlikely, the government's strategy of widespread tax hikes has already seen protests from the agriculture industry.7
The economic crisis in Venezuela continues following a reduction in oil exportations, failing state-owned PdVSA and ineffective currency controls over recent years. The introduction of the sale of oil for Petro tokens has had limited success, with international buyers concerned that they may fall foul of ever-tightening US sanctions. The IMF predicts that the downward spiral will continue, with an anticipated 35 per cent decrease in GDP in 2020. EU sanctions against Venezuela continue and the US strengthened its sanctions regime in 2019 by freezing the assets held by PdVSA in the United States. Neighbouring Colombia, Ecuador, Peru and Chile have seen an estimated 5 million nationals cross the borders. While many seek to reach the United States or Spain, over 1.6 million people are reported to have settled in Colombia, many of whom live without any support or access to medical care. With the spread of covid-19, there are fears that this group will be particularly at risk. The migration issue reached the Supreme Court of Brazil in 2018, which refused to close Brazilian borders to Venezuelan nationals. However, the global pandemic is now forcing many countries to close their borders and it is unclear how migrants will be protected from the outbreak.
In addition to political and economic challenges, Latin America also faced multiple man-made and natural disasters during 2019, including hurricanes, flooding and droughts.
The Bahamas and other Caribbean islands suffered the full impact of Hurricane Dorian, with losses estimated at up to US$8 billion. These losses would likely have been much worse had it not been for the Bahamas having some of the strictest legal requirements for construction in the Caribbean.
Mexico was also hit by US$25 million in insured losses, compared to the estimated economic impact of US$383 million caused by Tropical Storm Fernand.
World headlines were dominated by the Amazon wildfires, with a reported 85 per cent increase in the number of fires during 2019.8 The wildfires affected the rainforest and biome within Brazil and extended to Paraguay, Peru and Bolivia. The fires were linked to deforestation and illegal slash-and-burn-methods, with 970,000 hectares lost.
Argentina's economic fortunes were worsened by heavy rains in the northeast of the country at the start of 2019, causing mass evacuations and power cuts. Heavy rain and flooding were repeated in the middle of the year, with neighbouring Uruguay also affected. The rain was attributed to the effects of the El Niño weather pattern, due to the warming of the surface waters in the Pacific. Although a natural weather event, the impacts of El Niño and La Niña (the upwelling of cold water to the surface of the Pacific, usually following El Niño) are likely to increase in frequency and demonstrate more polarised effects as global warming worsens.
Colombia continues to see regular flooding incidents year on year. Torrential rain in June and July 2019 resulted in humanitarian assistance being provided to 2,173 families in the Orinoquía region in the east of the country, on the border with Venezuela. The flooding also severely affected agricultural land and over 5,000 homes.
Flash floods and landslides are a common feature of many regions in Colombia and across the region, with the location of houses and construction methods putting many people in danger. In March 2019, heavy rain caused major flooding across Paraguay, Ecuador, Peru and Bolivia, which affected tens of thousands of people.
By contrast, between November 2017 and April 2018, Argentina and Uruguay suffered from the worst droughts since those of 2008 and 2009, and central Chile has been though a decade-long 'mega-drought'. Thousands of people have been left without direct access to drinking water and the impact on flora and fauna has been critical. From an economic standpoint, drought is one of the key challenges facing the agriculture industry and is one area where parametric crop insurance may be part of the solution. In Colombia, subsidies for parametric insurance have helped facilitate access to weather index insurance for smallholder farmers, such as through the CaféSeguro programme backed by the Blue Marble Consortium.
There are clear opportunities for insurers and reinsurers to address the huge protection gap in the region, which is reflective of stubbornly low insurance penetration. Recent research by AON suggesting that US$8 of every US$10 of losses due to natural disasters are uninsured.9 The research showed that the largest loss events in 2019 were all weather related, with total economic losses for Latin America, the Caribbean and Canada of US$19 billion.
The growth in insurtech is allowing access to online platforms offering home and life policies to a market that had previously been difficult to reach. Examples of local innovation are found in Chile, with comparison website ComparaOnline, and in the Dominican Republic with Contigo (a product that facilitates access to health insurance).
At the other end of the market, there are similar opportunities for innovation. Cyber insurance is one product with room for growth in a region where 92 per cent of banks were subject to a cyberattack in 2018. Likewise, in support of much-needed investment in construction and infrastructure projects, surety and trade credit insurance, often placed via reinsurance arrangements in international markets, provide specialist support for investors and banks.
In August 2019, there was an oil spill along 2,250 km of coastline in northeastern Brazil, the source of which remains unverified. As countries bring in increasingly strict environmental regulation, there is also scope for more specialist environmental insurance products to gain support. Environmental groups and local communities in Central America have placed open pit mining under increasing scrutiny, with the activity now banned in Costa Rica and El Salvador.10 There is also a push for a move away from the oil and gas industry. At the UN Climate Conference in December 2019, a regional initiative coordinated by the Latin American Energy Organization (OLADE) set an ambitious regional target of reaching at least 70 per cent of renewable energy in electricity by 2030.
III INTERNATIONAL EXPANSION AND CONSOLIDATION
Growth in the Latin American insurance market stalled in 2019, and 2020 looks set to be a challenging year if, as expected, the economic recovery is disrupted by the covid-19 pandemic. In fact, premium growth reached a peak in 2013 and growth has been concentrated in smaller economies such as Peru and Central America, whereas four of the five largest markets – Brazil, Mexico, Venezuela and Colombia – have been stagnant.
Insurance companies will face difficult economic conditions, and some insurers may struggle, so we would expect to see continued consolidation, as well as opportunities for those insurers able to push continued innovation. Diversifying the means of promotion and access to insurance products, including through the embracement of digitalisation, will be important in increasing penetration rates in 2020 and beyond.
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. In recent years, there has been a significant increase in regional capacity provided by local insurers and reinsurers in their native countries but also throughout the region, commonly known as 'multi-Latinas'. Colombian insurer, Suramericana (Grupo Sura), is cited as a success story, including the acquisition of Argentinian, Brazilian and Uruguayan operations through the purchase of RSA's Latin American arm in 2015.
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. In 2019, Axon Re was established by Axon Underwriting Services to provide both facultative and treaty reinsurance protection in property, cargo and stock risks, as well as environmental protection, in Chile, Panama and Ecuador. However, there has been notably less activity over the past 12 months.
In Brazil, despite welcoming many new entrants to the reinsurance market over the past decade, the former state-owned reinsurer IRB Brasil Resseguros SA continues to dominate with a one-third share of the market. During 2019, in line with President Bolsonaro's plan to reduce the role of the state, the Brazilian government sold its last stakes in IRB Brasil Re. Despite expectations that Brazilian banks Itaú Unibanco and Bradesco would follow the government's lead, this is yet to happen.
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 Chile and Mexico) is motor 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.
Liberty is the dominant player in Chile, following its merger with local company Penta Seguros in 2017. Liberty Mutual sold its Venezuelan carrier to Chilean businessman Isidora Quiroga in 2019. Venezuela poses almost insurmountable 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) Regulations11 against specific Venezuelan individuals and entities. The lists of individuals continue to be extended and, in January 2019, the US applied additional sanctions in the petroleum, gold, mining, food and banking industries. 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. However, technology is changing the way business is placed and the dominant market position held by the two largest insurers, Rimac Seguros and Pacífico Seguros, is being challenged by Mapfre Perú, La Positiva and others. In 2019, the Peruvian market began to purchase insurance for catastrophic risk. For the first time in history, the government obtained cover for up to US$200 million of catastrophe risks for 2019 as part of a catastrophe bond backed by the World Bank that also covered Chile (US$500 million), Colombia (US$400 million) and Mexico (US$260 million).
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), but continued growth will be largely linked to the country's economic fortunes and projects in the infrastructure and energy markets. Discussions over a new Bidding Law12 and an amendment13 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 gained the preliminary approval of the House of Representatives in June 2019, suggesting simpler and more transparent mechanisms could govern the contractual and bidding processes of the future if agreed by the National Congress.
Mexico's large population and low insurance penetration rates make it a target for many insurers and reinsurers, and they saw steady growth in surety and insurance during 2018 and 2019. However, there were already signs at the end of 2019 that the market was starting to contract. 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.
The insurance market in Guatemala grew by 6 per cent during the first half of 2019. It remains in the early stages of development in a country where motor insurance is not obligatory and only 10.7 per cent of vehicles are insured. There have been discussions around increased regulation in this area.
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 US$3.1 million for reinsurance companies, roughly US$6.8 million for insurance companies and approximately US$5.1 million for those operating in both markets. Mexico introduced Solvency II type regulations in 2016, with Chile, Brazil and Colombia all implementing a risk-based capital scheme to some extent. 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.
There is recognition across the region of the need to target corruption and money laundering, as set out in the Lima Commitment for Democratic Governance Against Corruption agreed at the Eighth Summit of the Americas in April 2018. 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 161st out of 180 global nations), after Haiti (168th out of 180) and Venezuela (173rd out of 180), despite comprehensive legislation.14 Enforcement of the region's developing regulations is therefore key in combating such issues – and to understanding the commercial environment.
Following years of financial scandal in Brazil, development of the country's Anti-Money Laundering Regulations continues to progress in Brazil. The Brazilian Superintendence of Private Insurance (SUSEP), the National Superintendence for Pension Funds and the National Agency of Supplementary Health have safeguarded their decision-making independence and will operate as separate entities in 2020, despite government downsizing rumours last year. New legislation has established various working groups and committees to identify the national risks associated with money laundering, terrorist financing and the proliferation of weapons of mass destruction financing, and also to combat corruption within federal administration (Decree No. 10,270 of 6 March 2020 and Decree No. 9,755 of 11 April 2019). Despite such progress, those at the top of political power continue to require investigation by the Brazilian Supreme Court with the activities of former president Michel Temer and others subject to an investigation at the end of 2019.
The regulation of the Chilean insurance market is among the most open and sophisticated in the region, and there are strict regulations on the adjustment of losses, which were introduced after the 2010 earthquake. It would not be surprising therefore to see the Financial Market Commission (CMF) step in to regulate the response of insurers to the adjustment of losses caused by civil unrest. The immediate impact of the protests has led commercial premiums to double and insurers to introduce exclusions for 'strikes, riots and civil commotion'. In many property policies, cover for political violence had become automatic, due to soft market conditions and the view that Chile was low risk. The events of 2019 are likely to have a knock-on effect for the terms on which insurers and reinsurers offer property cover across the globe.
There are similarly strict adjustment rules in Peru. As with Chile, the loss adjuster is regulated and must carry out the role of an impartial adjudicator of the loss, in compliance with strict time periods. Over the past few 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.
The Peruvian regulator, Superintendencia de Banca, Seguros y AFP (SBS), came under pressure from local and international insurers and reinsurers for its statement in October 2018 that 'claims-made' policies were not permitted under Peruvian law and would be declared null.15 The opinion was based on a strict interpretation of the Peruvian Insurance Contract Law;16 specifically, the description of the trigger for civil liability policies as being the occurrence of the harmful act – within the policy period.
The SBS reconsidered its position on the validity of claims-made policies and issued a draft bill on 17 May 2019. This passed into law on 19 August 2019 by way of Statutory Law SS No. 3695-2019, which recognises that civil liability policies may respond to third-party claims made within the policy period or extended reporting period. 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.
On 28 June 2019, Argentina issued a decree allowing businesses or individuals carrying out activities that pose a risk to the environment to take out surety insurance for environmental damage.17 The requirement for mandatory environmental insurance has been in force since May 2017,18 in order to guarantee the availability of funds to restore the environment, regardless of whether damage has occurred as a result of a sudden or accidental event.
The state would assume the role of the beneficiary of the surety insurance, whereas typical liability products see the state acting as the third-party claimant. Insurers and reinsurers offering public liability insurance should therefore check that cover for pollution liability aligns with these mandatory requirements and any other insurance held by the insured. There are also strict restrictions on policy limits and excesses for environmental insurance and, more generally, for the insurance of public risks.
In 2017, by way of Resolution 40,422, the Argentine insurance regulator (SSN) signalled the relaxation of regulations on foreign reinsurers admitted to provide reinsurance for risks placed in the Argentine market. As of 1 June 2019, admitted reinsurers can compete with local reinsurers for 75 per cent of all risks. However, there remains caution over entering a market that has been problematic for international reinsurers, underpinned by the current economic uncertainty and recent experiences of the unpredictable interpretation of Argentine insurance and reinsurance law.
The Brazilian regulator (SUSEP) marked the 10-year anniversary of the end of the state monopoly by removing any mandatory rule for placing reinsurance in the local market. Brazilian insurers must now only show that they offered 'first choice' to local reinsurers of 40 per cent of each treaty or facultative risk. In practice, the need to record and document that this has been done has also been relaxed.
The relaxation of the rules regulating the Brazilian market continued in 2019 with Decree No. 10,167/2019. The new rules allow insureds to cede 95 per cent (a significant increase on the previous maximum of 10 per cent), based on gross written reinsurance premiums in a calendar year, to 'occasional reinsurers'. Similarly, 'local reinsurers' are now permitted to transfer up to 95 per cent of risk (based on the same measure), which is an increase on the previous 50 per cent restriction. Occasional reinsurers need only be registered with SUSEP, without requiring a representative office in Brazil. With rates hardening in Brazil after recent losses, and the regulatory environment developing, there are opportunities for reinsurers at the top end of the market.
Brazil approved a data protection bill in July 2018, which is strongly inspired by the General Data Protection Regulation formulated by the European Union.19 The Brazilian General Data Protection Law (LGPD) is due to come into force on 18 August 2020,20 although there is now a proposal to postpone this date until 15 August 2022. When applicable, the LGPD must be observed in all data processing operations carried out in Brazil, as well as foreign processing of personal data collected in Brazil or relating to individuals in Brazil. Breaches of the LGPD may lead to fines of 2 per cent of annual revenue, subject to a maximum of 50 million reais, and administrative sanctions, such as suspension of data processing activities.
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 cyberattacks, 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.21
In December 2019, the Ministry of Justice and Public Security hit Facebook with a US$1.6 million fine for the misuse of personal data of almost half a million users. This is already a significant increase on the £500,000 fine in the UK and the introduction of the LGPD will put data controllers under more scrutiny. The LGPD includes a broad definition of 'personal data', with organisations required to notify breach incidents within a 'reasonable time'. The uncertainty around how the LGPD will be interpreted and enforced poses a challenge for businesses inside and outside Brazil, particularly in the financial services sector.
The introduction of the CMF in Chile has created a specific, prosecutor-led investigation unit for financial markets resulting in the devolution of the Superintendence 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.
Chile saw the creation of specialist environmental courts in 2012,22 together with increased regulation for operations affecting the environment. This additional scrutiny comes following the severity of the 2017 wildfires and ongoing 'mega-drought' in central Chile. The CMF is now consulting on the introduction of laws that will require companies to report on their carbon footprint and environmental impact. In turn, there is a growing demand for environmental insurance products that will respond to the broad range of exposure faced by insureds in all sectors.
The local and international insurance and reinsurance markets were following developments in Colombia closely, particularly with regard to the Comptroller General of the Republic (CGR) or Contraloría. By way of Constitutional Amendment No. 355 of 2019, which was approved in September 2019, the CGR gained new powers to take proactive and preventative measures to guard against the misuse of public funds. We discuss the latest position with regard to the CGR's views on claims-made policies below.
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 overarching objective of Chilean insurance contract law23 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),24 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 Mexican and Brazilian markets have also traditionally been consumer-focused. The most effective way for insurers and reinsurers to protect their position is to provide very clear policy wordings and to take active involvement in managing claims from an early stage. In recent years, due to the increased use of arbitration and signs of a more sensible approach by the courts in some countries, there is a noticeable trend towards more commercially and technically sound decisions, as well as sensible discussion with the insurance regulators.
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.25 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.26
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 Bill27 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.
Following enactment of the new Brazilian Code of Civil Procedure in 2015 (Law No. 13,105), the reasoning in decisions of the Brazilian Superior Court of Justice28 (STJ) may be binding on lower courts. In 2019, the STJ provided some clarification on the interpretation of the three-year limitation period for claims for 'compensation' under Article 206 of the Civil Code. The STJ stated that this provision applies only to claims alleging liability in tort and therefore claims in contract are subject to a limitation period of 10 years. This clarification is helpful for insurers and reinsurers writing civil liability insurance products for Brazilian insureds. The decision is part of a trend of the Brazilian courts towards a more technical interpretation of insurance policies, based on the wording as opposed to an overwhelming need to find in favour of the insured.
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 Colombian courts, particularly the Supreme Court of Justice, provide a reliable source of clear guidance on the interpretation of insurance policies. As with many jurisdictions, there is less understanding of insurance in the lower courts and within government institutions, as borne out by the uncertainty that has been created over claims-made policies by some decisions adopted by the CGR – the government authority in charge of fiscal control in Colombia. The CGR deemed claims-made clauses to be disproportionate, or abusive, and stated the view that the Colombian Commercial Code and Law 389/1997, which regulates insurance contracts in Colombia, was not applicable in fiscal liability proceedings.
After a period of consultation, the CGR revoked one of its more criticised decisions in November 2019 and recognised the operation of claims-made clauses. It is hoped that this will clear a path towards consistent and clear recognition of this concept.
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,29 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.30 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.31
Meanwhile, the Mexican Federal Civil Code was amended in January 2018 to alter the measure and restatement units32 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 increasing moral damages awarded by the Mexican courts, shifting from a compensatory approach to one that aims to punish the perpetrator for 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.
These are just some examples of how, even though case law is non-binding across Latin America, the courts are becoming increasingly important in the development of insurance and reinsurance law.
Another common theme regarding 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 rules around the adjustment of losses provide for a strict timeline that directly affects insurers. The rules in Peru33 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 on 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 Brazilian 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 reinsurer's 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.34
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.35 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.
VI DEVELOPMENT OF REINSURANCE LAW
The continued liberation of local reinsurance markets in Latin America during the past few years has been 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.
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, continued to grow during 2019. 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. The year 2018 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.
Whether the 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, which continues to make slow progress through Congress. 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.
The new Ecuadorean Commercial Code entered into force on 29 May 2019; it includes rules on the regulation of insurance contacts in the 'Sixth Book' (Article 690 onwards). In Article 794, there is express recognition that rules relating to insurance will also apply to reinsurance contracts by default, but with the possibility for the parties to expressly contract otherwise.
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. 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.
Chilean law36 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, although this provision remains largely untested.
Peruvian contract law defines reinsurance37 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, which states the general prohibition on the payment of an indemnity under the original policy being conditional on the relationship between the insurer and reinsurer.38 The simple explanation is that the aim of this provision is to prevent insurers from deferring to reinsurers as an excuse for late payment, although there is now an exception to this rule.
In most countries, local insurers are not permitted to delay payment under a policy while they wait for reinsurance funds to become available. In Peru, however, 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.
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.
Colombia has one of the most sophisticated bodies of law on insurance and reinsurance, including helpful guidance from the Supreme Court of Justice. The Colombian Commercial Code and supplementary laws contain detailed provisions, which include the express recognition of the 'follow the fortunes' principle in reinsurance contracts, as set out in Article 1134 of the Code of Commerce, and subject to the contractual terms agreed between the parties (Article 1136).
As a general rule, 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. For example, the use of terms such as 'condition precedent' will usually mean nothing to a local court.
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.39 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 a 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 2020, with many Latin American countries having recently elected presidents promising change, who now face huge challenges to bring about economic stability – and political transparency.
When it comes to interpreting insurance contracts, the approach of the courts tends towards favouring the insured, but a clear trend is developing towards a more technical interpretation reflecting the wording of the contract. There is a continuing debate over whether contracts negotiated between sophisticated commercial entities (including reinsurance contracts) merit separate treatment from consumer contracts. 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 and improved accessibility across all lines of business.
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 conjunction with an understanding of the political, economic and social context. 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 faces new challenges in 2020, as the covid-19 pandemic threatens to eradicate the green shoots of economic growth that had appeared in 2019. The use of technology and digitalisation provides a way to increase accessibility of insurance products for consumers in areas such as life and healthcare. On the commercial side, there is also a need for innovation to provide solutions in areas such as cybersecurity and environmental liability, as well as in traditional lines such as D&O and property and casualty, to ensure that they are understood by companies across the full range of industries.
1 Duncan Strachan is a partner and Kayleigh Stout is an associate at DAC Beachcroft LLP.
2 IMF Blog 'COVID-19 Pandemic and Latin America and the Caribbean: Time for Strong Policy Actions', 19 March 2020.
3 MAPFRE Economic Research, 2018 Report on the Latin American Insurance market.
4 'Shaking the Latin American Equilibrium: The Petrobras & Odebrecht Corruption Scandals', Fordham Journal of Corporate & Financial Law, 4 November 2019.
6 Associated Press in Mexico City, as reported by The Guardian on 2 December 2018.
7 Financial Times, 'Farmer's protests pose challenge to Argentina's new president', 18 March 2020.
8 The National Institute for Space Research (Inpe) satellite data.
9 AON, 'Weather, Climate & Catastrophe Insight 2019 Annual Report'.
11 These sanctions can be viewed in Council Regulation (EU) 2017/2063.
12 Bill No. 1,292/1995.
13 Bill No. 6,814/2017.
14 Transparency International: Corruption Perceptions Index 2019.
15 Memorandum No. 36805-2018.
16 No. 29946, principally Articles 105 and 109.
17 National Decree No. 447/2019 of 28 June 2019.
18 Article 22 of the General Law of the Environment.
19 Brazilian Personal Data Protection Law No. 13,709 of 2018 from Bill 53/2018.
20 Law No. 13,709.
21 As at January 2019.
22 Created by Act No. 20,600 of 2012.
23 Insurance Law No. 20,667 came into force on 1 December 2013.
24 Unidades de fomento is an alternative currency that varies daily based on the previous month's inflation rate.
25 Legislative Decree 1341.
26 Article 543 of the Code of Commerce.
27 Bill No. 5,555 of 2004 and amendments.
28 Special Appeal No. 1,281,594 – SP.
29 Judgment on 14 December 2015.
30 Superior Court of Justice, Special Appeal 962230/RS, Judge Luis Felipe Salomão, 8 February 2012.
31 Súmula 529, which is a non-binding but persuasive statement to clarify the law.
32 Unidad de Medida y Actualización.
33 Article 74 of the Insurance Contract Law.
34 Precedent No. 616 of the Superior Court of Justice.
35 Insurance Contract Law No. 29,946.
36 Article 584.
37 Article 138 of the Insurance Contract Law No. 29,946.
38 Article 139.
39 Article 869 of the Code of Commerce.