In recent years, the insurance market in Costa Rica has experienced a process of innovative transformation. The long-awaited transition from a monopolistic market into a competitive arena has attracted various foreign insurers, while local consumers are already benefiting from the liberty of choice between various policies from authorised insurers. Esteban Carranza of Lara, López, Matamoros, Rodríguez & Tinoco surveys the changes.
Although not a topic of worldwide knowledge, the insurance market in Costa Rica has quite a particular history. Prior to 2008, the insurance and reinsurance industries were under a state-owned monopoly, among the last of its kind. Such monopoly was decreed in 1924 by the National Congress and since then, local policies could only be offered and sold by the government’s insurer, the National Insurance Company. Even though this situation may have benefited the country and its citizens in the early 20th century, in more recent years it became evident that a monopolistic insurance market had no place under a globalised economy. Costa Rica suffered from the lack of modernisation and diversification of its insurance market, and especially from the absence of an independent regulatory agency.
Despite the fact that previous bills were discussed in the National Congress in relation to a potential opening of the market to competition, it was not until the approval of the Central America Free Trade Agreement (DR-CAFTA) that Costa Rica undertook a formal commitment to regulate its insurance market and authorise the participation of private insurers. After various national debates regarding the convenience of DR-CAFTA, this commitment was finally materialised through the enactment of the Insurance Market Regulatory Statute, Law No. 8653 of 1 July 2008, which entered into full force and effect on 7 August 2008.
The Insurance Market Regulatory Statute, hereinafter referred to as “IMRS”, established the general framework for conducting the business of insurance in Costa Rica, as well as the duty for insurers, reinsurers, producers, local service providers, and cross-border providers to register before and/or be licensed by the local regulator. It also created the General Insurance Superintendence (SUGESE), the local authority in charge of regulating the market, supervising its participants, and protecting consumers.
The creation of SUGESE represented a major change, as in the previous years of monopoly no supervisory agency existed for our insurance market. Evidently, there was a significant absence of control and regulation of the business of insurance in Costa Rica, and the majority of citizens lacked the “insurance culture” that can only be achieved through competitive markets. In this aspect, one of the predominant roles that SUGESE has successfully accomplished in the first few years of operations has been the preparation and distribution of various insurance-related booklets, magazines and materials of interest, aiming to provide a simple and understandable reference for any consumer who may not be familiar with insurance policies and their importance.
In the following months after the enactment of the IMRS, and because the IMRS only established a general framework for conducting the insurance business in Costa Rica, the National Council for the Supervision of the Financial System (CONASSIF), which is SUGESE’s supervisory and controlling agency, issued further and more detailed regulations for specific aspects of such business. Among others, it is important to highlight important regulations such as: (i) Regulation SUGESE 01-08 “Regulation on Authorization, Registration, and Operating Requirements for Supervised Entities by the General Insurance Superintendence”, which details the requirements and procedures for SUGESE to license insurance and reinsurance companies, to authorise the registration of insurance products, to authorise insurance producers, among others; (ii) Regulation SUGESE 02-08 “Solvency Requirements for Insurers and Reinsurers”, which covers the regulations to evaluate the capital solvency of insurers and reinsurers, the valuation of their assets and technical provisions, the investment guidelines for their capital, among others; and (iii) Regulation SUGESE 03-10 “Regulation on the Marketing of Insurance”, that includes the consumer-information guidelines that must be followed by insurers and producers in the sale of insurance products.
Subject to certain exceptions, the general rule in Costa Rica is that any insurer, reinsurer, producer, service provider or cross-border provider that performs, or wants to perform, any insurance activity or business in Costa Rica must follow an authorisation or registration procedure before SUGESE, the requirements for which are detailed in Regulation SUGESE 01-08. These requirements in some cases will vary depending on the type of entity and its country of origin. For example, there are special rules for foreign reinsurers who are directly contacted by local insurers, as well as for foreign companies domiciled in countries that have signed a free-trade agreement with Costa Rica that includes insurance-related commitments.
In highly relevant news in our insurance industry, the main regulatory change in the past few months came with the enactment of the Insurance Contract Regulatory Statute, Law No. 8956 of 17 June 2011, which entered into full force and effect until 12 September 2011. This statute, hereinafter referred to as “ICRS”, was part of the market-opening regulation and was supposed to be approved along with or shortly after the IMRS, but other bills in the National Congress were set into a higher priority for various reasons. Needless to say, the approval of the ICRS was expected by SUGESE and the market participants, as it was needed to complete a modern regulatory framework and thereby replace the obsolete policy laws that were originally enacted in 1922. In general terms, the ICRS establishes a modern and consumer-oriented regulation of insurance policies for the local market by covering aspects such as policy requirements and its minimum content, consumer rights and obligations of the contracting parties, policyholder declarations and duties, risk aggravation, general regulations for property and casualty insurance, general regulations for life and health insurance, mandatory clauses for insurance policies, among others.
During the upcoming months, it is expected that CONASSIF and SUGESE will issue additional regulations such as regulations for the defence and protection of Insurance Consumers; a complete amendment to the current solvency requirements, which will aim to a transition into risk-based capital supervision; Regulation of Group Policies, as required by the ICRS; and additional regulations derived from the ICRS.
Due to the annual premiums sold and growth potential, the Costa Rican insurance market is considered the most important insurance market in Central America (excluding Panama). This business opportunity has interested various foreign insurers who seek an early advantage in our emerging and promising industry. Currently, there are 11 authorised insurance companies, including local company and current market leader National Insurance Company, as well as renowned international insurers like MAPFRE, Alico, and BMI. The market regulator SUGESE expects this number to increase in 2012, as there are five additional companies in process of their licensing and registration.
The amount of annual premiums sold shows a steady rise in the part years. For example, in 2009, annual premiums sold climbed to $618.8 million, nearly duplicating its size since 2005. Official results for the year 2010 showed a significant increase, as the amount of net premiums sold totalled $744 million; while official results for the year 2011 reflect a 6 per cent increase, as the sum of net premiums sold totalled $794 million. Economic experts have predicted that the local insurance market could generate approximately $1,100 million in annual premiums once the market fully develops, especially in the rising life and health sector.
On this matter, it is important to highlight that although our country has benefited since the 1940s from the existence of a universal health-care programme, in reality a significant portion of upper-middle-class citizens either have additional health insurance with the National Insurance Company, or with a foreign company – as a consequence of the previous monopoly – or are interested in potentially obtaining additional health insurance. This particularity of our market is reflected in the fact that most licensed insurers have obtained their registration solely for the life and health sector. Their efforts in obtaining part of this niche are becoming highly effective, as official results for the year 2011 reflect a 36 per cent increase in the sale of life and health policies.
As an additional indicator, it is interesting to observe how the registration of policies by authorised insurers has skyrocketed since the year 2009. The initial figure of 68 products by the end of 2009 climbed to over 200 products by the end of 2010, and then again scaled to over 300 products in 2011. This steady increase of available products has not only allowed licensed insurers to offer an array of policies, but has also enabled a higher consumer awareness of the benefits of a competitive insurance market, including a significant decrease in the price of insurance policies, compared those before the market opened of to competition.
ADDITIONAL FIELDS OF INTEREST
It is worth noting that Costa Rica may also experience interesting developments in two other insurance-related areas.
The first is the reinsurance business. It is a fact that licensed insurers need to reinsure part of their policy risk, but there are no authorised reinsurers in Costa Rica other than the National Insurance Company, whose main activity is the insurance, and not necessarily the reinsurance business; its reinsurance authorisation derives from statutory provisions. Consequently, one can conclude that licensed insurers may seek international reinsurers to transfer part of their policy risk; therefore international reinsurers and brokers may play a key role in the development of our market. It is thus essential to note that the IMRS and Regulation SUGESE 01-08 establish that local or domiciled reinsurers must be licensed with SUGESE, but international reinsurers may not require licensing or registration if certain parameters are met – which also creates an opportunity for regional fronting programmes. In general terms, if a foreign reinsurer or reinsurance broker is directly contacted by the local insurer, registration may not be required before SUGESE; but this will not exempt the local insurer from certain disclosure procedures to obtain the corresponding credit for reinsurance.
The second field of interest is the medical tourism industry, where international insurers and local service providers will definitely play an increasing role in the next few years. Thanks to the intensive work by the local medical industry, along with its competitive prices and quality, and the government’s strong support of medical tourism, Costa Rica has positioned itself as a very attractive destination and is now a top choice for patients around the globe. International insurers, corporations with self-funded health-care programmes and other interested participants are not only benefiting from the reduction of their health-care costs, but from the existence of top-of-the-line medical facilities and highly qualified physicians in Costa Rica.
As closing remark to this brief synopsis, I strongly consider that the efforts from market participants and the local regulator have facilitated an innovative and positive transition of our insurance market towards competition. The next few years will help consolidate what has already shown to be a growing industry in Costa Rica.