Although all of the Latin American jurisdictions had notable regulatory and market developments in 2008, Argentina stands out as particularly significant given the size of the market involved and the fundamental nature of the developments seen there in the past year.
Consolidation And Uncertainty Despite Promise
By most measures, Argentina is considered Latin America's fourth largest insurance market. The market has continued on a path of steady growth and consolidation in 2007 and 2008. The total number of insurers operating in the jurisdiction declined to 184 in 2007, from 189 the previous year and 266 in 1998. Meanwhile, average insurance market growth has topped 12.8% over the last four years and insurance penetration remains relatively low. That being said, however, Argentina's high sovereign risk and the government's recent nationalization of the nation's private pension funds has caused many, including Moody's, to express concern about the coming year for the Argentinean economy generally and the insurance market specifically.
On October 21, 2008, Argentina's president, Cristina Fernandez de Kirchner, announced a plan to nationalize the country's 30 billion dollars in private pension funds (a number of which were managed by affiliates of international banks and insurance companies), ostensibly in a effort to protect retirees' savings during the current global economic turmoil. The announcement, however, rather than stabilizing Argentina's economy, resulted in greater uncertainty and tremendous economic and social turmoil. Argentina's stock market subsequently lost more than half of its value, the bond market plummeted and the value of the Argentine peso dropped dramatically. The Argentinean government publicly blamed the markets' performance on the ten companies in charge of the pension funds, but much of the losses were attributable to declines in the value of government bonds. After the announcement, the Buenos Aires police raided the pension system's offices and a judge prohibited the companies from trading on the Buenos Aires exchange for a week. The private pension funds then proposed a series of reforms as an alternative to nationalization.
Despite significant domestic and international concerns, the Argentine government moved forward with its elimination of the country's private pension system later in the year. A nationalization bill was passed by Argentina's lower house of Congress on November 7th and by the Senate on November 20th, and President Kirchner signed the law on December 4, 2008, establishing an Argentine Integrated Pension System (SIPA) to replace the current capitalization regime as of January 1, 2009.
The new system provides that two commissions will be created to function within the existing national social security system (ANSES): a bicameral one containing members of the majority and opposition parties, and another with representatives from the country's labor unions, businesses, private banks, and retiree groups. Under the new law, the System will be financed through distributions to affiliates and beneficiaries, and it guarantees terms equal to or better than those previously existing under the private system.
Annuity payments will continue being paid through participants' existing retirement insurance companies. Affiliates' voluntary contributions to individual capital accounts may be transferred to ANSES accounts if it is determined that such a move would be beneficial. The new law, however, prohibits compensation corresponding to retirement and pension administrators from exceeding certain levels. Steps will be taken to ensure employment for certain medical, technical, and administrative workers affected by the change. The law also provides for a SIPA Sustainability Guarantee Fund to create structures for sustainable economic expansion of the national economy, the growth of remedial funds set aside for SIPA, and the preservation of the Fund's assets.
Proponents of the plan maintain that nationalization will protect the pension funds' assets from risky investments and pump enough cash into the state treasury to finance infrastructure projects and pay off considerable amounts of national debt, although the government has publicly denied that the funds will be used to pay off or refinance debt. Opponents of the plan, however, both within Argentina and in the national community, have expressed little faith in the Argentinean government's intentions or in its ability to maintain appropriate fiscal oversight of the funds. A United States court has also frozen American assets owned by Argentinean pension funds, a major roadblock to the effectiveness of the fund nationalization.
Commentators have also cautioned that the pension fund nationalization may have broader ramifications for the Argentinean economy. Standard & Poor's lowered Argentina's debt ratings due to the nationalization and Fitch released a report calling the outlook for Argentinean companies "dismal" for 2009, due in part to the pension fund nationalization:
Local liquidity is scarce, the banks are working to preserve capital and the international capital markets are closed to Argentine corporates. This situation has led blue chip companies to seek financing in the local bond market, which has become increasingly dormant during 2008. The [nationalization] threatens to eliminate the local bond market as a source of liquidity. While the asset allocation of corporate debt in the Argentine pension system is small, the pension funds' participation in the local debt market is essential. Without them, there are not enough investors to absorb the huge financing needs.
Nonetheless, the legislation was widely supported by both the Peronist party and the opposition, and many local commentators disagree with these gloomy predictions.
Conclusion: Cautious Optimism
Trends in the Latin American economies generally and insurance markets specifically indicate that insurance and reinsurance companies with a dedicated strategy and experienced advisors can take advantage of tremendous opportunities in the region. On the other hand, however, the undertaking of activities in the region without a coherent plan or full understanding of the local regulations and markets can lead to unprofitable operations and significant potential enforcement issues with local regulators.
Given the sorts of local idiosyncrasies that exist in many of the Latin American markets, and the frequent fundamental changes such as those seen in the past year in regulatory requirements, failure to understand and closely monitor market and regulatory developments can impact both a company's profitability and its continuing right to conduct business in the region's jurisdictions. It is therefore imperative that insurance and reinsurance companies operating or considering expansion into the region obtain the assistance of experienced and knowledgeable advisors.
If you would be interested in learning more about these issues and/or insurance and reinsurance developments in other Latin American countries in 2008, we would like to invite you to our free webinar on January 21, 2009 entitled "(Re)emerging Mercados: Significant Recent Developments in the Latin American Insurance and Reinsurance Markets." To view an invitation and register for this event, please click here: http://www.insurereinsure.com/BlogHome.aspx?entry=1279.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.