Through Decree 377/2023, published on July 24, provisions were made restrictions on access to dollars for insurers, which were affected by the 25% PAIS tax on reinsurance payments and accidents abroad. The rule generated a strong complaint from the sector, which warned that the measure would generate a loss of $30,000 million and would also lead to an increase in the cost of coverage, given that this tax would have to be transferred to the premium. What is happening almost two months later in the market?
The regulation established the payment on account of the PAIS Tax, which is collected by the banks (which are tax withholding agents), by the importer at the moment in which the arrival at the destination of the merchandise is made official and, in the reinsurance, is equivalent to the moment in which the contract is issued. And the big problem is that, in Argentina, although the lines that demand the most reinsurance are Fire, Hail and Air Navigation, most of the contracts have the backing of reinsurance (including Automotive, which concentrates the majority of the market), therefore which is a decision that affected almost the entire insurance market.
Initially, the sector estimated that some insurance would have increases of between 10% and 15%, but that was even more aggravated by the 22% devaluation that was applied to the peso post PASO. In addition, The situation is worrying that the contracts are annual and valid for less than one month, which close on 06/30, the date of publication of the rule that attempts to be retroactive.
Thus, the decree implied an additional cost for the entire market, with the misfortune that, in addition, due to restrictions on access to the official exchange market, when the regulation was issued, there were amounts pending authorization for about four or six years. months, to which 25% of the country tax was applied retroactively. And that was not contemplated in the business plans, which is why it generated a strong technical imbalance.
A market that became unbalanced
And when companies transfer risk to a reinsurer, they take into account how much they can retain, the commissions, etc. It plans its costs and includes them in the premium it charges its insured. For this reason, as a market source indicates in dialogue with Ámbito, “having a cost that was not contemplated generates a significant technical imbalance, which implies a solvency problem at the same time.”
In turn, the regulations generated a degree of inconvenience to competition because it exempted companies or companies of the State from paying the PAIS tax to access the dollar for imports and the only public insurer is Nación Seguros, which, thanks to this exception, is 25% cheaper than the rest, so it guides you to choose that operator.
On the other hand, let us remember that what reinsurance does is cover insurers in the face of the need for capital. Currently, in Argentina, 75% is allowed to be transferred in admitted reinsurers (from abroad with permission to operate), which are from abroad, and the remaining 25% in local ones.
There are about 125 reinsurers admitted in the country and about 15 local ones. And the latest information as of June 2022 reflected that the premium ceded at that time was 11.26% of the total premium issued by the market. That is, in pesos, the amount transferred was $191,000 million (around US$600 million, at the exchange rate of $350).
The curious fact is that, of the total amount that is transferred, the local market retains 43%. The rest comes out as retrocession abroad. And that 43% is increasing given that reinsurance has an increasingly greater concentration in local reinsurers because the authorized ones do not bet on the local one.
Argentina in the world of reinsurance
“Argentina is a market of little significance at a global level and many reinsurers withdrew from trading over time due to the existing difficulties,” says a representative of the insurers. In that context, the July renewals were very much towards the local market and, to address that, many reinsurers are sharing risks so that less external reinsurance is needed. This is a modality that transfers risk to several reinsurers at the same time and not just to one.
But the problem is also that some stores began to limit themselves to their own portfolio, for example. And, thus, the rule aggravated an already complex market situation, which is already greatly affected by the technical results given that the premiums are not enough because inflation raises the replacement costs of spare parts, for example, which increase in line with that variable or with the dollar if they are imported.
Likewise, insurers have a very large liability that they do not manage, which are claims in court, and Justice makes very strong updates of capital amounts. Added to this is the tax burden that the activity already has prior to the PAIS tax and the fact that, due to the economic crisis, many people do without non-mandatory insurance, prioritizing other expenses.
Balance of two months with new rules
In this context, the path taken from July to date has been one of adaptation for the reinsurance market, with transformations that were forced by regulations and, going forward, what reigns in the vision of the operators is a lot of uncertainty regarding the need to define a clear political and economic context in a month, but also because the inflationary escalation makes planning difficult. Something complex for a business, like insurance, that requires predictability, something that the current economic framework does not provide.
Without a doubt, this regulation aggravated the difficulties that the market had been having, in such a way that, according to voices from the sector, “many insurers are managing the crisis and managing themselves with cash flow and without making an investment stock to solve liabilities.” ”. This, in a context in which electoral uncertainty is added, which opens the door to a possible dollarization of the economy (another resounding change in the rules of the game) and a certain post-election devaluation.
On the other hand, Reinsurance has a greater concentration in local reinsurers each time because those admitted do not bet on the local. And the concern was further aggravated by the devaluation, which increased costs in the domestic and foreign markets.. Thus, technical results are today a very strong concern in Argentine insurance and reinsurance support tends to become an increasingly burdensome and difficult cost to achieve due to the risks that Argentina represents for the outside world.
Source: Ambito
