Argentina: towards new rules in the reinsurance market?

The new regime in Argentina is likely to lead to a major turnaround for the reinsurance sector, but the road ahead is not without obstacles, says Pedro M. Lorenti, a partner at Aurigon Advisors.

In December 2023 a new administration took office in Argentina. President Javier Milei, an economist and an outsider to the political system, achieved notoriety as a media influencer passionately endorsing an economic model along ultra-liberal ideas—he defines himself as a “libertarian”. For a traditionally corporatist country such as Argentina—which is undergoing a severe economic crisis qualifying as a stagflation—this amounts to a revolutionary change, the outer reaches of which have yet to be seen. 

Under this framework, it should be expected that the reinsurance industry also faces a turnaround. Traditionally regulated along corporatist guidelines—from a state monopoly to a heavy regulatory burden—it experienced a market-friendly environment only during the 1990s, amid the neo-liberal reforms by former President Carlos Menem under the “Washington Consensus”. The current political tides seem to point to a similar direction, but due to the urgency of other economic problems, the path ahead is still unclear.

The reinsurance model under government intervention

Since 1953 reinsurance in Argentina was rendered exclusively by the state through a government agency named Instituto Nacional de Reaseguros, aka INDER (see Law 14.152 and Decree 10.073/1953, later amended by Law 21.678 and Decree 879/1985).

INDER held a monopoly of the domestic reinsurance market, albeit it was authorised to retrocede reinsured risks to foreign companies on account of the nature of the risk or when its technical capacity was exceeded. It could also participate in international reinsurance consortiums, provided that it did not diminish its capacity as domestic reinsurer.

Argentine insurance companies could also be authorised by INDER to enter into reinsurance agreements with foreign companies, when INDER was not able to provide reinsurance itself.

With the enactment of the Insurance Law 17,418 in 1967 reinsurance became subject to the legal framework contained in its Title II. According to this, in addition to some specific rules, the insurance regulations—Title I—would also apply if they were compatible. Further general norms in the Civil and the Commercial Code—unified since 2015—would also be applicable as background legislation.

Law 20,991 of 1973 created the insurance regulatory agency named Superintendencia de Seguros de la Nacion, aka SSN. Its regulatory powers concerning reinsurance were not straightforward due to the fact that the sole reinsurer in the country was also a government agency. This situation changed after INDER’s liquidation, when the SSN was vested with a clear regulatory mandate reaching the reinsurance industry, mainly to oversee the fulfilment of legal requirements and the technical capacity of reinsurance companies.

The neoliberal experience

As mentioned above, during the 1990s the Menem administration pursued a wide programme of privatisation of state-owned companies and deregulation of the economy, along the guidelines of the Washington Consensus.

These reforms included the liquidation of INDER and the end of the state monopoly of reinsurance, which was left to the market forces. Since foreign capital inflows and outflows were also free, the Argentine currency—the peso—was pegged to the US dollar at an exchange rate of 1 to 1. Convertibility was mandatory to the monetary authorities, the establishment of foreign reinsurers within the country and the full provision of cross-border reinsurance services were also unhindered. Many international reinsurers incorporated affiliates in Argentina during these years.

Back to government intervention—but of a different kind

The economic model in force during the 1990 decade collapsed at the end of 2001, when the tides of crises in South East Asia (1997) and Russia (1998) reached Argentina’s shores. The inability of the Menem administration to keep public expenditure in check after the currency inflow of the privatisation policies was over, led to the issuance of a huge amount of sovereign debt which in turn rendered the country vulnerable to international financial turmoil. Emergency legislation (Law 25.561, decree 214/2002) was enacted by a new government which, albeit not specifically aimed at the reinsurance industry, impacted it through the currency devaluation and the heavy restriction of payments abroad imposed through the Argentine Central Bank and the National Trade Secretary.

The reinsurance regulatory change came with Resolution SSN 35.615/2011, which set forth the current framework for reinsurance activities. Its main features are the following*:

(i) “Local” reinsurers shall be either domestic companies, ie, companies incorporated in Argentina, or branches of foreign reinsurers. Local reinsurers shall hold an equity equal to that required for domestic insurers, ie, Argentine pesos 350 million, or 16 percent of retained premiums in the previous 12 months, with a threshold of 40 percent of gross premiums issued—whichever is higher.

(ii) “Admitted” reinsurers shall be foreign companies not established in Argentina. Admitted reinsurers shall be authorised in their countries of origin, subject to a legal framework allowing payments in freely convertible currency and having a minimum net worth of $100,000,000. 

In addition:

a. They shall evidence creditworthiness according to international standards and grades awarded by rating agencies, such as S&P Global, Moody’s, etc.

b. The country of origin shall not be a tax haven and comply with FATF requirements.

c. They are subject to a cap—in passive or facultative reinsurance contracts—of 75 percent of the premiums, except facultative reinsurance with a $35 million threshold for the liability of the reinsurers according to a maximum probable loss analysis; and treaties providing non-proportional coverage for catastrophic or event and catastrophe, with a threshold of $35 million.

(iii) Both types of reinsurers shall apply for authorisation to the SSN, as well as to the corporate overseeing authorities for incorporation requirements.

On the other hand, a system to prevent payments of re/insurance premiums abroad—as well as any other “hard” currency outflow—was consistently implemented. It aimed to forestall the macroeconomic crisis afflicting the country by means of preventing the decrease of US dollar reserves in the Argentine Central Bank. The latter consistently delayed or rejected authorisation to said transfers relying on its general powers as a financial authority. 

In the re/insurance sectors, this policy became a heavy burden around 2020 and was somehow regularised through a Joint Resolution by the SSN and the National Trade Secretary requiring an application to make such payments abroad, in October 2022. These authorisations were extremely hard to obtain, if ever they were granted.

Restrictions to payments abroad were lately increased either by SSN Resolutions or by norms issued by other authorities. Such was the status when the Milei administration took office on December 10, 2023.

What now?

Milei’s election manifest does not address specifically the reinsurance industry. It can be inferred from it, however—and also from his economic ideas—that his administration will sooner or later frame a liberalised regime close, if not equal, to that of the 1990s.

So far, the Milei administration has had to postpone many of its most radical ideas, such as shutting down the Central Bank, adopting the US dollar as national currency instead of the peso, eliminating many taxes, privatising state-owned companies, etc. 

It is, however, pursuing a bold deregulation of the economy and cutting down public expenditure—thus following a different path than the Menem administration, which failed in this regard. The inflation rate—which peaked at a 30 percent monthly rate in December 2023—was confirmed  to be less than 14 percent in February 2024. Central Bank reserves, almost depleted by the previous administration, are increasing rapidly. 

The other side of the coin is the expected deepening of the economic recession for most of 2024 and the increase in prices and public utility tariffs which were heavily constrained during the former government. Milei inherited a country with nearly 60 percent of its people below the poverty threshold and it is feared that social unrest may become an obstacle to the economic reorganisation. 

The first Argentine pro-market administration in more than 20 years is sailing through uncharted waters. Within this scenario, we believe that reforms in specific sectors such as reinsurance would come with the second wave of reorganisations. As of today, it is difficult to predict exactly when this will happen. But we expect that most of Milei’s libertarian ideas will be implemented in the end. 

For example, payments abroad would sooner or later be liberalised, but probably once the Central Bank has accumulated enough reserves to resist any global monetary shocks. This is not the case yet, so most of the restrictions set forth by the previous administration have not been lifted so far and constitute the legal environment in which reinsurers still have to operate.

We believe that the progressive normalisation of the Argentine economy during 2024 will create incentives for international players to seize the opportunity and come back to the country, so as to be ready to freely operate in the domestic market—one of the biggest in Latin America—once the necessary reforms are finally implemented.

Pedro M. Lorenti, Partner of Aurigon Advisors Ltd. and lawyer admitted in the City of Buenos Aires, Argentina (1989). Solicitor (N.P.) in England and Wales (2017). Master in EU Law (Univ. Autónoma de Madrid, Spain, 1997). Master in Public Administration (J. F. Kennedy School of Government, Harvard University, 1999). Postgraduate in Insurance Law -Univ. Catolica Argentina, 2021). Contact: p.lorenti@aurigon.ch

* See: SSN General Regulation of the Insurance Activity. 

At the date of issuance of Resolution 35.615 -February 11th, 2011- the exchange rate was 1 USD = 4 ARS - https://dolarhistorico.com/dolar-oficial/cotizacion/11-febrero-2011 -. At the date of this draft, it is 1 USD = ARS 865,5 - https://www.cronista.com . Therefore, the capital requirements calculated in USD were of USD 87,500,500 on February 11th, 2011 while today amount to USD 404,390.52. It must be borne in mind, however, that the SSN has powers to increase these capital requirements

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