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|Devaluation, high inflation, the pace of public and private investment, and government regulation of different markets are some of the concerns shared by bond-specialized insurers for the year 2014.
However, even though bond insurance production has clearly slowed down, market players continue ahead with their plans for modernization and conquer of new markets.
“Mercado Asegurador” met with a group of bond insurers to discuss the possibilities of this line of business for 2014 and their plans for achieving a greater market penetration in the Argentine economy.
The first executive to express his opinion was Aníbal López, Vice President of Afianzadora Latinoamericana Compañía de Seguros S.A.: “We think there will be a near absence of growth, and the expected reactivation of the demand of guarantees from the foreign-trade related sector will take some time, especially because of the measures adopted by the economic authorities in respect of the balance of trade and Central Bank reserves.
On the other hand, we expect an increase in investment in public works urged by the need for infrastructure in a number of sectors such as energy, housing, transportation (railways, roads), and ports.
We also believe there will be a greater impetus of private investment, especially through mixed developments with the national state for the exploitation of hydrocarbons and conventional and alternative energies; but we do not expect large private investments in general, except for those which are indispensable for maintaining the installed capacity or for much needed developments.
To conclude, we expect growth figures to be below the inflation rate as a result of a lower economic activity and a moderate level of direct domestic and foreign investment”.
Next, Santiago Seigneur, Underwriting Director of Fianzas y Crédito, pointed out: “the country is going through a period of uncertainty in the economic and political arenas, and our market will remain more or less unchanged with respect to 2013, that is to say, with a moderate nominal growth of around 20-25% but exchange-rate variables which may significantly impact our business”. He added: “We believe the business niches related to public work and supply will continue playing a very important role in our portfolios whereas private business will be more conditioned by the economic and political decisions adopted by the country, which will inevitably affect private investment and consequently this type of guarantees”.
For his part, Agustín Giménez, also Underwriting Director of Fianzas y Crédito, added: “The reform of Law 17418—to be soon debated in Congress—should also be mentioned for it will have a considerable impact on our activity. Until now, bond insurance has been governed by an array of rules and regulations; once the law reform is enacted, a number of important aspects related to this line of business will be clarified and ordered. To this end, the legislators and the control entity should take into consideration the reality of our market, the needs of our clients and beneficiaries as well as the rights and obligations the law should protect”.
In turn, Enrique Arbini, Vice President of Alba Compañía Argentina de Seguros, pointed out: “In the past, specialist insurers have gone through cycles which were similar to the present one, with figures that reflect a readjustment of the major variables. It is indeed necessary to face the challenges posed by complex scenarios with the professionalism that has helped us overcome situations which were not favorable for the expansion of the economy. The uncertainty prevailing among policyholders and insureds offers an excellent opportunity to stress the advantages of insuring contractual obligations. Acting as a facilitator and rating risks in a realistic manner reinforce the importance that AlbaCaución assigns to the underwriting process. This is a good moment to also pay special attention to complaints handling by taking early actions in order to anticipate possible conflicts and provide a good service in case a loss occurs. To sum up, there are some indications of a reduction of risks related to foreign trade, which we believe will be moderated by the investments announced by the government in the field of public infrastructure works, provision of goods and services, and, indeed, the intended development of large energy matrices, which require bond insurance”.
Gustavo Güereña, Head of Bonds at Allianz Argentina, then anticipated that “this will be a difficult year for the bonding business as a consequence of the deterioration of the country’s main macroeconomic variables, in particular, the lower level of activity in certain economic sectors (public and private works, and foreign trade) and under-funding in the case of some specific company segments”.
In addition to the above, in his opinion “the higher costs and the lower chances of transferring them onto the products and services offered create a very complex and uncertain future scenario”.
He finally reflected: “This progressive deterioration could cause delays in payments of policy premiums as well as an increase in claims resulting from defaults, which in many cases may end up in losses.
The estimated lower GDP growth will have its correlation in a lower premium growth of the traditional bond market, excluding environmental guarantees.
And all this takes place in a context where new players have appeared.
Some inertial growth from 2013 will probably extend until mid-2014. It should be noted, however, that for the last three years the traditional bond market has been growing at a lower rate and the technical results have shown mixed fortunes for different operators”.
Next, Jorge Furlan, General Coordinator of Prudencia Seguros, said that the growth in premiums for traditional bond covers for this year is not expected to be above inflation—which he estimated at 30%.
“And it may even be below that percentage, thus suggesting that there will be no recovery of the rates level and that competition will become stronger”, he added.
He further insisted that: “Bond insurance is closely related to variables of the overall economy. In this respect, in January and February 2014 there were accelerating inflation levels—, as was admitted by the national government itself—, a greater difficulty in the development of small and medium sized companies as a result of higher interest rates and devaluation, a greater difficulty in launching new ventures—both public and private, albeit for different reasons—, and a very moderate GDP growth. This picture does not suggest a favorable sustained growth for this line of business”.
In contrast, Furlan’s expectations regarding bonds for the Obligatory Environmental Insurance (or SAO, after its name in Spanish) are very optimistic: “The growth in production expected for this year is not below the above inflation rate, thanks to the possibilities raised by the new jurisdictions which require SAO, the renewal of policies for minimum capital amounts which include a 100% increase, and the natural growth of operations because environmental control agencies increasingly request this insurance”.
Luís Malaspina, external advisor of Testimonio Seguros, made a similar prediction: “The lower production trend in real terms will continue, as in 2013. Additionally, collections and losses will have a negative behavior, thus heavily hitting most insurers who do not have an effective management of collections and underwriting”.
To conclude, Juan Martín Devoto, General Manager of Company de Seguros Insur, ratified that “the backbone for bonds continues to be public works. Following the October 2013 elections, the government re-launched public works, but a comeback to the sector’s high levels of growth of previous years cannot be foreseen. We expect a stable 2014, with no meaningful increases in loss rates. Unfortunately, we do not foresee an increase in rates because of the high level of competition and the number of companies which now write bonds. All that remains is to underwrite carefully, and ‘walk the streets’ in order to be close to the business.
There was consensus amongst insurers that restrictions on imports, devaluation, and changes in the exchange rate policy continue having a negative effect on the production of customs bond insurance.
“Customs-related operations have been lately affected by restrictions on imports and exchange rate swings; their volume and portfolio participation have decreased considerably.
Additionally, restrictions on imports have given rise to a new situation that should be factored in when underwriting: complying with a contract often depends on the availability of imported supplies, for this reason we have to make sure those supplies are authorized to enter the country”, indicated Giménez.
Along this same line of ideas, Mariano Nimo, General Manager of Afianzadora Latinoamericana Cía. de Seguros, explained: “Those situations do have an effect on the production volume because policies specifically related to this kind of activity have decreased substantially, directly impacting on the volume of operations. The import business affects not only the number of policies issued but also the subsequent re-invoicing because this is a long tail business”.
In this respect, López pointed out: “The restriction on imports is clearly the main cause of the decreasing demand of goods related to foreign trade. There is also a downturn in the demand from neighboring countries and a lower growth of the world economy.
The impact could be moderated, in the medium term, by the ambitious import-substitution scheme, whose results are generally evident in longer terms (five or more years). Devaluation can have positive effects if inflation can be brought under control, with a view to having a more competitive rate of exchange.
Economies throughout the country are, in general, agriculture-dependent; in that case, a better rate of exchange position immediately generates higher competition and a positive spillover onto the economic activity”.
From Arbini’s point of view, “currency exchange adjustments will help favor competitiveness of the export market players, and that may bring the awaited boost to currency income which will ultimately spill over the domestic market”. He nevertheless expressed his concern over the fact that the restriction on imports affects the purchase of goods for the development of the industry or basic inputs to produce goods which are subsequently exported.
In addition, Arbini regretted not to see signs of a “moderation” in the restrictions on imports in the short term and in his opinion the economic policy should “revalue our currency and create financial instruments which are profitable in the long term so that insurers may maintain their solvency and shareholders may obtain a return on their investment”.
For his part, Furlan explained that the development of the bond market related to customs guarantees decreased not only because of restrictions on imports and on the purchase of dollars “but also because of the pressure exerted on mining activities to substitute foreign for local providers, which limited private investment in capital goods”.
“Solvency policies for small importers and exporters have also decreased and the industrial exports from regional economies may be expected to recover after devaluation”, added Furlan.
Güereña, in turn, pointed out: “The internal problems faced by SMEs on a daily basis and inflation depress the demand for customs guarantees, in particular temporary imports (which is the risk that weighs more heavily amongst customs guarantees), because the industrial products manufactured in Argentina have less chances to compete with products from other countries.
In summary, foreign markets are not in general inclined to validate the higher price of products manufactured in a country with inflation. Devaluation affects importers because it is expensive to buy goods from abroad in order to complete productions processes that require imported inputs; the demand for these companies’ products decreases due to the higher production costs and the lower demand from consumers. All this translates into a substantial reduction of the customs business incidence within the bonding market”.
Environmental risk cover is a controversial topic in Argentina, and in the last years it has even been the object of a legal dispute.
Some businessmen have historically been reluctant to assume the costs associated with preventing and repairing environmental damage caused by production processes. Law No. 25,675 “General Law on the Environment” (or LGA, after its Spanish name) -which is in force today- sets forth a number obligations for companies which are involved in activities that may produce pollution having a collective impact.
One of the options is bond insurance for environmental risks. In this respect, Seigneur reminded: “Insurance has not been indifferent to the growing role that care for the environment has gained all over the world and has supported legislations developed in different countries in order to have a cleaner and more sustainable environment. In Argentina, Law No. 25,675 was passed to comply with an obligation imposed by the National Constitution, and it establishes the framework under which both public agencies and companies have to comply with the obligations to repair and compensate in case of causing damage to the environment. The need to cover this type of risks thus emerged and bond insurance responded to a market demand through bond insurance policies for environmental damage having a collective impact; after five years of operations it has generated an important volume of premiums”.
Along this same line, Furlan commented: “After the UN’s Río ‘92 (which took place in Rio de Janeiro, Brazil, in 1992), the National Constitutions of the American Southern Cone countries included -with varying differences- Principle 16 of the Conference, which sets forth the State’s involvement in environmental issues, the principle of ‘polluter pays for the damage caused’, and the concept of unlimited responsibility. In Argentina, this was expressed in Section 41 of the 1994 National Constitution and regulated in 2002 through Law No. 25,675, which incorporated SAO as a guarantee to do in order to provide certainty to the obligation to repair damages.
It is the State who transfers the risk and therefore prevents failure to comply with the obligation to repair from falling onto the community, as was the case prior to the enactment of the above Law.
Five years after being authorized, it may be said that environmental insurance has evolved on a permanent basis and that the responsible parties’ initial resistance to internalize the corresponding costs has gradually worn out”.
In the last few months, Argentine authorities have become more firm in demanding compliance with the obligation to take a SAO. Different government agencies have resolved that having this policy is a pre-requisite for obtaining certain licenses to operate.
As an example, Furlan mentioned that in 2013, Resolution No. 177/13 of the National Secretariat of Natural Resources and Sustainable Development updated the adjustment factor to calculate the minimum and adequate insurable amount, and extended the requirement to the transport of dangerous materials; at present, the formula to determine the insured capital is being revised.
“The new jurisdictions demanding environmental insurance are Santa Fe and Córdoba, where the requirement will be made effective in the short term. The number of jurisdictions where environmental bonds are enforceable (Buenos Aires Province, Chubut, Chaco, La Rioja, Santa Fe, Córdoba, Buenos Aires City, and, for certain activities, Santa Cruz and Tierra del Fuego) has increased and contracts have grown in a sustained manner there”, added Furlan.
In fact, he explained that “the guarantees issued in the last calendar year to September 2013 amounted to around $ 14 billion”.
Changes into the LGA were introduced by the Argentine government through Decree No. 1,638 in the year 2012. One of the changes decided that the risk could be covered not only by a bond insurance for environmental damage with collective impact -which was already in force- but also by a legal liability insurance for environmental damage with collective impact; and bond covers were not under the obligation to prove their capacity to remedy damage. A civil entity went to court and managed to have a Federal Judge suspend the enforcement of said Decree. Today, therefore, only bond insurance is acceptable for covering environmental risks.
According to Malaspina “today LGA is applicable, and the National Secretariats of Finance and of Natural Resources and Sustainable Development (SAyDS) have issued a resolution in line with its provisions. It establishes that authorized insurers should have signed a contract with companies enrolled as Dangerous Waste Generators and Operators so that these carry out the corrective actions outlined in the repair plan.
This obligation to do is quite different from other obligations covered through other bond policies, which can be satisfied by means of either a compensation to the damaged contractual party, whether it be a physical or a legal person, or fiscal compliance (customs guarantees) where the insured can be either a public or a private entity.
In the case of Environmental Bonds, the pertinent control agency (ACUMAR, OPDS, etc.) should be guaranteed the recomposition and treatment of polluted wastes in very short periods. Action should be immediate because damages with collective impact are involved”, he explained.
However, another group of insurers thinks differently:
“AlbaCaución has taken all legal actions seeking an opening up of a market where the offer from insurance companies is low. The remarkable fact is that in the case of this obligatory insurance the environmental insurance players and their trade Chamber are intent on maintaining unlawful restrictions and therefore an unacceptable concentration”, said Arbini.
For him, “such position is unlawful because it was so ruled twice by the Federal Administrative Disputes Chamber in respect of two interim measures. Even so, through a Foundation, the issue of unconstitutionality was raised again, but this time with respect to Decree No. 1,638.
AlbaCaución managed to write a few operations but was stopped by the interim measures which were recently reverted.
Thanks to an intensive work with reinsurers -at a time when Argentine reinsurance was not obligatory- automatic capacity for the risk was obtained.
Even though legal proceedings take a long time, we understand that in the course of 2014 a sentence will be passed with respect to the interim measures against the lawfulness of Decree No. 1,638, and more insurance companies will have the opportunity to offer their covers.
With the lifting of the interim measures that unfairly prevented the marketing and issuance of Obligatory Environmental Insurance for damages having a collective impact, AlbaCaución is in a condition to cover this risk and is among the group of insurers doing so”, he noted.
For his part, López emphasized: “The interim measure which leaves the traditional bond insurance market out of competition is still in force. The -almost monopolistic- system applicable to this type of risk has increased the volume of premiums of the bond market as a result of the increasing requirement by the pertinent authorities”.
Devoto, in turn, noted that “the changes above brought about a debate about the real environmental cover and repair after a loss has occurred; which is something difficult to define (and cover) clearly today”.
Nevertheless, Devoto highlighted some parts of the Federal Court decision: “the Decree turned the original concept of the Obligatory Environmental Insurance -which was of a remedial nature and designed as an environmental management tool- into a financial one (Decree No. 1,638/12) focusing only on funding the repair of the damage covered by the policy; and also changed it by stating ‘without prejudice to the enforcement authority’s decision’, because, if the main purpose of the environmental insurance for damages having a collective impact is to ensure the damage is remedied, then, any clauses limiting the risk -and excluding the SAyDS from the policy approval process (which is its obligation and main task together with the determination of the minimum insurable amount)- violate the spirit that the LGA and the National Constitution seek to protect”.
Based on the above, Devoto finally considers that “for the time being, we have to wait”.
Even though production does not show the signs of progress of previous times, operators continue investing in improving processes, increasing quality, and seeking new business opportunities.
“For 2014, Prudencia Seguros shall have to choose a strategy to maintain the level of sales of both portfolios (traditional bonds and SAO) without leaving aside service quality and level of profitability. We will start analyzing the possibility of writing domestic commercial credit insurance either in association with some specialist company or developing our own knowledge base”, Furlan explained.
For his part, Giménez explained: “Our idea for 2014 is to go on growing in spite of the country situation; we are planning to continue developing our business in both Buenos Aires and the provinces and to continue incorporating producers. At the same time, we will invest in technology to improve our online processes and services and will try to continue responding to our clients in a dynamic manner”.
Nimo, in turn, confirmed that at Afianzadora Latinoamericana “we will continue working very strongly in training and raising awareness about the advantages of our covers among policyholders, insured, producers, trade chambers, associations, state agencies, etc., with a view to increasing penetration of our product in the economic activity. We are also developing new covers in order to satisfy certain market needs associated with financial aspects”.
According to Güereña, changes are under way also at Allianz Argentina: “We are developing new systemic tools to facilitate request for new policies and queries about line-specific information through our website. We are also working to improve the exchange of information between company/ broker and producer in order to ease the administrative burden generated by the business throughout time. Our focus lies in collecting premiums of business written and being more careful when underwriting new operations”.
Devoto, for his part, explained that at Insur they are intent on “working, demanding more from ourselves, challenging ourselves, being creative and rendering an excellent service”. He reflected: “We know we should not feel discouraged if the levels of bond sales are not similar to those of the 2005-2010 period. This is another market and another situation”.
Because of this, and focusing on the future, Devoto explained: “We have decided to start working in the provinces, both directly and through brokers and producers. We are travelling extensively and see that the market (taking into consideration what the other companies are doing) is settling down. We believe to be on the right track and meet our goals year after year”.
On the other hand, Malaspina said that Testimonio is focused on “continuous training of insurance producers, improving our administrative processes, increasing our presence in regional markets and, above all, listening to our clients’ needs and offering solutions”.
Finally, in a reflective manner and with much enthusiasm, López concluded: “Bond insurance has evolved on a permanent basis and has adjusted itself or developed covers suitable for the country’s different life cycles. We will continue seeking to make a contribution to the market so as to increase bond participation in the economic life of the national, provincial or municipal states and in the private sector”.
Translation: Graciela Padilla.
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