- Primer On Underwriting Insurance Risks In Argentina
- April 9, 2015 | Authors: Jason Reeves; Jose M. Umbert
- Law Firms: Zelle Hofmann Voelbel & Mason LLP - Dallas Office ; Zelle Hofmann Voelbel & Mason LLP - San Francisco Office
Latin America presents excellent opportunities for the global (re)insurance industry. But, there are a number of important considerations for insurance and reinsurance companies underwriting risks in the region. This article addresses some critical issues relating to underwriting first-party property risks and handling claims in Argentina.
Opportunities and Risks of Insuring Argentine Businesses
Argentina is one of the largest economies in Latin America. The country has a diversified industrial base and is a major agricultural producer. Some sectors of the Argentine economy are of particular importance for first-party insurers and their reinsurers.
Argentina was the fourth-largest oil producer in Latin America in 2012. The majority of the country’s refining capacity is controlled by (the now) state-owned Yacimientos Petrolíferos Fiscales and derives from four refineries. Argentina is also home to the world’s fourth-largest shale oil reserves. The Vaca Muerta shale oil and gas deposit in particular, which YPF and a number of international companies are currently developing, has vast potential for the energy industry.
The Argentine electricity sector is the third-largest power market in Latin America. The two main sources of electricity generation are natural gas and hydroelectric plants and a significant number of wind farms have been developed during the last two decades.
Argentina’s mining industry is also growing. The country has enormous geological potential as evidenced by its large gold, silver and copper resources.
Naturally, insuring these and other large businesses presents risks for insurance carriers. For example, in recent years there have been several major catastrophes in Argentina, affecting both industrial and residential properties. In April 2013, a severe storm caused flash floods in the neighboring areas of Greater Buenos Aires and Greater La Plata, resulting in more than 100 deaths and significant property damage and business losses. A fire erupted at YPF’s La Plata refinery, the largest in the country, and was temporarily shutdown. Another tragedy occurred in August 2013, when a gas explosion in a residential area of Rosario, caused by a gas leak in a building, killed 22 people and caused the collapse of a nearby apartment building and substantial damage to many properties in the vicinity.
As a final example of potential losses, a large area of Argentina frequently experiences tornadoes. In December 2013, three separate tornadoes caused, on the same day, significant property damage and several deaths in three Argentine cities.
Important Considerations for Underwriting Risks in Argentina
When agreeing to provide coverage for first-party risks located in Argentina, international insurers and reinsurers should keep in mind, among others, the following issues, specific to this jurisdiction.
Argentine law is of mandatory application to all insurance policies and reinsurance contracts covering risks in the country. Argentina is a civil law jurisdiction, and several statutes and regulations primarily govern insurance and reinsurance contracts.
Direct policies can only be issued by local insurers. Reinsurance must be placed in principle with Argentine reinsurers. Also, in some cases, it is possible to reinsure risks with locally registered subsidiaries or branches of foreign reinsurers if certain conditions are satisfied (e.g., if there is no capacity to reinsure the risk locally or for risks in excess of $50 million. In connection with retrocession agreements, it is possible to obtain coverage with both local reinsurers and admitted reinsurers. London- and Europe-based reinsurers are currently writing business in the Argentine market through local reinsurers, which in most cases retain only a very small portion of large risks and retrocede the majority of those risks to the international market (i.e. to admitted reinsurers).
Another important consideration is that all policy forms must be approved by the insurance regulator, the Superintendencia de Seguros de la Nacion. Any provisions lacking authorization may be found unenforceable.
In addition, any insurance or reinsurance disputes arising out of risks in Argentina are subject to the jurisdiction of the Argentine courts. Arbitration agreements are not permitted in direct insurance policies; however, after a loss occurs, the parties may agree to submit a dispute to arbitration. In reinsurance contracts, arbitration agreements are enforceable, provided that the seat of the arbitration is in Argentina.
As in other jurisdictions, an often critical issue in large first-party losses in the country is underinsurance. When the policy limit purchased is less than the actual value of the property or business income insured, Argentine law limits the policyholder’s recovery in the event of a loss, so that the insurer need only indemnify the loss sustained in the same proportion that the policy limit bears to the value of the insured property or income. This “proportional rule,” however, applies only where the parties have not agreed otherwise.
Underinsurance becomes even more important due to Argentina's high inflation rate, currently more than 20 percent annually, which afflicts the country's economy and may lead to large disparities between the sums insured and the actual value of the policyholder’s insured interest at the time of the loss. Underwriters should therefore pay close attention to any policy provisions concerning underinsurance and payment of the loss, including clauses providing for payment in a specific currency or the conversion of Argentine pesos to a foreign currency. It is possible for gaps to exist between a cedent’s and a reinsurer’s respective contracts.
Another important consideration is that, like other Latin American countries, Argentina does not have a developed body of law that can provide guidance on some issues that are frequently contested in complex first-party claim, most significantly the calculation of business interruption losses. Consequently, the outcome of any disputes in this area will largely depend on the specific language used in the policy, making it all the more important for the underwriter to make sure that the contract wording is clear and unambiguous and reflects the carrier’s intent. Local expertise is critical, as is occasionally involving foreign vendors in handling claims and resolving disputes.
Significant Claims Issues for Losses in Argentina
The following are some aspects of Argentine law and practice that international insurers and their reinsurers should be aware of when a policyholder submits a claim for a first-party loss.
A direct insurer has 30 days, from the date of notice of the loss, to accept or reject the claim. If the insurer fails to do so, liability will be deemed admitted. This 30-day deadline will be extended if the insurer requests relevant additional information from the policyholder. If the insurer accepts coverage for the claim, but the parties have not yet agreed on the quantum of the loss, the policyholder is entitled to an advance payment of 50 percent of the amount of loss estimated at that point by the insurer. Also, according to some case law precedent, the reinsurer has this 30-day deadline to accept or reject coverage.
As a result, it is critical for international insurers and reinsurers to be involved in the adjustment process from the outset, so that they have access to the information necessary to make a coverage determination within this limited timeframe. The insertion of a claims control clause in the agreement will strengthen the position of the foreign insurer or reinsurer in this respect.
Conclusion In re "El Comercio Compañía de Seguros a Prima Fija S.A. vs. Zurich Ins. Co. Reasegurador." Commercial Court of Appeal of Buenos Aires City, 12/06/2005.
Argentina presents significant opportunities for international insurers and reinsurers. To maximize the benefits of doing business in the country, these companies should pay particularly close attention to the underwriting issues discussed in this article, namely the provisions in their contracts addressing business interruption, underinsurance, loss payment, dispute resolution and claims control. In the event of a claim, foreign carriers should also be very mindful of Argentina’s strict claim-handling requirements.