UK: The Insurance And Reinsurance Law Review, Colombia

I INTRODUCTION

Colombia is among the world's most dynamic insurance markets, attracting leading global companies to compete against strong local players.2 During the past year the industry maintained a healthy growth rate of almost 9 per cent, outpacing the general economy and benefiting from stable political and economic policies. This year the insurance sector is likely to see growth of between 8 and 10 per cent.3

Following this trend, the Colombian legal system has undergone a very substantial process of improvement to satisfy the growing demand of business. The Colombian regulator is recognised as one of the most advanced in the region, gearing towards the establishment of international solvency standards,4 while a new body of consumer protection laws will lift the industry's domestic reputation and stimulate local demand. With the entry into force of a new infrastructure law and special regulations, the government has cleared the way for much-needed infrastructure projects.5 Dispute resolution procedures have been fundamentally improved by the introduction of an arbitration law in October 2012 and a new Civil Procedure Code is set to enter into force gradually over the next few years.

II REGULATION

i The insurance regulator

Insurers, reinsurers and brokers operating in Colombia are supervised by the Financial Superintendency (FS), an independent body attached to the Colombian Ministry of Finance and Public Credit.6

The main regulatory framework is contained in the Organic Statute of the Financial System (EOSF),7 and other regulations including:

a Decree 2555/2010, which sets reserving and minimum asset requirements and contains the regime applicable to insurance intermediaries;

b Law 1328/2009, which regulates access to the Colombian market by foreign non-domiciled insurers and contains consumer protection rules specific to financial products;

c Law 1480/2011 on general consumer protection;

d Title VI of External Circular 007/1996 of the FS, which develops the regime applicable to general insurance operations, some special lines of insurance, solvency requirements, risk management procedures and the registration rules for foreign non-domiciled insurers, reinsurers and brokers; and

e the Colombian Commercial Code.

ii Position of non-admitted insurers

Unregulated insurance and reinsurance activity is prohibited in Colombia.8 Contracts made with unauthorised entities are void and the unauthorised insurer may be required to return all premiums received.9 It may also be subject to further sanction in the form of fines, compulsory dissolution and disqualification.

Colombian residents are generally free to purchase insurance outside of Colombia, in which case the contract will fall outside the scope of Colombian regulation. Colombian insurers may cede 100 per cent of their written risks abroad by way of reinsurance. However, certain policies must be purchased from a regulated entity within Colombia:10

a insurance that is compulsory under Colombian law or is contingent upon compulsory coverage;

b insurance in the nature of social security such as life insurance, annuities and employers' liability insurance; and

c insurance issued to state entities.

iii Requirements for authorisation of insurers

Following a major reform in July 2013, Colombian law now allows four options for insurance entities wishing to do business in Colombia:

a incorporated insurance or reinsurance companies;

b branch offices of foreign insurers;

c registered foreign insurers or reinsurers; and

d representative offices of foreign reinsurers.

Incorporated insurance and reinsurance companies

Insurers or reinsurers wishing to incorporate in Colombia require prior authorisation from the FS. The principal requirements for authorisation are as follows:

a the proposed entity must be structured as a public limited company or a cooperative association;11

b the proposed entity must satisfy a minimum capital requirement, of which 50 per cent is paid at the point of incorporation and the remainder within 12 months;12

c in addition to its minimum capital, the proposed entity must maintain assets,13 a solvency margin14 and minimum reserves15 according to law.

Upon receipt of an application, the FS institutes a short period of public consultation. If no objections are received, and the FS is satisfied with the proposed entity, authorisation will be granted and incorporation may proceed.

Branch offices of foreign insurers

Foreign insurers (not including reinsurers) are able to access the Colombian market by establishing branch offices. These are treated as an extension of the parent company and are free from the strict requirements of incorporation. However, branches are treated as regulated entities within the jurisdiction of the FS and they must comply with the same regulations which apply to incorporated entities.

Branch offices are subject to the following additional requirements:16

a minimum capital which must be paid immediately upon the establishment of the branch office;

b minimum assets located in Colombia; and

c the presence of a permanent local representative with professional credentials and moral standing.

Registered foreign insurers and reinsurers

Limited classes of insurance and reinsurance may be marketed in Colombia by foreign entities that are not regulated by the FS, on condition that they obtain local registration.

Marine and aviation transport (MAT) insurance

Foreign insurers may issue transportation policies, known as MAT insurance, in respect of goods, vessels and associated liabilities arising in the course of international transportation by air and sea, including space launch.17

A foreign insurer wishing to issue MAT policies must apply to the FS for a place on the Register of Foreign Insurers offering Marine and Aviation Transport (RAIMAT).

The principal requirements are a minimum rating of BBB- by Standard & Poor's or equivalent and minimum capital, solvency levels and asset levels equal to those which are required of incorporated Colombian insurers.18

Agricultural insurance

Foreign insurers may also issue agricultural insurance policies19 by applying to the FS for a place on the Register of Foreign Insurers and Brokers of Agricultural Insurance (RAISAX). The government is considering subsidising the purchase of this type of cover.20 The principal requirements are similar to those that apply to MAT insurers, as set out above.21

Foreign reinsurers

Foreign entities may transact reinsurance business in Colombia.22

Foreign reinsurers should apply to the FS for a place on the Register of Foreign Reinsurers and Reinsurance Brokers (REACOEX) and demonstrate compliance with requirements which are very similar to those which apply to MAT insurers.23

Representative offices of foreign reinsurers

A reinsurer which is included on the REACOEX register may also open a representative office in Colombia. Applications are made to the FS and require extensive documentation to be served in support.24 Representative offices are subject to the control and supervision of the FS.

iv Position of brokers

To operate in Colombia, insurance and reinsurance brokers must be authorised and regulated by the FS.25

Incorporated entities

If a broker wishes to incorporate in Colombia, it must satisfy the following principal requirements:

a If the proposed entity is an insurance broker, it must be incorporated as a limited company or general partnership.26 If a reinsurance broker, the proposed entity may be structured differently.27

b The managing directors and administrators of the proposed entity must be approved by the FS and possess a minimum level of qualifications and personal standing. A candidate is presumed to be suitable if he or she can show at least two years' experience as managing director, consultant or other relevant functionary in the insurance sector.28

c The proposed entity must satisfy a minimum capital requirement.29

Registered foreign brokers

Foreign brokers wishing to market agricultural insurance or reinsurance products in Colombia without establishing a local office may apply to the FS for inclusion on the relevant register. Registration for MAT brokers is effected through the relevant MAT insurer.

v Regulation of individuals employed by insurers

The names of the directors and senior management of an insurance entity must be disclosed to the FS as part of the authorisation process.30 Those individuals must demonstrate that they are fit and proper persons and authorisation may be denied if they have criminal convictions or sanctions for breach of duty.

The directors and senior management of regulated entities are also subject to a code of conduct requiring that they act within the law, in good faith and in the advancement of the public interest.31

vi The distribution of products

Regulated entities must submit their policy wordings, including any schedules, amendments and premium models to the FS whenever they begin writing a new line of business.32

The FS may disallow the use of wording which does not comply with Colombian insurance law and regulation or is insufficiently clear.33 The FS may also prohibit the sale of a product if it determines that the proposed premium is unfair or unjustified by statistical evidence.

vii Compulsory insurance

There are more than 50 types of compulsory insurance in Colombia including various forms of motor liability, employers' liability, transportation liability, environmental liability and credit insurance in transactions involving international trade and state entities.

Unfortunately, there is no single point of reference and it is beyond the scope of this chapter to list them all. However, reinsurance brokers may be interested to know that they are among a very small number of professions who are required to carry professional indemnity and fidelity insurance.34 The Colombian legislator frequently adds new mandatory insurance requirements affecting different sectors. Recent developments include a bill requiring compulsory building guarantee insurance.35

Despite the extensive regulation, evasion rates are high. The evasion rates for third-party motor insurance and employers' liability cover are said to be in the order of 23 per cent and 62 per cent respectively.36

viii Compensation and dispute resolution regimes within the financial services context

Law 1328/2009 requires regulated entities to set up (at their own expense) a customer complaints procedure known as a Consumer Attention System (SAC) and to offer the services of an independent adjudicator.37 In theory, the procedure applies to all disputes involving any type of customer, line of business and magnitude of the claim. However, the adjudicator's decision will be binding only if the statutes of the regulated entity make provision for binding determination and prior agreement has been reached with the customer.

Footnotes

1 Neil Beresford is a partner and Raquel Rubio is an associate at Clyde & Co LLP.

2 Ernst & Young ranks Colombia as the insurance market with the fourth highest level of opportunity after Turkey, Indonesia and China. 'The shifting insurance landscape in rapid growth markets', EY 2014 www.ey.com/Publication/vwLUAssets/EY-Waves-of-change/$FILE/ EY-Waves-of-change-The-shifting-insurance-landscape-in-rapid-growth-markets.pdf.

3 Fitch Ratings Special Report, 15 January 2015, 'Perspectivas 2015: Sector Asegurador Colombiano– Balance positivo en 2014; grandes retos en regulación y crecimiento,' http:// www.fitchratings.com.co/ArchivosHTML/RepEsp_7295.pdf .

4 Decree 2954 of 2010 and Circular No. 45 of 2012.

5 Law 1682 of 2013.

6 Article 325 Decree 663/93 EOSF.

7 Decree 663/1993 EOSF.

8 Articles 39 and 108 EOSF.

9 Article 108.3 EOSF.

10 Article 39 EOSF.

11 Article 53 EOSF.

12 Articles 80 and 81 EOSF.

13 Article 2.31.1.1.1 of Decree 2555/2010.

14 Section 2.1.1 of Chapter 2 of External Circular 007/1996.

15 Article 186 EOSF and Title 1 Chapter 2 of Book 31 of Decree 2555/2010 (as modified by Decree 2954 of 2010).

16 Articles 65 and 66 of Law 1328/2009.

17 Article 61 of Law 1328/2009.

18 Chapter 7 of title VI of External Circular 007/1996.

19 Article 74 of Law 1450/2011.

20 Article 5 of Law 1731/2014.

21 Chapter 6 of Title VI of External Circular 007/1996.

22 Article 94 EOSF.

23 Chapter 4 of Title VI of External Circular 007/1996.

24 The list is specified in Article 4.1.1.1.4 of Decree 2555/2010.

25 Article 1351 of the Commercial Code.

26 Article 1347 of the Commercial Code.

27 Article 44.1 EOSF.

28 Article 2.30.1.1.3 of Decree 2555/2010.

29 Section 1.2 of Chapter 3, Title VI of External Circular 007/1996.

30 Article 53 EOSF.

31 Article 72 EOSF.

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.

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