In August 2008, Costa Rican President Dr. Oscar Arias Sanchez signed into law Costa Rica's new Ley Reguladora del Mercado de Seguros, thereby ending the Instituto Nacional de Seguros' (INS) more than eighty-year-old monopoly over the country's insurance industry. The new law and subsequently-issued regulations permit domestic and foreign companies (with local branches) to operate insurance and reinsurance business in Costa Rica, subject to minimum capital (US$ 3 million for personal lines insurers and US$ 10 million for reinsurers) and other financial and technical requirements.

Despite the new laws and regulations, concern has persisted that foreign companies would continue certain grey market practices rather than comply with the new regulatory scheme. Halfway through 2009, Eduardo Recinos, Insurance Director for Fitch Centroamerica, reportedly commented that the true volume of insurance sales in Costa Rica is obscured by illegal sale of foreign insurance, and that he does not expect either the opening of the Costa Rican insurance market to private competition or the creation of an insurance regulator to eradicate the problem. Mr. Recinos further reportedly commented that the lack of competition in the market due to the long-standing government monopoly, together with the relative wealth and sophistication of the country's population, has created a grey market in foreign insurance that may be difficult to eliminate. Nonetheless, the market has moved forward toward a more competitive atmosphere, while the developing regulatory authorities have warned of increased vigilance concerning grey market practices now clearly prohibited by Costa Rican law.

At the end of 2009, Costa Rica's financial services supervisor, the Consejo Nacional de Supervision del Sistema Financiero (Conassif) unanimously selected Javier Cascante as the head of country's new insurance superintendency, the Superintendencia General de Seguros (Sugese). Mr. Cascante previously served as the superintendent of the nation's pensions superintendency (Supen), which has been responsible for overseeing the development of the nation's insurance market pending the creation of the insurance superintendency. Mr. Cascante will take his place at the head of Sugese on January 1, 2010. He can be expected to drive forward the implementation of the remaining necessary regulations governing the market, as well as step up enforcement activities against non-conforming insurance and reinsurance companies.

New Faces

2009 brought several new faces to the Costa Rican market, as well as one familiar face. Seguros del Magisterio, S.A. quickly became the first company authorized to compete with the INS, receiving authorization to all sectors of the Costa Rican population. Prior to the liberalizing legislation, the company was authorized to sell only life insurance and only to teachers and their relatives under an exception to the government monopoly. Seguros del Magisterio may eventually sell a variety of insurance products, but is expected to initially offer only medical and life insurance policies. Seguros del Magisterio officials interviewed in La Nacion predict that the introduction of competition will make insurance accessible to people who have until now remained uninsured.

Later in the year, American Life Insurance Company (Alico) and Grupo Mundial received conditional authorization to operate in Costa Rica. Neither company has yet received authorization to actually sell insurance in the country as of the writing of this paper, each still needing to satisfy certain technological and marketing control requirements. Upon receiving full authorization, both companies will be permitted to sell personal lines of insurance in the country, including life, health and accident insurance. At least four other foreign insurance companies have indicated an interest in entering the nation's insurance market, reportedly including Atlantic Southern Insurance of Puerto Rico and ASSA Compania de Seguros of Panama.

In another move likely to eventually impact the Costa Rican market, Mapfre (Spain) and Grupo Mundial (Panama) agreed to form a joint venture that would constitute Central America's largest insurance company. The resulting venture would bring together Mapfre's subsidiary in El Salvador and Grupo Mundial's operations in Panama, Costa Rica, Nicaragua, Honduras and Guatemala. The combined entity would reportedly currently collect US$ 223 million in annual total premium. Although Grupo Mundial itself would have represented a formidable competitor for the INS, Mapfre has a regional Latin American platform that rivals any insurance company and will pose an even greater threat to the INS' dominant market position.

Finally, near the end of the year, Brazilian reinsurance company J. Malucelli Re indicated that it expected to shortly receive foreign reinsurer authorization in Costa Rica. Although it is somewhat unclear given the nature of the Costa Rican regulations exactly what was meant by this announcement, it is clear that J. Malucelli intends to offer additional competition in Costa Rica's reinsurance market.

The Future of the INS

Much like the IRB in Brazil, it will be interesting to see how the INS can compete in a post-monopoly Costa Rican insurance and reinsurance market. The INS clearly benefits from tremendous history and name recognition in the country, but it remains to be seen whether the company can compete with other private insurers on price, product diversity and service. Much like the IRB, however, the INS has taken steps to attempt to compete on these bases rather than simply resting on its familiarity to the market.

In October 2008, as it prepared to compete in the country's newly de-monopolized insurance market, the INS announced the creation of four new insurance entities: INS Internacional, INS Servicios, INS Vida and INS Comercializadora. The move was part of an effort by the INS to restructure, retain customers and grow its business in the face of new competition. INS Servicios is to serve an auxiliary function, enabling INS to restructure areas such as auto/motor insurance. Efficiency savings achieved through INS Servicios will be fed back to customers through reduced policy premiums, according to local press reports. INS Vida will focus on the life insurance sector, which had been largely neglected during INS' time as the monopoly provider. INS Comercializadora will be the sales arm of INS, offering its range of products to the market. INS has also stated that it may enter the catastrophe risk market, offering insurance on state-owned assets at first.

The creation of INS Internacional reflected the INS' understanding that the new laws permitted it to operate in foreign markets. INS Internacional was to manage such overseas operations. The INS identified the Caribbean and other Central American markets as its first targets and set aside US$ 100 million for potential foreign operations. It even later announced its intent to enter each of the Central American markets in 2009. However, a series of conflicting regulatory decisions raised questions about whether the INS was in fact authorized to carry on operations in foreign markets, disrupting the INS' acquisition of a Nicaraguan insurer and putting any further foreign discussions in limbo. In November 2009, the Superintendencia de Pensiones (Supen), the interim regulator of the Costa Rican insurance market, issued an opinion stating that the Instituto Nacional de Seguros (INS) and its component entities are not permitted to engage in insurance or reinsurance business outside of the country, whether by acquisition, establishment or joint venture. Given the uncertainty, the Executive President of the INS, Guillermo Constenla, subsequently stated that the company would not actively pursue any foreign investment. Prior to the current debate, some commentators had maintained that international expansion to achieve diversity and volume would be key to the INS' ability to compete with private (especially foreign) competitors.

In December 2008, the INS announced the launching of 17 new insurance products. The new products, to be marketed and sold through public and private banks, include various personal lines policies, such as a family protection policy and a cancer coverage policy. The family protection policy offers coverage for food, housing, education and transport for surviving family members, while the cancer policy provides coverage for diagnostics, funeral expenses and hospitalization. Constenla reportedly commented that the new products were chosen because the INS expected new competitors entering the market to offer such products. HSBC Bank, which has 38 branches and 200,000 accounts nationwide began selling the policies in early 2009.

In April 2009, as permitted by the new regulatory scheme, the INS moved to diversify its investments in an effort to seek better returns and thereby improve its competitiveness. To that end, the INS announced two agreements with the Costa Rican electrical utility, the Instituto Nacional de Electricidad (INE), to invest in two bond offerings by the INE. The INE bonds are intended to fund the expansion of and improvements to the national electrical system. Mr. Constenla reportedly commented as follows regarding the new agreements: "The investment that we are now making in the ICE is part of the diversification that we are undertaking in our investment portfolio. More than that, it represents a contribution to the Costa Rican population, given that we are investing some of our capital in the public works infrastructure in an area as sensible as production of electricity that benefits the country."

Taken together, these initiatives make clear that the INS intends to vigorously defend its market share by diversifying and improving its product offering, overhauling its investments strategies and restructuring its operations to more effectively compete with private and foreign companies. It remains to be seen, however, whether the INS will be hamstrung by its shortcomings in the following areas: (1) international reach -- should the regulatory prohibition on foreign activities remain in place, the INS will be at a disadvantage to multinational insurers in that it will be uniquely exposed to natural disasters and economic problems in Costa Rica; (2) service -- one of the recurring complaints about the INS, particularly in the auto sector, has been poor service, an issue not clearly addressed by any of the initiatives discussed above; and (3) pricing -- another prevalent complaint about the INS in past years has been the perception that it has, protected by the monopoly, artificially inflated premiums in various lines of business, a practice which the INS will clearly be unable to successfully continue in the face of private competition.

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