Peruvian government facilitates more business opportunities for insurers

Peruvian Labour Minister, Mr Alfonso Grados, has publically announced that the Ministry of Finance and Economy is considering taking on an unemployment insurance program by the third quarter of 2017.

Peruvian Labour Minister, Mr Alfonso Grados, has publically announced that the Ministry of Finance and Economy is considering taking on an unemployment insurance program by the third quarter of 2017. Unemployment insurance was one of President Kuczynski most controversial campaign promises.

Labour informality in Perú has become a major problem as 72% of the working population is neither taxed, nor monitored, by any form of government. This lack of governmental monitoring has relaxed liability consciousness of employers and the only existing employee protection program in case of layoffs is the “Compensation for Time of Service (CTS)”.

The CTS is a kind of severance paid while the employee still works. It is regulated by Legislative Decree 650 and has been modified in 2014 by Supreme Decree 008-2014-TR. The law provides that employers are obliged to retain 8.33% of employees’ annual income (equal to one month payment) and deposit it into a separate CTS bank account. The funds will only be available to employees if they lose their job and while searching for another job, or once an amount equal to four monthly payments (of current salary) has been accumulated.

However, CTS is, in shorter terms, a regulated savings program because the funds come from the employees’ own money instead of coming from an insurance policy paid by the employer. Mr Kuczynski offered in his campaign that the unemployment insurance would not replace CTS and that both instruments will be used in a parallel fashion.

How would unemployment insurance work?

The new labour law that will regulate unemployment insurance is still in the works and an initial bill has not been released yet. However, the following are some of the known aspects of this proposal:

  • Unemployment insurance will be a protection mechanism against the possibility of workers losing their jobs. The idea is that from the time that the law is in force, all new employees will be required to purchase unemployment insurance, however, all other workers already employed may purchase the insurance but will not be required to do so.
  • The targeted population will be young adults and low income workers as they are the most susceptible to lose their employment because of lack of capacitation or experience.
  • This unemployment protection system would consist of a joint fund where the main contributor would be the employee, as the main beneficiary, the employer, and the government.
  • The policy benefits would consist of a decreasing percentage of the employee’s average monthly salary in the last six to 12 months. The unemployment benefits would be paid only for a maximum period of four months while the beneficiary looks for another job.
  • The following is an example of how the unemployment insurance benefits would be disbursed:

Month of unemployment   Average monthly salary past 12 months   Benefit percentage   Benefit amount
1st month                                 US$1,000                                                           100%                             US$1,000
2nd month                                US$1,000                                                            75%                              US$750
3rd month                                 US$1,000                                                            50%                              US$500
4th month                                 US$1,000                                                            25%                              US$250

  • Beneficiaries of this insurance would only be eligible for unemployment benefits after a certain period of time of active contribution. Although this aspect of the law is still under evaluation, it is presumed that all unemployment beneficiaries will be entitled to policy benefits after a year of contributions.
    The unemployed beneficiary will be required to register with a regional or municipal Unemployment Service Agency, to enforce the unemployed beneficiary’s duty to search for another job.
  • The unemployment insurance will be managed by a sole private insurance company, and lobbyists are pushing for an international bid so that international players are able to compete, thus promoting the offering of a more cost-efficient unemployment policy.
  • Temporal employees will not be entitled to the same benefits as full time employees.

The current government’s goal is to reduce informal labour by the end of 2017, from 72% to 68%. In order to reach this goal and continue the efforts to reduce labour informality, an extensive labour law reform is needed. Part of such reform is to offer more security to the active working population, and eventually generating more trust in regulatory government entities.

The active working population in Perú, according to a 2016 census done by the National Institute of Statistics (INEI), is 15.9 million, therefore, insurers should be prepared to offer Unemployment Insurance services once new labour laws are enacted.