Venezuela: how high is the tide for (re)insurers?
In recent years, Venezuela has been in the spotlight for many reasons - unfortunately, not necessarily good ones. Political instability, contraction of the economy, high inflation rates, the oil price plunge and shortage of essential goods all feature in the complex Venezuelan environment.
Despite the years of hardship, Venezuela is still reported to be within the largest non-life markets in Latin America in premium volume. According to the Superintendence of Insurance (SUDEASEG), the number of local insurance companies has almost tripled since 2014, with 121 insurance companies currently operating in the country. Although there are no official statistics for 2015, it is estimated that the profit of the insurance market increased around 84% at the end of September 2015. Although some of this growth may be due to inflationary pressures and financial speculation by new entrants, there appear to be business opportunities for the brave, or well connected with the public authorities, to seize.
There is no doubt, however, that the traditional Venezuelan insurance market has been seriously affected by the political and economic conditions the country encounters today. The purpose of this article is to review the main challenges (re)insurers face and the tolls these have taken on their business.
Official statistics of the Venezuelan Central Bank show that the country ended 2015 with an inflation rate of 180.9%; nonetheless, non-official estimations are substantially higher. The International Monetary Fund estimates the inflation rate for 2016 will surge to 720%. This presents serious challenges for insurers in many respects, including loss reserve estimations, solvency margins accuracy, aggregate accumulation control and reinsurance needs, as well as premium adequacy, particularly for long tailed business.
Most insureds try to update their sums insured regularly in order to keep pace with inflation rates. However, there are some that cannot realistically afford higher premiums. Underinsurance is becoming an issue for policyholders, particularly when it comes to collecting a full indemnity on otherwise valid claims.
In cases of underinsurance, the rule under Venezuelan insurance law is that average applies by default. However, we have seen cases where the parties have contracted out of it, which is allowed, in order to agree first loss cover for instance. Doing so relieves the pressure during the adjusting process of having to refer to the value of the property insured at the time of the loss.
Venezuela is experiencing dramatic shortages of food, medicine, power and water, amongst other essential goods, and this has caused the escalation of protests into riots. The Venezuelan Observatory of Social Conflicts (OVCS), a non-governmental organization, reported that from January to July 2016 the country encountered 537 lootings or attempted lootings. The current social discontent has resulted in a significant increase in the frequency of looting and rioting related losses.
On this subject, it is important to note that all fire policies must adhere to the official wording of the Riots, Civil Commotion, Labour Conflicts and Malicious Damage Endorsement issued by SUDEASEG, which has limited (but defined) exclusions and includes cover for measures taken by the authorities to suppress such activities.
Maintenance of risk
An issue that features in almost every large Venezuelan loss that we have seen in recent years is whether appropriate maintenance of the facilities and timely replacement of worn parts took place as scheduled.
It has become very difficult for insureds to maintain investment in maintenance of machinery in industrial complexes. In addition, the variable prices of spare parts and the high cost of replacement are problematic not only for insureds for the operation of their business, but also for insurers once claims are presented, as the adjustment value can appear disproportionate when inflation and exchange rate issues are factored in.
There is no specific provision in the law of Venezuela making the breach of the insured’s maintenance obligation sufficient for insurers to deny cover when a loss occurs. However, the law does set expectations of a diligent family father, compliance with which should be discussed with an insured early in the adjustment process.
Foreign currency exchange control has been in place in Venezuela since 2003.
Limited access to foreign currency in Venezuela has affected not only the operations of the local players from an accounting perspective, but also their ability to access reinsurance capacity. This particularly applies to special risks, where obtaining financial assistance from international markets is rather essential.
Unfortunately, the need for foreign currency by the insurance sector is a ‘lower priority’ compared to other sectors of the economy such as food and medicines. Therefore, the allocation of foreign currency to cover payment of reinsurance premiums is not in the top of the agenda for the Venezuelan government when granting requests to sell USD locally.
Following the most recent changes introduced by the Central Bank in March 2016, the SICAD rate has been eliminated and the exchange control system now consists of two exchange rates:
- The official exchange rate, called DIPRO, which is still available but only for essential public needs.
- The SIMADI rate, also named DICOM, which is a floating rate that varies on a daily basis and applies to insurance-related transactions.
We have experience in advising reinsurers how these rates affect their business.
Allowing the (re)insurance sector to operate normally has not been a priority.
However, it is important that the imbalances described above are properly addressed. Otherwise, with a further shrinkage of insurance premiums expected in 2017, the scenario could become even more complex and could lead to a systemic failure of the Venezuelan market as we know it.