The Superintendence of Insurance (“SSN”, after its acronym in Spanish) issued new rules to ease the restructuring of local reinsurers affected by the recent changes to the reinsurance regime.
As informed in our Client Alert dated May 5, 2017, on May 4 Resolution No. 40,422 of the SSN was published, substantially amending the regulatory framework of the reinsurance regime.
We recall that in 2011 Resolution SSN No. 35,615 approved the so-called “Reinsurance Regulatory Framework”, which, with a few exceptions, established that insurers could contract reinsurance exclusively with local reinsurers.
This Reinsurance Regulatory Framework did not lead to the consolidation of the local reinsurance market that the Argentine authorities were expecting at the time. Consequently, the new authorities considered it appropriate to adapt it through Resolution SSN No. 40,422 to allow national insurers and reinsurers greater risk placement with reinsurers from abroad.
Some of the main changes of Resolution SSN No. 40,422 and some of the guidelines recently issued by the SSN (Communiqué No. IF-2017-09634742-APN-GTYN#SSN) to facilitate the restructuring of local reinsurers affected by the changes are mentioned below.
Minimum capital to operate locally in reinsurance
The minimum capital required from local reinsurers and insurers licensed to operate in reinsurance as of July 31, 2016 was increased from AR$300 million (approximately USD 20 million) to AR$350 (approximately USD 22.5 million).
The deadlines provided under the regime on Gradual Adequacy of Minimum Capital of such reinsurers and insurers (see “Insurance and Reinsurance: Extension of intermediate deadlines to prove the minimum capital to operate”, published in Insurance News No. 2 of March 20, 2017) were extended, with the exception of the first that expired on March 31, 2017, date on which evidence of having reached a capital of AR$60 million must have been provided. The following three deadlines will be December 31, 2017 (instead of June 30, 2017) to provide evidence of having a capital of AR$130 million, December 31, 2018 (instead of September 30, 2017) to evidence AR$250 million (the previous value for this stage was AR$200 million) and, finally, December 31, 2019 (instead of June 30, 2018) to prove a total capital of AR$350 million (the previous total value was AR$300 million).
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Entities that adhered to the regime on Gradual Adequacy of Minimum Capital should submit certified documentation proving such decision, adopted by their management, together with their financial statements as of March 31, 2017. For insurers with a reinsurance line, the deadline for submitting the aforementioned financial statements, together with the accreditation of the decision to adhere to the Gradual Adjustment of Minimum Capital system, expired on May 15, 2017 and, for reinsurers, on May 30, 2017.
In the event of not having adhered to the mentioned regime on Gradual Adequacy of Minimum Capital, or not having provided evidence of the total minimum capital required, such local reinsurers and insurers with reinsurance operations could submit a Restructuring Plan. This decision should be proved in the same way as that to adhere to the regime on Gradual Adequacy of Minimum Capital. The Restructuring Plan is subject to the prior written authorization by the SSN. If rejected, the SSN may require the entity to submit a Regularization and Sanitation Plan in accordance with article 31 of Law No. 20,091.
The Restructuring Plan must be presented within 60 calendar days counted from the expiration of the term to submit the financial statements as of March 31, 2017. In the case of insurers, the Restructuring Plan may be filed until July 14, 2017 and, in the case of reinsurers, until July 29, 2017. Together with such Plan, the commitment of the shareholders to make capital contributions for the entity to afford all expenses and operating costs must be presented. The use of resources or assets of the entity that is not to satisfy and cancel commitments with cedants and/or retrocessionaires is prohibited.
Communiqué No. IF-2017-09634742-APN-GTYN#SSN, issued by the Technical and Regulatory Management of SSN on May 23, 2017, established the form of presentation and the minimum guidelines that should be contemplated in the Restructuring Plan. Among them, a detailed description of the strategy adopted to carry out the reconversion alternative that is intended to be carried out, including the policies, projection of goals and objectives set for its achievement, as well as the deadlines for compliance with each partial stage, which must be recorded in the minutes of the administrative body. The description must also include the active reinsurance and retrocession contracts affected by the Plan and the details of outstanding claims in charge of the reinsurer and in favor of each assignor. It also requires the presentation, every 60 days, of a Monitoring Report detailing the evolution of the Plan, approved by the management body. If any deviations from the projection arise from this Report, the causes must be explained, indicating the measures aimed at achieving the objectives proposed as of June 30, 2018.
The alternatives admitted under a Restructuring Plan are merger by absorption of the entity by another reinsurer or insurer; portfolio of reinsurance transfer to another reinsurer or insurer; the assignment of rights in favor of the insurer regarding the retrocession agreements, net of pending payment of premium obligations; and cut-off agreements with assignor insurers and/or retrocessionaires regarding premiums and/or claims. Other proposals may also be submitted to the consideration of the SSN.
In all cases the conformity of each cedant and retrocessionnaire must be evidenced.
When submitting a Restructuring Plan, the SSN will adopt the precautionary measures provided for in article 86 of Law No. 20,091, keeping them in force until the end of said Plan. Under this provision, the SSN may, without hearing, prohibit the insurer from carrying out, with respect to its investments, any act of disposition or administration that it specifically specifies and the prohibition of entering into new contracts in certain cases.
Cessions to admitted reinsurers
Reinsurance and retrocessions may be placed both with local reinsurers and with admitted reinsurers.
Insurers may place reinsurance, in all lines, with admitted reinsurers subject to the following regime:
- Contract incepting from July 1, 2017, up to a maximum of 50% of premiums ceded under the contract.
- Contract incepting from July 1, 2018, up to a maximum of 60% of premiums ceded under the contract.
- Contract incepting from July 1, 2019, up to a maximum of 75% of premium ceded under the contract.
Facultative reinsurance contracts for individual and catastrophe risks for sums equal or higher than USD35 million incepting from July 1, 2017, may be fully placed with admitted reinsurers, being exempted from the previous gradual hiring scheme.
As regards active reinsurance operations, the rule that insurers that carry these out for up to 10% of the total direct insurance premiums, calculated at the end of each fiscal year, must carry out the retrocession operations with local reinsurers, was maintained.
On the other hand, the obligation of local reinsurers to retain the risks assumed by reinsurance contracts in the Collective Life and Collective Burial business was eliminated.
The limit up to which local reinsurers may retrocede within a same economic group was increased from 40% to 75%. Therefore, local reinsurers shall not transfer to companies located abroad related or belonging to the same financial conglomerate more than 75% of written premiums, net of annulments, calculated as of the end of each fiscal year. Such limit may only be exceeded with the SSN’s prior authorization, for which evidence of the impossibility to count with coverage by other market operators is required.
Requirements for the registration of admitted reinsurers
In relation to foreign reinsurers that request authorization to accept retrocession and reinsurance operations as admitted reinsurers, the required net worth for their registration with the SSN was increased from USD30 million to USD100 million. In addition, new requirements were included, such as providing evidence of certain credit ratings during the past 3 years by certain international rating companies. As for the financial statements required for the registration of the foreign entity, those corresponding to the last two (2) fiscal years must be filed.
Also, the requirement of the SSN that foreign reinsurance companies authorized as such in their countries of origin be registered with the Public Registry of Commerce (“PRC”) in Argentina as a permanent representation in the terms of article 118 et seq. of the Argentine Companies’ Law No. 19550 was lifted.
We understand that the elimination of this requirement will put an end to the regulatory conflict that arose from requiring foreign entities to comply with a registration with the PRC, as if they would normally practice in the country the acts included in their corporate purpose, when in fact they would operate from abroad. This led to the PRC observing the application for registration, as it did not meet the requirements of the applicable corporate regulation, thus did not fulfill the SSN requirement.