Although privatisation in Latin America has been a recurrent theme in recent years, Costa Rica actually adopted this concept in the early 1980s when, as a consequence of the serious financial problems resulting from the growing public sector, the government decided to transfer a portion of its publicly owned companies to private hands. In the beginning, this process was restricted to companies affiliated with the Corporación Costarricensede Desarrollo SA (CODESA), which suffered significant losses and thus constituted a financial burden for the government.

Despite this limited beginning, privatising government entities and opening the economy have become cornerstones of Costa Rica's liberalisation process. The transformation of the insurance sector, a crucial element in this process, has recently encountered considerable scrutiny. Notwithstanding significant congressional resistance to drastic changes in the insurance ambit, it appears that a new insurance law will soon enjoy legislative approval. Thus, this imminent liberalisation makes this Central American nation increasingly attractive to foreign financial services companies.

Efforts to liberalise

As a result of varying economic conditions and changes in political leadership, this initial impetus to privatise dissipated in the following years. However, when Miguel Angel Rodriguez assumed presidential power in

1998, the urge for widespread privatisation was revived. Indeed, shortly after being elected, Mr Rodriguez announced that he intended to take three major actions: (i) enact a law to reduce public expenditure, (ii) reduce Costa Rica's internal debt which was approximately 3.5% of GDP in 1997, and (iii) privatise several state-owned entities, including the Instituto Nacional de Seguros (INS).

To facilitate these actions, Mr Rodriguez has attempted to incorporate views from all segments of society on pivotal social and economic issues. A working group called la Concertación Nacional (the National Consensus), comprised of 76 representatives, was formed to address issues such as privatisation.

Currently, the INS is wholly controlled by the government and enjoys a monopoly status in the local insurance market. Its service, though, has been criticised. For example, a study conducted in 1998 entitled “Document for the National Consensus Regarding the Future of the Insurance Market in Costa Rica,” says: “Pervasive problems include unnecessarily high costs, an inadequate variety of services and the unscrupulous sale of illegal insurance by unauthorised foreigners.”

The causes of these problems, indicates the study, are multiple. First, legislation governing the insurance industry is outdated. Although the original insurance code promulgated in 1922 was amended in 1940 and 1973, such reforms did not take into account many technological advances in the modern insurance market. Second, the supervision of the insurance market is inadequate. Out of the 22 countries that comprise Latin America, Costa Rica is the only one which has not created an insurance superintendency. As a result, the entities that sell insurance (banks, agents, pension operators) have excessive negotiating power over consumers due to their size and technical information.

Third, consumer control is non-existent. With private corporations, the stockholders serve as “watch-dogs” to scrutinise monetary control. With public institutions like the INS popular participation is virtually nil. In Costa Rica, la Contraloría de la República (the Inspector General) attempts to guarantee an adequate use of the funds. However, studies indicate that such state restrictions limit the efficiency of the INS in terms of budgetary guidelines, investment restraints and salary caps which repel quality personnel.

In light of these problems, a draft insurance law (Proyecto de Ley - Ley de Seguros), designed to modernise and open the insurance sector, was submitted to Costa Rica's congress in December 1998. The Proyecto calls for opening of the market to both foreign insurers and reinsurers. Thus, for the first time, foreign insurance companies would be permitted to establish operations in Costa Rica.

Article 1 provides, among other things, that persons resident in Costa Rica can only be insured by companies (Costa Rican or foreign) duly established and authorised by the Superintendency of Insurance in accordance with the provisions of the law. Chapter X provided for the privatisation of the INS

and the creation of a private corporation called Seguros de Costa Rica S.A. to which the portfolio of insurance and reinsurance of the INS would be transferred. According to this plan, 40% of the shares would be sold to a “strategic partner” that would incorporate new technology in the insurance market, 20% would be publicly offered on the stock market, 20% would go to a trust for the benefit of the national pension regime and the remaining 20% would be channelled directly to the state pension system. (La Nación, 27 Nov 1998).

Despite presidential enthusiasm for privatisation of the INS, the Proyecto faced several perhaps insurmountable obstacles. Mr Rodriguez's political party, Unidad Social Cristiana, has only 27 members in the 57 seat legislature, leaving them two votes short of control. Thus, to pass a bill, the president must obtain the support of at least three of the minor-party legislators. The Costa Rican supreme court ruled in March 1998 that public employees are allowed to strike, provided that their jobs do not affect public health or safety. Consequently, if the INS were privatised, state workers might initiate mass protests. The public has shown a certain reluctance to selling the INS, and Mr Rodriguez lacks the charisma necessary to sway them to such a degree that some journalists claim that

“Mr. Rodriguez's speaking style makes Alan Greenspan sound like Jesse Jackson.”

Down but not out

Conforming with the predictions, in October 1999 the Economic Affairs Committee of the Costa Rican congress unanimously rejected the proposal to privatise the INS. Members of the committee expressed diverse reasons for

their decision. Danilo Chaverri, minister of the presidency, stated that the objectives could be reached without incurring the “confrontations and disputes” that the sale of the INS would necessarily imply. For his part, senator Guido Alberto Monge argued that the government should focus first on modernising and strengthening the INS to improve efficiency, the variety of services and overall quality. Likewise, senator Otto Guevara of the right-wing Movimiento Liberal party maintained that the issue of privatisation should be addressed only after the opening of the insurance market.

Moreover, several senators were disgruntled by what they perceived as usurpation of their authority. The controversy began when the official legislative journal, La Gaceta, published a public request for bids to conduct the appraisal of the INS and stated that it would cease to be a monopoly on 31 December 2000. One senator expressed his frustration: “If they are already taking it for granted that the insurance market will be dismantled before the congress has approved such action, then we are not doing anything here and it would be better if we stopped legislating and just went home.” (La Nación, 3 March 1999.)

The Rodriguez administration refuses to interpret this congressional disapproval as a defeat and continues to seek alternatives means to open the insurance market to foreign financial services companies. According to Mr Rodriguez, the government has temporarily renounced its idea of selling

the INS in order to concentrate first on achieving a political consensus which would, in turn, accelerate competition in the Costa Rican insurance market. He argues that the INS already has “sufficient preparation” to face international competitors. The president of INS, Cristobal Zawadski, concurs, claiming that the INS has a solid technological base, a good market and quality administration. To fortify these claims, Mr Zawadski points out that the INS has already been competing successfully against illegal foreign insurers for over two decades. (La Nación, 10 Dec. 1999.)

A new version of the Proyecto was submitted to congress in January 2000. Chapter X expressly discards the possibility of privatising the INS at this time but, as with the original version of the Proyecto, Articles 2 and 26 allow for the opening of the Costa Rican market to foreign financial services companies. To expedite the legislative process, the primary political parties agreed to form a six-member “commission of experts” dedicated to analysing the modified Proyecto.

Opportunities yet to be reaped

From a foreign multinational's perspective, now is an opportune time enter this market for several reasons.

  • Costa Rica is quite promising due to the relative economic sophistication of the native population.

  • Numbers of wealthy retirees have permanently relocated in Cosa Rica. The average age of the population is falling, so the sale of all types of insurance to this group is expected to increase exponentially in the forthcoming years.

  • Experts are optimistic regarding future growth in the country, unlike other countries throughout the region.

  • The recent influx of foreign companies will increase the number of people seeking insurance coverage locally. For instance, the US technology giant Intel recently established a microchip production center in Costa Rica. Such foreign presence is not limited to the high-tech sector. Fast-food franchises, care rental companies, video rental outlets, hotels, designer clothing boutiques and stores selling computer products have been successful in recent years.

  • The deterioration of the current state-run health care system should lead to an increase in the purchase of private insurance coverage. Although Costa Rica's system has been labelled the “envy of many wealthier countries”, studies reveal that growing financial pressures are jeopardising the historic gains.

  • Finally, with the imminent approval of the Proyecto, experts predict that foreign entities will soon inundate the local market, which could disadvantage later arrivals. In particular, a report in the US

    National Underwriter on 18 January 1999 predicted that “deregulation and liberalisation of the insurance markets will foster intense competition [and] we will see decreasing profit margins and excess capacity.” Despite the congressional hesitancy over INS privatisation, Costa Rica still arguably remains on the right track for numerous reasons. The Rodriguez administration appears undiscouraged, the initiative is gradually gaining public support and the concept is finally being discussed at the highest levels (political, business and legal).

    Moreover, the National Consensus has managed to create a four-step chronological plan to achieve the goal. It entails: drafting a new insurance code, creating an insurance superintendency, eliminating the INS monopoly and privatising the INS. Furthermore, international organisations, such as the Inter-American Development Bank. have recently made loans to Costa Rica to fund a programme to improve the effectiveness and transparency of public sector management, strengthen the Superintendency of Financial Institutions and develop competitive markets in the insurance sector.

    In addition, market forces will further encourage, if not effectively force, the country to adopt a more liberal attitude toward privatisation and foreign financial services companies. While it is clear that the struggle may be formidable, it appears that Costa Rica, now more than ever, is realising that the idea of a state-owned insurance monopoly and a closed insurance market is incongruent with the pervasive open-market mentality which now exists.

    According to a recent news article in La Nacion, the Costa Rican congress is currently focused almost exclusively on the modernisation of the Instituto Costarricense de Electricidad. Discussions about the Proyecto de Ley de Seguros were temporarily postponed, but the congress now hopes to approve the Proyecto by the start of the summer. As a result, the initial battle to privatise the INS was lost in congress recently, yet it is likely that the long-term war will be resolved in favour of privatisation.

  • Hale Sheppard, who has law degrees from the University of Kansas and University of Chile, is currently an associate in the Latin American practice group of Haynes and Boone, an international law firm with offices in Texas, Mexico and Washington D.C. E-mail: A list of references is available from the author.