John H. Rooney, Jr. explains the Latin American regulatory environment from the perspective of the foreign reinsurer.
As in most countries of the world, the transaction of insurance and reinsurance in Latin America is a regulated activity. Notwithstanding the existence of regulatory structures in all countries of Latin America, the transaction of reinsurance in the region has not historically been subject to very specific or detailed regulation. As the sector has grown in importance, the regulatory environment in Latin America has evolved as well. Many countries now specifically regulate through laws and regulation the transaction of reinsurance, whether conducted by national or foreign reinsurers. In general terms this article describes some of the important characteristics of the regulatory models that are used in Latin America. Obviously, in an article of this length it is not possible to cover all models and to indicate the countries in which the aspects of each are applicable or not. Nevertheless, it is important that the foreign reinsurer has an understanding of the regulatory environment in which it is operating. It is for this modest purpose that I have prepared this article.
I briefly cover the topics of legal framework, market entry, the transaction of reinsurance, dispute resolution and conclude with a short section identifying trends and conclusions. Under the topic of market entry, I discuss the modalities of establishment, the representative office, and the cross-border model. Under transaction of insurance, the reinsurance contract and the reinsurance intermediary are discussed. Before commencing operations in any country or accepting reinsurance from that market, investigation should be conducted into the specific regulatory conditions applicable in that country.
The countries of Latin America have adopted systems of law that adhere to the continental European system of written codes based in significant part on principles of Roman law. Generally, this signifies that legislation rather than case law is the predominant source of law, and the determination of the legal principles that will govern in a particular situation will be undertaken by review of interrelated codes and legislation, informed by learned sources and judicial opinion.
In the case of reinsurance, in almost all cases the activity is regulated in the same body of law as insurance. The regulatory models for insurance regulation vary among countries. Some have regulators dedicated exclusively to supervision of insurance. In other countries, the regulator responsible for insurance also regulates related activities, such as banking or securities. In some countries, the banking regulator will have responsibility for insurance, and in others the insurance regulator is subordinated to a higher authority (such as the Ministry of the Treasury). All regulatory regimes permit the issuance of regulations to implement legislation, and in most countries specific regulations have been issued to govern various aspects of the transaction of insurance.
In addition, the insurance law and regulations implementing the insurance law will sometimes contain dispositions that govern the content of the reinsurance contract. In most cases, however, the content of the reinsurance contract is regulated through either the commercial code, the civil code, a combination of both or a special law that governs the contract of insurance.
The recognition of documents executed in foreign countries is generally contingent on the completion of an authentication process, that in many cases involves the consulate of the country in which the document is to be used and the Ministry of Foreign Relations or its equivalent in the country in which the document is to be used. This process can be simplified in those situations in which the generating country and the receiving country accept authentication by apostille.
Entry into the reinsurance market, where permitted, is normally accomplished by one of three models: (1) The investor can establish a local insurance or reinsurance company, which in turn can accept risk and cede risk to the local and international markets; (2) a foreign reinsurance company, where permitted, may establish a representative office in that country, or (3) a foreign reinsurance company may accept reinsurance from abroad, after being approved or qualified to do so by local regulatory authorities. In some countries, the cross-border model is not an option, and in other countries the cross-border model is not specifically regulated. In a small number of countries, the transaction of reinsurance is reserved to a monopoly, making none of these models applicable.
Establishment of an insurance or reinsurance company will vary according to the requirements of the specific country. In some countries, a branch office of a foreign insurance or reinsurance company, after being duly qualified and satisfying local capital requirements, will be able to operate along side and compete with stock companies authorized to transact insurance or reinsurance in the jurisdiction. In other countries it is required that the legal entity engaged in the transaction of insurance or reinsurance be a stock company. Some countries will also require that a company authorized to reinsure does not operate in the direct insurance market and vice versa. With respect to establishment, an insurer or reinsurer can expect to encounter regulatory principles similar to those which they would find in the country of origin. The local laws and regulations will normally impose capital requirements, look to the character and experience of the entity wishing to transact insurance or reinsurance in that market, and supervise the company with respect to its solvency and the type and quality of insurance products and reinsurance products that are offered in the local market.
The representative office
For those countries that permit the establishment of a representative office of a foreign reinsurer, normally the office would be established and operated either by a natural person or local stock company.
The functions of a representative office in a particular country will normally be limited. Generally, the representative office can only contact potential cedants within the jurisdiction and assist generally with administrative problems that might arise in the context of an established reinsurance relationship. Normally the representative office does not have authority to bind the home office to reinsurance coverage. Nor will the representative office normally accept reinsurance premiums or pay claims on behalf of the home office. It is important to examine carefully the regulations applicable in the subject country in order to determine the types of activities permitted for a representative office in that country.
Many Latin American countries permit the acceptance of reinsurance by foreign reinsurers that do not maintain establishments within the country. Often, but not always, the foreign reinsurer has met certain requirements imposed by national law as a condition of accepting reinsurance from the national market. Many countries require that the foreign reinsurer be entered into a registry of foreign reinsurers maintained by the local regulator.
Entry in the registry will only be done after the foreign reinsurer has satisfied the requirements imposed by local law and regulation. The requirements for registration will vary from country to country. In many cases it is required that a foreign reinsurer appoints a local representative or attorney. In almost all cases, information with respect to the financial condition of the reinsurer is required, and many countries today require evidence of the reinsurer's ratings granted by internationally recognized rating agencies such as A.M.Best Company and Standard & Poor's. In some countries, a high rating will either exempt the reinsurer from registration or permit an expedited registration. Some countries permit the foreign reinsurer to request registration directly, while others require a local insurer to request registration on behalf of the foreign reinsurer.
The form in which the required information must be presented will vary from country to country. In some cases, all information and documents generated in a foreign country must be legalized or authenticated through counsellor or apostille process, and translated into the local language. Translation in some cases can be by a private person willing to attest to the accuracy of the translation; in other situations the translation must be done by a local certified or judicial translator. Registration as a foreign reinsurer is often the quickest and most economical means for a reinsurer to enter the Latin American market, assuming that the financial strength and ratings of the company justify registration.
The effects of registration with respect to the activities authorized will vary from country to country. It is important, therefore, to understand what in effect are the terms and conditions under which each country will permit a registered foreign reinsurer to accept reinsurance from its national market.
The transaction of reinsurance
The reinsurance contract
It is customary, although not always required, that the law of the ceding company will be the law applicable to the reinsurance transaction. As noted earlier, all Latin American countries adhere to the civilian system of law. Consequently, requirements with respect to the formation of the contract in the jurisdiction in which the contract will be executed, as well as public policy provisions contained in the insurance law, the Code of Commerce, the Civil Code and other laws, must be taken into account in the drafting of the reinsurance contract. Due to the relatively esoteric nature of reinsurance in the legal regimes of most of the countries of Latin America, often the drafter is faced with the situation in which no specific regulation applies to the content of the reinsurance contract or in which the provisions governing the contract of insurance are also made applicable to the reinsurance contract, which in some situations can produce anomalies in intended results. Also, the insurance law and related regulations may also impose requirements with respect to the content of the contract. Special attention should also be paid to the possible tax and exchange regulations that might affect reinsurance transaction.
The reinsurance intermediary
The foreign reinsurance intermediary also has two modalities available for operating in the Latin American reinsurance market. In many countries the foreign reinsurance intermediary can place reinsurance from and to the local market after successfully completing the registration procedure. The registration procedure is similar to that used for foreign reinsurers, where this procedure exists. In some situations, the intermediary is required to set up a local company and operate in the country through that company. Also, in some cases reinsurance can be placed through a reinsurance broker licensed in the local jurisdiction.Local law also often imposes requirements on the activities that the broker can undertake.
Historically, Latin American countries have had antipathy toward the use of arbitration to resolve disputes. This antipathy, coupled with formal requirements, i.e., the need for the arbitration clause to be contained in a notarized document or the possibility of enforceable agreement to arbitrate only after a dispute has arisen, has made arbitration a cumbersome and often ineffective method for the resolution of disputes. In recent years, however, many countries in Latin America have enacted arbitration legislation that has greatly simplified the procedure for conducting an arbitration, granted flexibility to the parties with respect to the selection of rules and institutions for the conduct of arbitration, and facilitated the recognition and enforcement of foreign arbitral awards. In addition, most of the countries in Latin America have now ratified either the Inter-American Convention on International Commercial Arbitration or the United Nations Convention on the Recognition and Enforcement of Arbitral Awards.
While the institution of more modern arbitration laws and the acceptance of the standard international conventions on the recognition and enforcement of foreign arbitral awards have gone far to improve the viability of arbitration as a means for resolving disputes in the region, it should be noted that in many countries special requirements for the use of arbitration in the field of reinsurance are imposed. In other countries, special options and facilities are available in the case of reinsurance arbitrations. For example, the regulator may be available to either hear and resolve disputes or to appoint arbitrators.
Notwithstanding the trend towards the promotion of the use of arbitration to resolve disputes, there are still significant differences among the different countries in Latin America with respect to the formalities for entering into agreements to arbitrate, the conduct of the arbitration, and the procedures available for recognition and enforcement of foreign arbitral awards. Consequently, care should be taken to ensure that the use of arbitration in a particular contract or treaty will in fact be viable, and the arbitration will bring about the reasonable expectations of the parties with respect to resolution of disputes arising out of the agreement.
Trends and conclusions
Latin America is a region of many contrasts and much variety, making generalization difficult. Still, it is clear that like the insurance sector of which reinsurance forms a part, the regulation of reinsurance in Latin America is entering a new era. Markets once dominated by monopolies are now open to national and foreign competition, and existing monopoly jurisdictions such as Brazil and Costa Rica are under increasing pressure to permit more competitive conditions. The movement in Latin America to privatize both the pension and health components of social security is also creating new opportunities for both insurers and reinsurers. Companies with solid financial backing and experience in the field should continue to encounter a relatively open market, but attention should always be paid to the unique characteristics of each jurisdiction.
John H. Rooney, Jr. is a partner with Rice Fowler in Coral Gables, Florida.