The financial regulatory framework in Colombia enjoys a solid reputation, both domestically and among international ratings agencies. In recent years, the insurance sector’s growth has been accompanied by the implementation of improved capital and solvency provisions, the strengthening of the industry’s leverage ratios and efforts to meet international standards. Requirements for risk management and internal control systems have also improved, while transparency and disclosure of financial information has traditionally been strong.
SYSTEMIC REFORMS: Newly introduced laws are set to enhance consumer protection, which will further improve consumer confidence. The financial regulator, the Colombian Financial Superintendent ( Superintendencia Financiera de Colombia, SFC), is also working on a slate of reforms with the goal of developing sector activity while simultaneously guaranteeing the strength and solvency of insurers and the protection of the insured. Starting in 2013, new policies have been introduced that address structural issues, such as the growing mismatch between assets and liabilities, better coverage of natural disasters and greater competition in the offering of multi-country policies.
One of the most far-reaching reforms is the adjustment of technical reserves. The growth of the technical deficit in recent years, and consequent increasing reliance on investment returns, has raised concerns about the industry’s solvency ratios. As a result, the regulator is looking to implement a two-pronged reform.
On the one hand, it aims to update the industry’s accounting standards, which are based on rules and regulations defined more than 50 years ago. The update is set to act as an interim step before the implementation of International Financial Reporting Standards, planned for 2016. A second amendment concerns the coverage of premium insufficiency in underwriters’ reserves. High competition over the past five years has led to a reduction in premiums for some business lines to levels below the calculated risk, in particular for automotive policies. Instead of intervening by establishing minimum rates, the SFC is opting for the definition of ample reserves to back these deficits.
Under the new regime, provisions will be stipulated per financial component, including assets, premiums and claims. This will allow underwriters to more effectively support their financial risks than the current regulations, which call for one flat reserve ratio.
IMPLEMENTATION: A final study is currently under way, and this will be the last step before proposing the reforms to Congress. At the time of writing, the regulator expected political approval before the end of the year, after which a transition period of six to 12 months will be applied before final implementation.
Anticipating its impact, María José Vargas Mancera, the director of economic studies at the Federation of Colombian Insurers (Federación de Aseguradores Colombianos, Fasecolda), said the measures are likely to have a substantial impact on underwriters specialised in automotive policies and surety bonds , such as Mundial Seguros, Seguros del Estado and Confianza. The impact will be lower for more diversified players, such as Grupo SURA and Bolívar, where these segments constitute much smaller proportions of the balance sheet.
Another amendment is being proposed regarding the calculation of reserves for natural disaster policies, in particular for earthquakes. Under the current rules, a flat provision rate of 15% is counted for every policy; however, this is set to be changed to a line-based calculation where the specifics of the risk and asset are taken into consideration. It is widely expected that the new calculative approach will result in lower provision needs than the current model. After finalisation of the new guidelines, underwriters will have a two-year transition period to allow for adequate implementation.
COMPETITION: The ongoing regulatory push coincides with the opening of the sector to underwriters that were previously forbidden from taking part in the market. As of July 2013, a law drafted in 2008 came into effect, allowing foreign companies to offer policies for international and spatial transportation of people, goods and services. The law will also allow Colombians to shop for insurance policies abroad, with the exception of social security and mandatory policies. The implementation of the law follows the gradual liberalisation of the wider Colombian economy, in particular through a free trade agreement with the US, which came into effect in 2012.
While the measure is expected to diversify the product offerings for transportation, the existing presence of a large number of policies and foreign underwriters will soften the law’s impact on the market structure. Moreover, possible advantages in sales taxes will be offset by an equalisation fee paid to the Colombian tax authorities. Nevertheless, the measure is considered an improvement for consumers, who will be able to more easily assess the cost and quality of Colombian offerings and, consequently, push domestic underwriters to deliver more cost-competitive and transparent options. The Ministry of Finance is also set to establish guidelines for providing education about buying policies abroad, promoted through the SFC and Fasecolda.
Thus far, local insurance firms have welcomed the measures, which, despite competitive pressures, are set to improve the level of financial education and, therefore, the number of clients. “If we want the insurance market in Colombia to be ruled by free market principles, we need to emphasise undertaking preliminary work on educating people,” David Bojanini, president of Grupo SURA, told OBG (see interview).
HEALTH REFORM: Efforts to reform the health system are also under way. In particular, the government hopes to reduce the number of insurance policies covered by public funds. Under the current scheme, subscribers fall under a subsidised or a contributory scheme, both operated by private health service providers ( Entidades Prestadora de Salud, EPS) that are overseen by the Ministry of Health. More than half of the population benefits from the subsidised scheme, with voluntary contributions limited to an estimated total of 1.5m subscribers. The government is eager to encourage voluntary contributors in a bid to alleviate the pressure on the public coffers. At present, more than 1000 EPSs are operating under diverse fund allocation principles.
Through standardisation and consolidation, the government aims to increase control of the allocations and improve the appeal for voluntary subscribers.
Despite the plan being in its the early stages, Congress has expressed its intention to pass the bill in 2013.
REGULATORY REFORM: In addition to these structural changes, the SFC is working on amendments to the regulatory framework. One such measure concerns defining the standards of intermediaries. While brokers fall under the regulations and supervision of the regulator, sales agents have thus far been subject to the guidelines of individual underwriters. Given their high number and dominant role in selling and collecting premiums, the regulator, in consultation with Fasecolda, is looking to establish minimum financial education requirements in a bid to guarantee they give sound and impartial advice to consumers.
One plan on the table is to incorporate all agents into a centralised public registry which consumers can consult to compare products, fees and service levels. Fasecolda is also working on the organisation of workshops and information rounds to help increase the level of product knowledge. The registry is slated for implementation before the end of 2013.
Microinsurance is another area of focus. Despite strong growth in recent years, the existing regulatory framework does not distinguish between micro and conventional offerings. This hinders the rapid adoption of products, as underwriters are faced with high administration costs. Regulatory efforts are aimed at recognising microinsurance, as well as creating incentives to promote segment growth (see analysis).
The regulator’s ambitious agenda will require underwriters to closely follow and react to legislative updates in a bid to stay abreast of structural changes, as well as of the added pressures from new competitors and better-informed clients. As long as private sector consultation is sustained and adequate transition periods are provided, the sector can look forward to continued growth in a more optimally administered environment.