A Decade After Opening the Insurance Market to Competition

By Neftalí Garro Zúñiga [1]

August, 2018

It is necessary to go back to September 1999, during the Rodríguez Echeverría administration and as part of the “National Concertation Forum”. The convenience and necessity of de-monopolizing the insurance market in order to open it up to private competition were discussed.

For  promoters, the opening of the insurance market in Costa Rica would improve the quality and supply of insurance coverage, provide better price formation mechanisms through open competition, give adequate protections for consumers (through an insurance superintendence with functions, regulations, and supervision), and assist the promotion of the economy as a whole through the development of insurers as key institutional investors.

On the other hand, some critics of economic freedom and the opening of markets pointed out that with the insurance market, what would happen is that the National Insurance Institute (INS) would go bankrupt, firefighters would be underfinanced, and “foreign companies” would come to compete unfairly without establishing or investing in the country

Fortunately, on the occasion of the tenth anniversary of the promulgation of the Law Regulating the Insurance Market (Law 8653 of August 7, 2010), we can affirm that the predictions of those who promoted the opening were fulfilled and dire predictions of opponents of the law did not happen.

For political reasons, the opening of the insurance market had to await the approval of the Free Trade Agreement between the Dominican Republic, Central America and the United States (known by its acronym in English as CAFTA-DR) through the famous referendum on October 7, 2007.

As a result, today, there are more than 700 different types of insurance products registered before the General Superintendence of Insurance (SUGESE). When the market opened, INS offered around 160 products. Likewise, the quality of the conditions and the diversity of coverage, plans, options and more, is now much greater.

As for the mechanisms for price formation, the natural and obvious dynamics of competition generated a substantial reduction in the prices of practically all insurance, to the point that at some time a few years ago, automobile insurance, for example, was found to be at 50% price levels of those of the monopoly era.

As evidence of the aggressiveness of competition,  the INSwas fined some years ago for selling insurance below cost which the Commission to Promote Competition (COPROCOM) qualified as a monopolistic practice.

Regarding the protection of consumers, it is sufficient to point out that today there is a Law Regulating the Insurance Contract (Law 8956) with a substantial advantages in favor of the consumer, as well as instances of attention to complaints and claims that did not exist before SUGESE and the insurance consumer care offices were created.

In terms of supervision and solvency, SUGESE has first-rate personnel, professional, committed, trained and with an excellent disposition to serve and supervise consumer affairs. Although we can sometimes disagree at a technical level with certain regulatory criteria, it is fair to acknowledge that the authorities of the Central Bank, CONASSIF and SUGESE have been on track for the first 10 years of the opening.

Consequently, today the country has companies of Costa Rican and foreign investment with solid capital,  support of first level reinsurers and good risk ratings under a framework of first world regulation.

Finally, we also see how the insurance industry developed, both from its inception as a state operator via INS as well as through the 12 private companies in the insurance segment and the many companies in other market segments, such as insurance agencies and insurance brokers.

Presently, thirteen insurance companies operate in Costa Rica, and there are 33 insurance brokerage companies in charge of advising clients on the decision to purchase insurance from the insurer that best suits their interests.

In addition, these companies employ 574 insurance brokers. Moreover, there are more than 2,200 insurance agents (a figure that doubles the number that existed at the time of the monopoly). There are more than 80 mass-market insurance distributors in operation non-traditional sales channels that, with the opening, emerged in order to bring more insurance to the population.

The insurance market went from less than US$700 million of premiums to more than US$1,200, becoming the most dynamic sector of the economy during the past ten years with sustained double-digit growth rates.

Although INS obviously lost market share by losing the monopoly, nevertheless it has seen its revenues in real terms grow consistently, precisely driven by competition.

But not everything is rosy. Even though we have advanced a lot, we can continue to improve in terms of education and consumer culture.

There are also some regulatory barriers on which the country must work to facilitate the placement of insurance. For example, we should simplify and rationalize regulations on issues such as corporate governance (especially for the insurance intermediary sector) and money laundering, to focus efforts on those means that truly reduce the risk of money laundering in insurance and not on procedures that were designed for other industries such as banks.

We must also increase the State’s risk protection by purchasing insurance in competitive terms, not just from the INS. The law allows it but, although there are already incursions, private insurance companies have been hesitant in providing coverage of State risks.

Undoubtedly, the great winner of the opening of the insurance market to competition has been the country and the Costa Rican consumer, which creates a strong precedent for facing the challenge of opening other markets (energy, hydrocarbons, etc.) and thus continue to boost our economy.

[1] Lawyer. Partner of the BLP law firm. Master’s Degree in Insurance Law from the University of Connecticut, USA. Professor of Insurance Law, University of Costa Rica. President of the Costa Rican Association of Insurance and Surety Law(ACODES).