Wednesday, February 15, 2017

Reserving Claims in Latin America

Determining reserve amounts can be a daunting task. The process can be affected by various obstructing factors.  Here are a few items that may affect the determination and posting of reserves for Latin American losses. 
1.  Hitting a Moving Target – the Market Ups and Downs
High inflation will distort market prices for goods and services thereby making it difficult to establish reserves. Once the reserve is posted, inflation will cause it to devalue.
Imported goods or those that rely on foreign components will also be affected by currency devaluations. The US Dollar exchange rate can be such a strong monetary reference that fluctuations can affect prices generally.
In response to this problem, insurers may employ case review procedures, reserve in a strong foreign currency, utilize special reference currencies (such as the “Unidad de Fomento” in Chile, or the “Unidad Tributaria” in Venezuela), or implement “accounting-generated” increases of all reserves pending at the end of the month, for example.
2.  Local Regulations
Regulations can provide mandatory guidelines for reserves, such as requiring the written estimation of the adjuster or of the attorney handling the case as support for the reserve amount. Also, regulations can require that the reserve be calculated on the basis of recent market or company history.
Sometimes it is possible to provide creative solutions to problems generated by regulations. In Argentina, for example, to avoid onerous reserving requirements applicable to cases in mediation, many local insurers invite plaintiff counsel to stake their claim and settle under an informal “fast track” arrangement instead.
3. Other Issues
Access to information is key to establishing an accurate reserve. This is why the performance of vendors who investigate, adjust or otherwise help determine case value is so important.
There can also be additional obstacles in obtaining information, such as the involvement of public authorities.  A fire investigation in most Latin American jurisdictions is conducted by the police and a criminal judge, which can delay access to the loss site anywhere from a few days, several weeks or even months.
The unavailability of public records is another hurdle that affects reserve determinations. 
In summary, we recommend the following: 
  • Establish a clear policy and procedure for posting reserves, and a specific methodology to keep reserves updated.
  • Provide internal training for claims handlers. Reserving involves internal decisions made by company officers, and it should not be left to outside vendors. 
  • Require that vendors provide accurate and complete information in a timely fashion, so that you can make an informed decision on the reserve. 
  • Know the rules and regulations relating to reserves in the specific jurisdiction, which may well play a role in your reserving strategy.
  • Even if all desirable information is not available, company guidelines generally favor posting a reserve reflecting the information at hand. Do not delay doing this.
Posted by Daniel Baron*

*Not licensed to practice law in Florida.