Monday, July 24, 2017

Bienvenidos a Colombia: A Friendly Market for Foreign Reinsurers

By comparison to other jurisdictions, international reinsurers have easy access to the Colombian market. While the access to underwriting risks is not as limiting, it is not boundless.  Colombia has delineated requirements for reinsurers, which depend on the nature of the business entity.

In Colombia, foreign companies need to be added to the Registry of Colombian Foreign Reinsurers and Reinsurance Brokers (the Spanish acronym is “REACOEX”) in order to operate in the country. The registration process commences with filing a petition with the local regulatory authority called the Colombian Finance Superintendent (SFC).  The SFC will conduct due diligence and confirm compliance with the regulations, which include a pre-established minimum financial rating from one of several accredited institutions (Standard & Poor’s: BBB-, A.M. Best: B+, Fitch: BBB-, Moody’s: Baa3). Once the reinsurer is registered, there is an ongoing annual responsibility to update its rating. 

Reinsurers may choose from any of the following operational options:

  • Incorporate a reinsurance company in Colombia: With the approval of the SFC, reinsurers may create a stock company in Colombia, subject to local regulations and supervision. To create this entity, the company must have a minimum of 5 shareholders with no singular ownership to exceed 95% of the company stock and a minimum capital requirement of USD12M. 
  • Open a branch of a foreign reinsurer: A foreign reinsurer can open a branch office in Colombia, subject to the same regulations and supervision as reinsurance companies. The difference is that the latter has the added burden of complying with the local corporate law formalities.  Conversely, a branch office does not have to have a board of directors, a Corporate Governance Code or an internal control system under Colombian law because it would naturally follow the internal corporate formalities of its main headquarters.
  • Create a representative office: Foreign reinsurers can open a local office to conduct its commercial/administrative activities. This is the most restrictive in nature.  Accordingly, all binding decisions must be made abroad and the local personnel are only meant to undertake commercial/administrative activities and serve as intermediaries between the insured and the insurance company abroad (much like a local sales office).

In the current atmosphere, foreign insurers seem to prefer opening a representative office as evidenced by the lack of incorporated reinsurers or branch offices.  

In addition to the ease of corporate structuring, Colombia is a reinsurer-friendly market because reinsurance contracts are freely-negotiated contracts. While the standard insurance contract tends to be interpreted in the light most favourable to the non-drafting party, the nature of a free-negotiated reinsurance agreement allows for a more equitable interpretation -without having to tilt the analysis in favour of either party- in the event of a dispute. 

While the region is commonly thought of and treated in uniformity as it relates to insurance and reinsurance discussions, the practical realities of its geopolitical boundaries become prevalent when looking at the ease with which foreign reinsurers may operate in individual Latin American countries.  These differences have been noted (in an effort to attract a more robust market) causing local legislative/regulatory changes for the better. For civil-law countries reliant on statutory changes, this is a slow process.  However, this change – much like other things in this practice – may be attributable to a better understanding of the reinsurance business.  Again, demonstrating that having the right personnel with the right knowledge leading the way is key to the success of reinsurers, insurers, and the growth of the Latin American insurance market.   

*Not licensed to practice law in Florida