Daniel Hardy and Miguel Palomino The policy sector remains small in most of Central America. The scarcity of indemnity affects welfare directly, because households and companies must bear most risk themselves, leading to undesired excitability of intertemporal consumption. furthermore, lack of policy may reduce the handiness of financing or increase its costs, because lenders are discouraged when they must bear both the economic risks associated with a project to be financed and besides insurable risks such as those for exercise accidents or place price. In addition, the restrict assets of insurance companies implies that they can not be major players in domestic fiscal markets and in particular in securities markets, so these markets are thinner than they would differently be. Hence, measures to promote the indemnity industry could yield multiple benefits if well targeted. many of these measures, such as those related to the modernization of the regulative model, can be undertaken by individual countries. In some cases, joint regional initiatives or coordination may make the measures more effective, for example, by exploiting economies of scale or telescope in the provision of information or diversify risks. Despite their differences, the countries covered in this study—Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama—are sufficiently alike that cross-country comparisons are meaningful, and that worthwhile joint action in certain areas might be identifiable. These considerations motivate the corporeal of this chapter. however, ascribable report must be taken of the limits of a regional study. information is sometimes not available for all countries, and data are often not fully comparable. 55 More basically, the countries differ in level of exploitation, the structure of their economies, and early aspects of the framework within which insurance markets operate. Panama and Costa Rica are well more comfortable than the other countries, and have generally displayed greater economic and political constancy in holocene decades. Costa Rica is unique in having a state owned monopoly provider of policy. Guatemala, El Salvador, Honduras, and Nicaragua are more like to one another, although Nicaragua is inactive transitioning from a retentive time period of state monopoly in the sector, which extended until 1996.

The prevalence of non-term life indemnity, that is, life sentence insurance with an important savings chemical element, depends on whether or not early savings vehicles are available and whether or not public or private pension schemes are in operation. Given the multitude of fiscal, distributional, and demographic factors affecting non-term life policy ; their heterogeneity across the region ; and the fact that important policy decisions are presently under argue in some countries, this study concentrates on non–life insurance. The next section describes the structure of the policy markets of these countries, the handiness of indemnity products, and the holocene performance of insurance companies. The subsequent section looks at the legal, regulative, and supervisory framework. The final examination department addresses a numeral of crosscountry issues and recommendations .

Structure and Performance

Insurance Penetration

The market bulk for policy products in most cardinal american countries is meek in absolute terms and relative to those countries ’ GDP ( table 3.1. and Figures 3.1 and 3.2 ). 56 however, the horizontal surface of insurance penetration as measured by the ratio of premium income to GDP is approximately in telephone line with the relationships that are seen around the world : demand for insurance is powerfully correlated with average income, and with the bearing of a substantial center class, that is, with a relatively even distribution of wealth. Central America contains some of the poorest countries in the Western Hemisphere, and is characterized by odd distribution of wealth, so one would expected relatively low demand for policy. For many central american english countries, their past history of macroeconomic imbalance and at times hard political conflict may have hindered the provide of, and demand for, insurance products, deoxyadenosine monophosphate well as the universe of an policy culture. furthermore, most of Central America besides faces large risks, for exercise, of natural catastrophes, that are not diversifiable domestically, and therefore expensive to insure against. 57 mesa 3.1 Financial Situation of the Insurance Sectorarticle image Sources : National authorities ; and IMF staff estimates .
table 3.1 Financial Situation of the Insurance Sector

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 2003 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
(In millions of U.S. dollars)
Gross premiums 314 318 230 350 274 344 157 185 50 57 368 393
of which: non–life insurance premiums 277 290 182 303 233 295 125 151 50 254 267
Net retained premiums 235 96 140 129 163 69 65 34 33 258 251
Gross damages payments 171 122 133 100 89 71 64 21 22 191 138
Profits (after tax) 17 27 11 21 6 21 3 2 30
Total assets 776 249 347 228 306 203 263 67 77 689 704
Investments 159 227 141 201 85 162 38 40 423 479
Technical reserves 422 91 123 155 134 101 131 39 48 261 305
Capital and general reserves 208 78 129 56 90 41 83 17 15 0 261
Paid-in equity 54 70 24 32 40 9 10
(In percent of GDP)
Gross premiums 2.0 1.9 1.8 2.3 1.4 1.4 2.7 2.7 1.3 1.4 3.2 3.1
of which: non–life insurance premiums 1.8 1.7 1.4 2.0 1.2 1.2 2.1 2.2 1.3 2.2 2.1
Net retained premiums 1.5 0.7 0.9 0.7 0.7 1.2 1.0 0.9 0.8 2.2 1.9
Gross damages payments 1.1 0.9 0.9 0.5 0.4 1.2 0.9 0.5 0.6 1.6 1.1
Profits (after tax) 0.1 0.2 0.1 0.1 0.1 0.3 0.1 0.1 0.2
Total assets 5.0 1.9 2.3 1.2 1.3 3.4 3.9 00 1.9 5.9 5.5
Investments 1.2 1.5 0.7 0.8 1.4 2.4 1.0 1.0 3.6 3.7
Technical reserves 2.7 0.7 0.8 0.8 0.5 1.7 1.9 1.0 1.2 2.2 2.4
Capital and general reserves 1.3 0.6 0.9 0.3 0.4 0.7 1.2 0.4 0.4 0.0 2.0
Paid-in equity 0.4 0.5 0.1 0.1 0.6 0.2 0.2
Assets/M2 (percent) 13.7 4.1 5.6 4.2 3.8 7.1 7.0 4.5 4.6 8.0 7.2

Sources : National authorities ; and IMF staff estimates. table 3.1 Financial Situation of the Insurance Sector

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 2003 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
(In millions of U.S. dollars)
Gross premiums 314 318 230 350 274 344 157 185 50 57 368 393
of which: non–life insurance premiums 277 290 182 303 233 295 125 151 50 254 267
Net retained premiums 235 96 140 129 163 69 65 34 33 258 251
Gross damages payments 171 122 133 100 89 71 64 21 22 191 138
Profits (after tax) 17 27 11 21 6 21 3 2 30
Total assets 776 249 347 228 306 203 263 67 77 689 704
Investments 159 227 141 201 85 162 38 40 423 479
Technical reserves 422 91 123 155 134 101 131 39 48 261 305
Capital and general reserves 208 78 129 56 90 41 83 17 15 0 261
Paid-in equity 54 70 24 32 40 9 10
(In percent of GDP)
Gross premiums 2.0 1.9 1.8 2.3 1.4 1.4 2.7 2.7 1.3 1.4 3.2 3.1
of which: non–life insurance premiums 1.8 1.7 1.4 2.0 1.2 1.2 2.1 2.2 1.3 2.2 2.1
Net retained premiums 1.5 0.7 0.9 0.7 0.7 1.2 1.0 0.9 0.8 2.2 1.9
Gross damages payments 1.1 0.9 0.9 0.5 0.4 1.2 0.9 0.5 0.6 1.6 1.1
Profits (after tax) 0.1 0.2 0.1 0.1 0.1 0.3 0.1 0.1 0.2
Total assets 5.0 1.9 2.3 1.2 1.3 3.4 3.9 00 1.9 5.9 5.5
Investments 1.2 1.5 0.7 0.8 1.4 2.4 1.0 1.0 3.6 3.7
Technical reserves 2.7 0.7 0.8 0.8 0.5 1.7 1.9 1.0 1.2 2.2 2.4
Capital and general reserves 1.3 0.6 0.9 0.3 0.4 0.7 1.2 0.4 0.4 0.0 2.0
Paid-in equity 0.4 0.5 0.1 0.1 0.6 0.2 0.2
Assets/M2 (percent) 13.7 4.1 5.6 4.2 3.8 7.1 7.0 4.5 4.6 8.0 7.2

Sources : National authorities ; and IMF staff estimates .Figure 3.1
Figure 3.1Figure 3.1 Relative Insurance Indicators, 2003, by Indicator Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

Figure 3.1Figure 3.1 Relative Insurance Indicators, 2003, by Indicator Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

Figure 3.1 Relative Insurance Indicators, 2003, by Indicator Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

Figure 3.2.
Figure 3.2.Figure 3.2. Normalized Insurance Indicators, 2003, by Country Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

Figure 3.2.Figure 3.2. Normalized Insurance Indicators, 2003, by Country Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

Figure 3.2. Normalized Insurance Indicators, 2003, by Country Sources : National authorities ; and IMF staff calculations .

  • Download Figure
  • Download figure as PowerPoint slide

The policy sector is little besides relative to banks and the market for government debt. Insurance company assets are just a belittled divide of broad money, which can be taken as a metric unit for the size of the trust arrangement ( postpone 3.2 ). In addition, many policy companies tend to be relatively little affiliates of banks. Hence, indemnity companies can not play a major character in counter-balancing banks in the market for deposits or in the market for securities. consequently, policy companies are not broadly of systemic importance. postpone 3.2 Insurance Sector Indicators ( In percentage )article image Sources : National authorities ; and IMF staff estimates
mesa 3.2 Insurance Sector Indicators ( In percentage )

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 2003 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
Non–life premiums/total premiums 88.2 91.2 79.4 86.5 85.0 85.6 79.3 82.0 87.8 69.1 67.8
Automobile/total non–life premiums 25.9 18.3 43.3 35.6 23.7 22.2 29.9 36.4 26.4
Property/total non–life premiums 69.1 22.2 29.8 19.9 27.8 21.4 27.8 25.7 13.8 17.6
Health/total non–life premiums 13.8 1 1.6 13.6 15.6 13.5 17.1 10.9 21.2 22.2
Retained premiums/gross premiums 74.7 41.8 39.9 47.0 47.3 44.0 35.0 67.7 56.9 70.0 63.8
Damages payments/premiums 54.5 53.2 37.9 36.6 25.8 45.3 34.6 41.8 38.6 51.9 35.2
Damages payments/reserves 40.5 134.0 107.4 64.8 66.2 70.5 48.6 53.6 46.0 73.2 45.3
Reserves/retained premiums 179.9 94.8 88.4 120.1 82.5 146.1 203.3 1 15.0 147.6 101.3 121.7
1nvestments/reserves 174.5 183.9 91.1 150.0 84.0 123.6 98.6 83.6 162.0 156.9
Share of investments
Claims on government 10.1 13.5 43.1 38.1 22.3
Claims on banks 36.8 37.6 9.9 22.8 40.0 47.8 32.7
Total capital/total assets 26.8 31.5 37.2 24.7 29.5 20.4 31.5 25.3 19.3 37.0
Total capital/reserves 49.2 85.9 104.8 36.4 67.3 41.0 63.0 43.7 30.9 85.4
Equity/total capital 68.9 53.9 42.9 34.9 48.4 53.7 66.5
Profits/retained premiums 1.8 1.9 0.9 1.3 0.9 3.2 1.0 0.7 1.2
Profits/assets 6.9 7.7 4.9 6.9 3.2 7.9 5.0 2.8 4.3
Profits/capital 21.8 20.6 19.9 23.4 15.6 24.9 19.8 14.3 1 1.5
Profits/equity 31.7 38.1 46.5 67.1 51.6 36.8 21.5
Annual growth rates, 2000–03
Gross premiums 0.4 15.0 7.9 5.5 4.7 2.2
Gross non–life premiums 1.5 18.4 8.2 6.6 1.6

Sources : National authorities ; and IMF staff estimates table 3.2 Insurance Sector Indicators ( In percentage )

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 2003 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
Non–life premiums/total premiums 88.2 91.2 79.4 86.5 85.0 85.6 79.3 82.0 87.8 69.1 67.8
Automobile/total non–life premiums 25.9 18.3 43.3 35.6 23.7 22.2 29.9 36.4 26.4
Property/total non–life premiums 69.1 22.2 29.8 19.9 27.8 21.4 27.8 25.7 13.8 17.6
Health/total non–life premiums 13.8 1 1.6 13.6 15.6 13.5 17.1 10.9 21.2 22.2
Retained premiums/gross premiums 74.7 41.8 39.9 47.0 47.3 44.0 35.0 67.7 56.9 70.0 63.8
Damages payments/premiums 54.5 53.2 37.9 36.6 25.8 45.3 34.6 41.8 38.6 51.9 35.2
Damages payments/reserves 40.5 134.0 107.4 64.8 66.2 70.5 48.6 53.6 46.0 73.2 45.3
Reserves/retained premiums 179.9 94.8 88.4 120.1 82.5 146.1 203.3 1 15.0 147.6 101.3 121.7
1nvestments/reserves 174.5 183.9 91.1 150.0 84.0 123.6 98.6 83.6 162.0 156.9
Share of investments
Claims on government 10.1 13.5 43.1 38.1 22.3
Claims on banks 36.8 37.6 9.9 22.8 40.0 47.8 32.7
Total capital/total assets 26.8 31.5 37.2 24.7 29.5 20.4 31.5 25.3 19.3 37.0
Total capital/reserves 49.2 85.9 104.8 36.4 67.3 41.0 63.0 43.7 30.9 85.4
Equity/total capital 68.9 53.9 42.9 34.9 48.4 53.7 66.5
Profits/retained premiums 1.8 1.9 0.9 1.3 0.9 3.2 1.0 0.7 1.2
Profits/assets 6.9 7.7 4.9 6.9 3.2 7.9 5.0 2.8 4.3
Profits/capital 21.8 20.6 19.9 23.4 15.6 24.9 19.8 14.3 1 1.5
Profits/equity 31.7 38.1 46.5 67.1 51.6 36.8 21.5
Annual growth rates, 2000–03
Gross premiums 0.4 15.0 7.9 5.5 4.7 2.2
Gross non–life premiums 1.5 18.4 8.2 6.6 1.6

Sources : National authorities ; and IMF staff estimates The indemnity sector in the area has shown tendency growth in absolute terms in the by respective years, but rather less when measured by arrant premiums relative to GDP. however, emergence in policy services is sometimes undervalue by measuring the service in terms of premiums paid when there is a reduction in unit prices ; sum premiums may fall even if the risks of being insured are growing. As can be seen in board 3.3, the number of policies is generally increasing. table 3.3 Insurance Contracts1article image Sources : National authorities ; and IMF staff estimates 1Statistics cover the number of contracts great and the value of coverage. The number of guarantee parties may differ because parties hold more than one policy each, or because policies cover multiple parties .
postpone 3.3 Insurance Contracts1

Costa Rica El Salvador Guatemala Honduras Nicara Panama
2000 2003 2000 2003 2000 2003 2001 2003 2000 2003 2000 2003
(Number of policies)
Life 81,231 174,688 117,826 134,678 108,770 105,250
Health and accidents 5,842 106,026 57,496 58,1 18
Property 60,981 64,937 68,678 78,857 105,501
Automobile 123,605 129,095 104,175
(Value of coverage; in millions of U.S. dollars)
Life 8,082 41,195 1,495 4,314
Health and accidents 4,579 8,364 4,029 3,788
Property 1 1,666 13,129 11,370 15,564 2,716 4,157
Automobile 1,764 2,853 2,836 3,538 1,012 583

Sources : National authorities ; and IMF staff estimates 1Statistics cover the number of contracts outstanding and the measure of coverage. The numeral of cover parties may differ because parties hold more than one policy each, or because policies cover multiple parties. postpone 3.3 Insurance Contracts1

Costa Rica El Salvador Guatemala Honduras Nicara Panama
2000 2003 2000 2003 2000 2003 2001 2003 2000 2003 2000 2003
(Number of policies)
Life 81,231 174,688 117,826 134,678 108,770 105,250
Health and accidents 5,842 106,026 57,496 58,1 18
Property 60,981 64,937 68,678 78,857 105,501
Automobile 123,605 129,095 104,175
(Value of coverage; in millions of U.S. dollars)
Life 8,082 41,195 1,495 4,314
Health and accidents 4,579 8,364 4,029 3,788
Property 1 1,666 13,129 11,370 15,564 2,716 4,157
Automobile 1,764 2,853 2,836 3,538 1,012 583

Sources : National authorities ; and IMF staff estimates 1Statistics cover the count of contracts outstanding and the value of coverage. The number of insured parties may differ because parties hold more than one policy each, or because policies cover multiple parties. however, insurance penetration is still depleted not alone in terms of value, but besides in terms of the number of policies. In addition to low income levels, this is a mirror image of the uneven distribution of income, because most households and production units can not access insurance services. The available data on the number of policies—because one policy can comprise a boastfully number of end users—complicate comparisons, but market participants agree that low penetration is a characteristic of all regional markets. The poor are specially deprived of policy services throughout the region. The relatively high administrative costs of offering minor amounts of policy coverage to low-income households and to little firms, where hazard assessment, record keeping, and handling claims generate fixed costs, tends to make the services either prohibitively expensive or unprofitable. Hence, the expansion of insurance services to the bulk of the poor people population is basically an issue of developing a low-cost engineering for the production of the service ( Boxes 3.1 and Boxes 3.2 ). Past administrative control of policy premiums and the import of insurance practices and models from more develop countries likely hindered the development of policy schemes that would make the service accessible to lower-income groups .

Product Range

indemnity companies receive most of their non–life insurance premiums for coverage of automobile and early property risks ; property insurance typically covers wrong from earthquake, fire, deluge, early natural catastrophes, and similar risks. Health policy is normally the third most important category. 58 Life policy generates between one-tenth and one-third of sum premium income .Box 3.1. Mass Insurance Products To assure low costs, mass insurance product carriers rely on dim-witted and exchangeable policies that require little confirmation ( and are consequently cheap and easy to sell ), and besides on cheap collection arrangements. One of the ways in which this has been achieved in some countries in the region is through “ bancassurance. ” Bancassurance relies on the habit of bank ’ mho arm network as a sales platform and the bank ’ s established payments arrangement as a solicitation mechanism with low bare costs. Bancassurance has been quite successful in several countries in the area. In El Salvador, possibly the most successful nation in this regard, a large insurance company led the feat to sell multitude indemnity products through a bank with which it was affiliated. The first base program was one for traditional individual life policy policies ( which can be made more plainly than property indemnity policies ) : in the five years to 2004, close to 300,000 individual life policy policies were sold. Of these, some 120,000 were in universe at the goal of 2004, compared to 3,000 policies in universe before the program was launched. reportedly, the number of policies sold by this caller in the five-year period was more than the count of individual life indemnity policies sold in all of Central America in the previous 20 years. however, bank networks may not be wholly well suited to the distribution of batch indemnity products. Banks may offer cost advantages chiefly in collecting bias amounts from established clients, quite than more broadly. Alternative distribution network with low cost collection arrangements could be available to sell a merchandise whose crucial component is its simplicity. indeed, respective policy companies in the region are developing aggregate insurance products that need not be distributed via bank branches. One autonomous insurance company that had successfully developed a mass intersection reported technical difficulties in using banks as a collection mechanism ; it proved difficult, for example, to keep racetrack of payments from policyholders who were not depositors at the collecting savings bank. It appears that a major reason that multitude policy products are much sold through banks is that banks are frequently affiliated with indemnity companies. Bancassurance, a well as any mass policy distribution system, may raise regulative concerns regarding the appropriateness of the information and advice provided to end users. The absence of a qualify salesperson ( be it a agent or a train indemnity caller employee ) in a bank sales point may reduce the scope for inform choice by consumers. Yet the success of mass policy products depends on humble costs, and if more expensive conditions are imposed on the compass point of sale, they may efficaciously block the intersection. ( This issue has a latitude with the question of when to allow sale of over-the-counter medicines quite than prescription drugs. ) The question is whether the electric potential costs of “ mistaken ” choices by consumers are offset by the gains from making the service more stingily available to larger numeral of consumers. In any subject, regulations should consider new and future developments in order to determine the responsibilities and the oscilloscope for action of agents in activities related to insurance. compulsory policy coverage exists in some countries. This is the case of third-party indebtedness ( TPL ) car policy in Costa Rica and Nicaragua and, for commercial vehicles, in Panama. other coverage is sometimes besides compulsory ( for example, actor compensation indemnity in Costa Rica ). mandatary policy policies are the reference of significant premium income and versatile schemes, particularly car TPL, are being debated in some countries. however, policy requirements seem often to go unenforced. 59 In most countries, some type of coverage is available for a broad crop of risks. Larger firms and better off households reportedly can obtain most standard forms of indemnity at competitive rates. Insurers are able to tailor contracts to especial needs when the customer is will to pay a sufficiently high premium. however, sum premium income from such business is humble. From the available statistics, it appears that policy of plant and equipment as opposed to buildings is still very limited. This reflects the weak industrial nucleotide of the region .Box 3.2. Product Bundling In accession to bancassurance ( banks and indemnity companies joining together for the mass commercialize of unbundled indemnity products ), banks throughout the area besides sell bundled fiscal and indemnity products. This is frequently the casing of insurance tied to mortgage loans or car credits. The sale of bunch policy products through banks may generate concerns over consumer security, as it may lead to confusion on the part of the public with gaze to both product price and which entity is responsible for the policy liabilities. This is particularly debatable in the sale of indemnity products tied to deposit products offered by consort firms, which creates stronger incentives for uncompetitive practices that are difficult to regulate. however, these kinds of uncompetitive practices broadly are caused by a preexistent lack of rival in lend services, rather than on the oblation of policy services themselves. Informing the public and requiring the unbundling of the prices for the different services offered would likely improve consumer choices. This appears to be another area for regulative improvement in some countries, in addition to the issues mentioned in Box 3.1. however, experience in the region suggests that it is not always easily to exploit “ prisoner clients ” : one insurance ship’s company reported that an try to integrate its customer basis and that of an consort bank so as to sell both products to all clients was abandoned because the prefer customers for each product lineage where quite different. Hence, attempting to force bunch products on them threatened to alienate the better clients of both product lines. Another exit that may be associated with intersection bundling and bancassurance is cross-subsidization between consort firms of a financial/business group. There appears to be evidence of this in some countries, with premiums for affiliated firms obviously being higher than those for nonaffiliated firms ( this may be motivated by tax arbitrage ). In one country, for exercise, an policy company ’ sulfur premiums for mortgage relate policies sold through an consort trust more than doubled when authorities determined that indemnity taxes were being avoided by setting artificially humble insurance premiums, which were compensated for by high ( tax-exempt ) indemnity sales commissions for the bank. however, the concern in these cases is not bancassurance itself but preferably the broader exit of adequate regulation of business/financial groups. Public sector institutions frequently take out indemnity for certain risks ( for example, affecting government cars ), but rarely for health coverage for government workers. In all countries, hearty public sector assets, such as roads and bridges, are not insured. Coupled with the miss of insurance of most of the secret sector capital stock, this exposes the state to significant macroeconomic risks from large-scale disasters, such as major hurricanes or earthquakes. The government ’ sulfur implicit liabilities regarding calamity relief and reconstruction in the case of far-flung destruction can besides have dangerous fiscal consequences. Crop policy and early forms of agricultural insurance are rare and in most cases have been newly introduced, despite the importance of the agrarian sector in the region, in particular in El Salvador, Guatemala, Honduras, and Nicaragua ( Box 3.3 ). This lack has several causes. First, snip indemnity is relatively building complex and expensive to administer ( tied in industrialized countries ) because ( 1 ) policies must be tailored to specific products and to such factors as projected weather and local anesthetic geographic conditions ; ( 2 ) high monitor costs result from such tailoring and from large vulnerability to moral luck ; 60 and ( 3 ) high loss rates are prevailing in the sector. These complications apply a fortiori in developing countries. Second, many farmers in the area are hapless and undercapitalized, so transaction costs are high proportional to potentially insured amounts. besides, agricultural hazard in undercapitalized countries tends to be higher because of the absence of agricultural infrastructure ( such as dams and irrigation networks ), which is largely aimed at reducing risks to agrarian output. ultimately, in small countries, premiums may have to be senior high school because it is unmanageable for companies to diverseness risk ( e.g., a drought may affect farming throughout the state ) .Box 3.3. Crop Insurance Initiatives Existing crop insurance schemes in about all cases are derived from insurance requirements tied to bank loans, with the loanword fund typically offered by department of state development banks. Hence, most crop insurance schemes are not wholly voluntary and appear to have some element of subsidy in the financing conditions, although no subsidy is provided directly to the indemnity premiums. In El Salvador, the crop insurance system promoted by the Banco Multisectoral de Inversiones ( BMI ), a state-owned deposit, resulted in the policy of 3,000 hectares of cotton in 2004, with premiums of 5 to 6 percentage of the lend amount. This appears low-cost in the context of barely and/or expensive agricultural credit rating, and the premiums appear approximately in line with the overall cost of subsidize crop indemnity in Mexico. The plan expects to increase coverage to 8,000 hectares of cotton in 2005, under similar conditions. Some farmers with early crops have begun to request the service directly, without being tied to a specific financing schema. The indemnity is calculated to cover the equivalent of 70 percentage of convention crop yields. approximately 75 percentage of the hazard is reinsured overseas. The program required extensive research and preparatory work by the insurance ship’s company, which won the opportunity to manage the program in a contest among local anesthetic insurers that was organized by the BMI. The program benefited from the experience in crop policy in other countries, including adept aid for the supervisory program for the approval of the fresh policy, and the BMI partially financed the external confer services needed for the preparation of the program. note, however, that the insurance covers only weather-related losses in craw yields and not losses related to pests or early causes. early private sector crop indemnity schemes are presently being pursued in most countries in the area, with varying degrees of success. The experience indeed far indicates that the service takes some meter to be amply developed on a sound basis and to be understood by farmers : A crop insurance program that was true rushed into operation two years ago in another state has had dangerous difficulties, with a substantial decrease in the amount of crop land covered and with losses for the policy caller that initiated the program. A total of private policy companies ( including at least one with extensive relate experience in a adjacent area ) appear to be planning to develop the product line .

Market Structure

Most insurance companies are locally owned, but subsidiaries of alien companies operate throughout the region with the exception of Costa Rica ( Table 3.4 ). The extraneous parents are typically located outside the region, in particular in the United States, but there besides exist a few local policy groups active in several countries. Foreign entrance is undertaken through subsidiaries rather than branches, with the latter forbid in respective countries. In all countries of the region, cross-border sell of indemnity is prohibited under the insurance police, with exemptions only for products that are not offered locally. Another reason for opening a local auxiliary, as opposed to a branch, is that it can be unmanageable to enforce insurance contracts and impression quarrel solution between entities in unlike jurisdictions. 61 board 3.4 Structure of the Insurance Sectorarticle image Sources : National authorities ; and IMF staff estimates
table 3.4 Structure of the Insurance Sector

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 20O3 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
Number of companies 1 1 18 21 18 16 11 11 5 5 20 19
of which: domestic 1 1 17 20 18 16 8 8 5 5 14 14
(Snare In gross premiums: In percent)
Shire of largest company 100.0 100.0 18.5 12.7 23.8 18.8 18.5 21.2 57.1 42.0 19.1
Share of largest five companies 100.0 100.0 54.7 54.2 70.3 63.9 70.8 61.4 100.0 100.0 72.9
(Average per company: In millions of U.S.dollars)
Gross premiums 314.1 1160 12.8 16.7 15.2 21.5 14.3 16.8 10.0 11.5 164 20.7
Profits 0.9 13 0.6 1.3 0.6 1.9 0.7 0.4 1.6
Assets 776.2 13.8 16.5 12.7 19.1 18.4 23.9 13.5 15.4 34.4 37.1

Sources : National authorities ; and IMF staff estimates postpone 3.4 Structure of the Insurance Sector

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
2000 20O3 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003
Number of companies 1 1 18 21 18 16 11 11 5 5 20 19
of which: domestic 1 1 17 20 18 16 8 8 5 5 14 14
(Snare In gross premiums: In percent)
Shire of largest company 100.0 100.0 18.5 12.7 23.8 18.8 18.5 21.2 57.1 42.0 19.1
Share of largest five companies 100.0 100.0 54.7 54.2 70.3 63.9 70.8 61.4 100.0 100.0 72.9
(Average per company: In millions of U.S.dollars)
Gross premiums 314.1 1160 12.8 16.7 15.2 21.5 14.3 16.8 10.0 11.5 164 20.7
Profits 0.9 13 0.6 1.3 0.6 1.9 0.7 0.4 1.6
Assets 776.2 13.8 16.5 12.7 19.1 18.4 23.9 13.5 15.4 34.4 37.1

Sources : National authorities ; and IMF staff estimates The indemnity sector in most of the region is highly break up and, therefore, the average company is small. As of 2003, the modal company in El Salvador received the equivalent of merely $ 17 million per year in gross premiums. Costa Rica, with its monopoly supplier, is an exception. The policy sector in Nicaragua is besides relatively saturated because a express monopoly existed there until 1997 ; the erstwhile monopolist has been lento losing marketplace plowshare but still makes up about half of the sector. The fragmentation is conducive to contest. It appears that most place product lines are offered under reasonably competitive conditions in most of the region. This dissertation is supported by data on falling premiums and high loss-rates. Nonetheless, premiums tend to be reasonably high in external comparisons, but this may be chiefly because of higher nondiversifiable risks associated with the region arsenic well as the higher average costs of operate on a smaller plate and with smaller guarantee amounts. however, markets are sufficiently compromising that fire premiums ( which include earthquake risks ) are lower in Honduras, where there is no substantial earthquake risk, and car premiums are lower in Nicaragua, where car larceny risk is relatively first gear. These numerous little companies about surely operate at well below effective size, particularly since most, if not all, of them operate as a traditional policy company with traditional procedures. 62 In many cases their revenues are insufficient to support the employment of their own statistician or the development of a in full cybernate system of record keeping, data analysis, and claims processing. Their investment portfolios may besides be excessively small to achieve wax diversification. The assiduity proportion has remained fairly stable in most countries over the past few years and, on average, the top six firms account for approximately 70 percentage of the commercialize. While high in absolute terms, this concentration ratio is not unusual in international comparisons. The number of policy companies has been relatively stable ( except for emergence in Nicaragua since the commercialize was opened to the private sector in 1996 ) ; some companies have exited, but others have entered. The available statistics may overstate the fragmentation problem to an extent because, in most countries, many insurance companies form groups with each early and possibly with banks ( for model, a deposit might have one life insurance subordinate and one non–life insurance auxiliary ), and the group as a hale might provide certain “ back office ” functions. Some companies, for model, in Nicaragua, are subsidiaries of larger alien insurers from the region or from industrialize countries. Insofar as insurance companies are attached to fiscal groups that have a strategy of offering a wax range of products, the lack of consolidation is not storm. Some insurance companies may be linked to broader industrial-financial conglomerates, which prefer to keep indemnity in-house and which may be able to benefit from regulative or fiscal arbitrage. 63 In addition, it is widely believed that consolidation is being held up besides by the desire of managers and major shareholders to preserve their independence. Industrial-financial groups will have to decide to break up for there to be significant extra consolidation in the insurance sector of several of the countries. 64 The near, and in some cases growing, links between indemnity companies and banks present a number of regulative concerns. chapter 2 in this volume addresses the regulation and supervision of fiscal conglomerates. however, it is worthwhile to note that affiliate insurance companies are broadly smaller than their relate banks, and that often the insurance company has had significant exposure to the bank ’ s risk ( largely from assets placed with the bank ). 65 The reverse is typically not true, as affiliate indemnity companies typically account for only a small part of bank deposits. however, the growth of bancassurance may lead to increase exposure of banks to the activities of their affiliated indemnity companies, to the extent that their profitableness may in time depend increasingly on insurance. insurance companies use a kind of means to distribute their products. Besides using their own offices, a network of independent agents operates in all countries. mugwump agents take the form of both individual brokers and brokerage firms, and in all countries they intermediate a substantial share of policies. The importance of brokers in distribution varies significantly across countries, although claim figures are not available : in Panama brokers reportedly generate over 90 percentage of premiums, while in El Salvador they generate less than half of all premiums. Bancassurance is growing in importance in most countries ( see Box 3.1 ). In some countries, such as El Salvador and Honduras, a meaning part of bank profits are reportedly derived from their sale of indemnity products. specialized reinsurance companies are found only in Panama. Companies in other countries are besides small to achieve the risk diversification built-in in reinsurance. rather, heavy use is made of reinsurance from the large international reinsurers, although the relatively small panamanian reinsurers ( both specialized reinsurance companies and indemnity companies authorized to besides perform reinsurance services ) besides accept risks in the area. The incentive to cede premiums to reinsurers is greater for companies with low capitalization, and it is reinforced by sealed regulative provisions ( see the adjacent incision ). reinsurance is particularly favored for intersection lines for which it is unmanageable to diversify risks domestically and for which monitor costs are lower. Thus, companies retain a higher proportion of premiums for car indemnity, where the big number of policies, their smaller value, and the nature of the risks ensure that loss rates are relatively stable and administrative expenses high, than for other place indemnity, particularly catastrophe risk. At the other end of the spectrum are specialized high-value products, such as airline insurance, where there is basically no local memory and reinsurance is handled through a small number of specialize foreign companies .

Recent Performance

Most indicators for the soundness and performance of insurance companies in Central America display constancy and do not raise immediate, systemic concerns. There have been no major failures in late years, despite the episodic failure of little companies. In at least one case, the failure of an policy party was the direct result of deficient reinsurance contracts, and, in another case, an policy party failed because of the collapse of its affiliated bank. In cases of failures, policy policies have typically been transferred to other indemnity companies along with consociate assets to constitute reserves. 66 however, the end decade has witnessed a few cases of more disorderly closure in which policies have not been honored, for example, because of delays in woo solution of disputes or because the affected company did not have enough remaining assets. soundness indicators such as profitableness rates, leverage, and liquidity ratios appear by and large adequate for sectors as a whole, although in most countries there are some firms that appear less healthy ( table 3.2 ). The absolute flush of capitalization of most firms is low and tends to be proportional to the size of the commercialize. average personnel casualty ratios ( the proportion of payouts on claims to premium income ) are in course with, or sometimes above, those found in other comparable markets. Since passing ratios are considered to be indicative mood of the degree of market rival, these indicators support the reported high level of competition in most product lines. holocene experience with heavy losses from both hurricane Mitch in several countries ( specially Honduras ) and two earthquakes in El Salvador in 2001 indicates that, in the involve countries, the insurance sector as a whole was prepared to cover its liabilities, largely because it was extensively reinsured. 67 In the case of the Salvadoran earthquakes, some $ 300 million in losses were paid for by local anesthetic insurers, but the net cost for the local companies was less than $ 5 million. All market participants agreed that most claims were settled quickly, which helped reduce the overall cost of the earthquake damages. however, the low penetration of indemnity services besides resulted in substantial losses being absorbed by producers and families, with some of those losses transferred to governments. Companies ’ investment portfolios are typically not very diversified, at least by character of investment. This appears to be largely the result of developing capital markets with few investment options ; diversification by asset type is greater in Panama, where the capital marketplace is most develop, although portfolio assiduity with related parties is in some cases meaning. Honduras applies rigorous portfolio diversification regulations with see to both asset types and secret sector issuers ( specially for associate parties and for foreign investments ), but there is nolimit to portfolio concentration in politics securities. Most companies place most assets in bank accounts or, in some cases, in securities issued by their respective national governments. real estate, target lending, and equity are besides significant investments for companies in some countries. investment afield is humble and in all countries is sternly constrained by regulations. partially due to regulative reasons, investments related to non–life indemnity business, which has a short clock time horizon, are held by and large in relatively fluent assets to match companies ’ liabilities ( i.e., their reserves against likely insurance claims and other risks ). In this case, the available investments may be broadly adequate, although real returns may be reasonably low, specially for little companies that lack the volume and sophistication to engage in active portfolio management or bargain with banks to obtain a good return on deposits. The latter is particularly true when dealing with banks that are affiliated with ( smaller ) policy companies. For non–term life insurance commercial enterprise, companies are often sternly constrained by the lack of securities with a adulthood approaching that of liabilities to policyholders.

Until at least the 1990s, the majority of the policy sector in all countries had antiquated back offices, which led to slow service both in issuing policies and in paying claims. information for adequate management decisions was hapless, leading to ill managed hazard taking. administrative costs and issuing costs were senior high school. largely due to the deficiencies of policy companies, brokers established a very solid put in most indemnity markets, much taking over some functions that are typically performed by the indemnity companies. In all countries, to varying degrees, the past few years have seen a significant improvement in the operations of at least the leading companies, largely as a solution of the use of more modern information systems. In the case of Nicaragua, the elimination of the state monopoly in 1997 leave private companies to start from chicken feed and build up relatively mod systems, despite engage in the smallest market in the region. Improved operations and information should lower costs and improve products, allowing for greater grocery store penetration. As an example, a company in El Salvador used its improved information organization to track and control costs in such a way that it could introduce a new car insurance merchandise that attracted new clients by offering no deductible at no extra cost. respective caveats must be made with relation to these indicators of performance. On the one hand, insurance companies have significant telescope ( possibly more than banks ) to smooth results from year to class. 68 On the early, the indemnity business is inherently vulnerable to rare but boastfully risks ; operation can be satisfactory for many years, but the true wisdom of the system is often apparent only when a major consequence such as an earthquake tests the capital adequacy of the sector. Some, but not all, countries in the region have weathered “ stress tests ” rather successfully. As mentioned above, the stress test of Hurricane Mitch in Honduras revealed that regulative standards for reinsurance contracts were inadequate, and that it was the strait business practices of most insurers ( and not regulative controls ) that allowed them to cope with the event. It is besides interesting to note that El Salvador and Honduras, the two countries that in the late by have suffered the greatest losses from natural disasters, were motivated to update their regulative frameworks. These considerations reinforce the importance of reviewing the regulative model .

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this: