State Insurance Monopoly Heads to Extinction
Costa Rica’s National Insurance Institute, the biggest insurance company in Central America, is on route to losing its 84-year-old state monopoly.
On Thursday, lawmakers were hoping to approve a bill to open the insurance sector the private sector to comply with the Central American Free-trade Agreement with the United States (CAFTA), set to take effect in October.
One of the most controversial parts of CAFTA, the bill will create a body within the Central Bank to authorize and supervise foreign and local companies looking to sell insurance here.
The bill will become law after the Constitutional Chamber of the Supreme Court (Sala IV) signs off and lawmakers pass it in a second vote.
Mike Garrett, founder of the insurance brokerage firm Garrett & Associates, estimated that the first insurance company will enter the market by June 2009.
Garrett expects new firms to trickle in slowly because of hefty capital requirements. Companies must deposit about $3.5 million in the Central Bank to sell insurance for people or property, $8.2 million to sell both, and $11.8 million to sell reinsurance policies. Those requirements will increase with inflation.
More Costa Ricans will buy insurance as new firms advertise, Garrett said. Only 27% of homes are now insured, and just 30% of cars are insured beyond the obligatory minimum, which pays $1,000 for personal injury and nothing for property damage.
Forced to court clients for the first time, the National Insurance Institute (INS) is working to improve its services. Executive Director Guillermo Constenla said the institute has signed contracts with the four public banks, which will begin selling INS insurance at their local branches within the next two years.
Also within that time, Constenla plans to hire 300 new agents to sell life insurance, which now make up just 15% of total sales.
While the bill prohibits INS from opening branches outside Costa Rica, Constenla plans to partner with regional firms to sell INS insurance in other Central American countries.
“We’re going to be very aggressive,” he said. “We are going to make the competition’s life impossible.”
Still, Nicaragua’s experience predicts major shrinkage for INS. The Nicaraguan Institute for Insurance and Reinsurance (INISER), a state body, has lost 64% of the national market since lawmakers took away its 17-year monopoly in 1996.
Garrett said INS must change substantially to compete. A recent CID-Gallup poll financed by INS found that just 55% of Costa Ricans are satisfied with the institute’s services.
“It still hasn’t shed its mentality of being a monopoly,” Garrett said. “Their view on everything is: We are the ones who call the shots around here and you fall into line.”
When Garrett’s firm asks the institute to calculate a policy’s price, INS sometimes takes three weeks. Other Central American insurance firms can give the same information to Garrett’s broker friends in four days.
Now Garrett can sell only INS policies, but he will soon be able to negotiate among various firms. Garrett plans to send employees to a partner firm in Guatemala to learn bargaining tricks.
“Later on, we are going to be in a position to say…‘I’ve got a factory on the Pacific coast in Golfito.What can you do for me?’”
At Constenla’s urging, lawmakers included several clauses to help the institute compete. The state must buy only INS insurance, unless another firm offers a better deal or a policy that INS does not carry.
The bill also allows INS sometimes to bypass the Comptroller General’s Office, which normally must approve any major purchase or contract by a state body. INS will be able to freely hire agents and consultants, for example, and buy real estate, computers and reinsurance.
The bill affects another party: firefighters, whose operations have been funded through INS. Traditionally part of INS, firefighters will now have more independence within the institute. Héctor Chaves, director of the Firefighters Corps, will have a greater say in the budget, hiring and administrative decisions.
The firefighters will now receive 4% of each insurance policy sold. The institute will shoulder the remainder of their needs. Still heavily dependent on INS, Chaves worries about its future.
“No one knows how insurance is going to work in an open market,” he said.
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