Market Opening Focuses on Consumers
When the Central American Free Trade Agreement with the United States (CAFTA) went into effect on Jan. 1, 2009, the National Insurance Institute (INS) – the longe-ststanding government monopoly in Costa Rica – lost its exclusive hold on that sector.
For 84 years, INS was the country’s sole provider of insurance, including life, automobile and home insurance.
During the past 14 months, INS has braced for competition as new insurance providers have ventured into the Costa Rican market. Overseeing the entrance of the new providers is the General Insurance Superintendency (SUGESE), a government regulatory body created by the new law.
The Tico Times recently met with SUGESE Superintendent Javier Cascante to discuss the restructured insurance market and what consumers can expect to see in the next few months, as well as the challenges he faces as the man in charge of ensuring fair competition.
TT: Can you give an overview of the opening of the insurance market?
JC: This opening began with the approval of the new regulatory law for the insurance market in August 2008. This law allows competition in practically all types of insurance. The only exceptions to this are workers and auto insurance, both of which will open at the beginning of 2011. The law was developed as a part of CAFTA, this being one of the obligations assumed by Costa Rica. Unlike the telecommunications law, the process of developing and approving the new insurance law was fluid and very organized.
Throughout this process, the position of INS has been positive and not against the opening of the market. INS actually believes it will provide a good business opportunity for them. They will be subjected to competition, and there will be many more insurance agencies and much more marketing and publicity in the insurance market. Some of the (new) insurance agencies will sell insurance for INS.
At the same time, from our point of view as financial supervisor, we think it’s important to present an organized entry plan for the competition into a market that is already open. The law is focused principally on the protection of the consumer, the insurance policy holder. I think it was a good decision for the law to focus on this because the hope for the opening of this market was that consumers would benefit by receiving a value-added service.
For a long time, the focus of the supervision and regulation has been on the stability of insurance companies because … if you give money to a company to buy a product, you are expecting that, in case of an accident, a settlement is contingent on the technical rules or clauses set up in the plan. That is a fundamental theme we will monitor. But also (we want to) educate people so that they have a broader perspective when making a decision regarding the different insurance options on the table.
If you are going to buy auto insurance and you have eight different participants, it is important that the information about the products is clear and simple and presented in a very straightforward way. In this way, people can choose without any doubt that they are securing the coverage they hoped to obtain and that the service provided by that insurance company will be adequate.
So what has happened in the first few months?
We have established all the regulations and procedures for the registration of products. This has been very important. We have prepared to work with companies in the certification process.
Since the beginning of January we have been collecting applications from companies interested in entering the insurance market, and we have been working to register all of the products that INS and other insurance companies offer. To date, we have approved 159 different products for the market, and we have rejected around 250.
As for the companies that have been accepted, well, INS already existed, as did the smaller insurance company for teachers (Seguro del Magisterio). As for the others, there have been some foreign entrants. One is the Aseguradora Mundial, from Spain and Panama, 65 percent of which is owned by Mapfre, the third biggest player in Europe. This is a very strong company. Another one is Alico, which is owned by AIG, the U.S. insurance company. The other company is ASA, a very important company in Panama. There are four more companies in the application process. We expect to finish the year with eight companies officially entered in the insurance market. (Note: On March 2, soon after this interview was conducted, the U.S. company Pan American Life Insurance Group of Costa Rica received approval to compete in the market.)
I hope that by the middle of this year these insurance companies will be offering different products and different insurance policies.
The nice thing about the process has been that we have been able to shape the information the companies provide so that people have clearer, simpler information that is more educational, and not 12 pages of fine print as has been the case in the past.
When customers buy insurance, they are going to know the origin of the company that provides that insurance. They will know that their policy has been accredited and that the products offered have been reviewed by SUGESE. That is the primary difference. People will buy from companies with the confidence that their policies have been reviewed and approved prior to purchase.
Can you explain all the types of insurance that will be made available?
We are in the process of reviewing the available products. Companies write to us to inquire about the amount of capital they will need to establish operations. The law says that companies can have capital of $7 million, more or less, to sell general insurance or personal insurance. The personal insurance covers an individual person, such as life insurance. General insurance is insurance of a different kind, such as fire, catastrophe and emergency-type insurance. At the same time, the companies have had to show that they have the technology in place to operate, that they have an established staff educated about the company’s offerings and that they have a business plan established. These companies write to us to register their products with us.
So if there is a person who wants to buy life insurance, for example, what is going to be the difference seen in the market for a consumer looking to find a provider? Will the different options offered make the purchase of insurance more complicated?
I think that what it going to be different is that the characteristics of the insurance policies offered are going to be very different. It might be easier to think of the opening of the market in terms of hamburgers. There is the very traditional American hamburger to which most of the people are very accustomed. But in a different neighborhood, they might be used to a different type of hamburger, one very different than what is offered at McDonald’s.
People might be very accustomed to one type of hamburger, but suddenly they find out there is a different option available. Some people might think McDonald’s isn’t very good, and now there is a different option available. People look for a distinct taste that they like.
In the insurance market, you have to look at the things that attract customers: price, coverage, other connected services, and the network of services that you can obtain by choosing one of the companies offering insurance.
Each of these themes has a different importance to different consumers. If price is the most important thing, customers can search for the cheapest and fastest way to get insurance. In auto insurance, for example, people will be looking for a good price to assure their car is taken care of in case of an accident, but they might also be looking for a company that offers a good mechanic who is available to help out when needed. In that case, someone might be willing to pay a little bit more to receive what they consider to be better service.
Will companies entering the market from abroad bring their own employees from outside of the country or will they hire and train a local staff?
This will depend on the individual companies. Of the companies coming, many are planning to bring in members of their own team from abroad, as they will serve as a vital part of the setup of the companies in the beginning, although they will hire and train people from here to join and help their efforts.
The hiring of Costa Ricans over the long-term will be very important to these companies, as local employees will have a better understanding of the marketplace and the marketing needed to attract customers.
Is there anything in particular you think that foreign residents should know about the opening of the insurance market?
There is one issue that I think is important, and that is people (should not buy) insurance from companies that are not registered in Costa Rica. It is prohibited in Costa Rica to offer illegal insurance. For insurance to be considered legitimate in Costa Rica, the company must be authorized and the products they offer must be registered. I think it is important for people to know that, even if an insurance company offers a policy in Costa Rica, for it to be legally registered, we must approve how the company is operating as well as the products they are offering. People could go out and buy a contract from a company anywhere in the world, but if it is not a company approved by SUGESE, it is not considered a legitimate offering.
So can foreign residents possess insurance?
They can buy insurance from whomever they want, but I think it is important for them to understand that, if they are going to buy insurance, it must be from a company authorized in Costa Rica. But if someone wishes to buy insurance from another company, they then carry the risk of buying from a company that has not been authorized or supervised.
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