Devaluation has plunged Argentinian insurers into crisis. Yvette Essen explains how the London Market can help
Rioting on the streets of Argentina a few weeks ago ensured that the country's familiar financial crisis made newspaper headlines.
As a result, at the International Cooperative and Mutual Insurance Federation's (ICMIF) 16th meeting of reinsurance officials in Athens last week, the South American country was, unsurprisingly, the hot topic of conversation.
Reinsurers worldwide are now cooking up plans to help save local insurers from going out of business. But what are their plans and can they succeed?
For the past few years, Argentina has been hounded by continuing problems. It has suffered from four years of recession and almost 20% unemployment.
The difficulties intensified last December after loans by the International Monetary Fund (IMF) were suspended after Argentina failed to meet budget-cutting targets. It said it would release $22bn (£15bn) of aid only if Argentina cut deficits by 3bn pesos (£608m) from 2001 levels.
The peso consequently dived and is down roughly 70%. Tens of thousands of Argentinians have protested and the future of president Eduardo Duhalde, who took over in January, appears unstable.
The insurance market was also severely impacted. Last year premiums had been accepted, based on the exchange rate of one dollar for one peso. But, as Argentina's currency is now worth only a third of its original value, insurers are paying three times as much premium and receiving three times more cover than they need.
ICMIF is now desperately attempting to renegotiate policies for its14 members, writing mainly motor business and small commercial risks. It has acted as the international placing broker for Argentinian companies since the state reinsurer Institute National de Reinsurance (INdeR) lost its monopoly in 1992.
"We need to redesign the reinsurance programme to match the needs of Argentinian insurance companies," says ICMIF senior vice president of reinsurance Lars Erik Lundqvist. "Otherwise some of them will go out of business. It would be too much of a burden as they are paying three times as much premium for cover they do not need.
"It is very important for the London Market and reinsurers to support them and consider that they are in a very difficult situation. To some extent the market must be able to react to the changing of conditions."
ICMIF has now begun asking major reinsurers to consider revising policies. It will negotiate with Trenwick and the Co-operative Insurance Society from the UK, plus other organisations including Hannover Re, Scor, Trygg-Baltica International, The Co-operators of Canada and Unipol.
Although reinsurance risks are traditionally renewed on 1 July, reinsurers are being asked to renegotiate policies to take effect retrospectively from 1 January 2002 - around the time when the peso collapsed. It is hoped the risks will be reinsured for 18 months until
30 June 2003. Lundqvist explains: "Insurers will pay less premium and have less coverage, which would make it easier to afford to pay for their reinsurance programmes. They would reduce their cover by two-thirds from $12m (£8.24m) last year to $4m (£2.75m)."
Vincenzo Adamoli, who is acting as a consultant for the Argentine Association of Cooperative and Mutual Insurance, adds: "We have prepared a new slip... where everyone protects each other and cuts down on a lot of exposure, and where one dollar will no longer equal one peso."
Argentina's Stop Loss Bureau de Reaseguros is also determined policies should be revised.
Bureau president Alfredo Gonzalez Moledo says: "It is very important for them to participate in this. The exchange rate should be one dollar to three peso."
If reinsurers agree to the proposal, they will get some guarantees in return. Adamoli says: "There will be no claims for the first four months until the end of April and there will be a warranty that insurers will pay the premium on time every six months."
Lundqvist is confident the market will agree. "It is a good thing for them," he explains. "The advantage is they will have much less exposure and more capacity."
Although Moledo claims "everyone is interested in this new project", convincing reinsurers will be a challenge.
Adamoli explains the main problem is that reinsurers have to agree to the proposals in the next month.
"This happened during the World Trade Centre crisis. And the reinsurers are being difficult this year," he says. "But they must try to find an understanding. It is a real investment and shows trust and support."
