Insurance & Reinsurance
The misguided efforts of many local authorities are undermining credibility and legal certainty
Corruption in Latin America continues to be a prominent issue. It is well documented that in the past few years, high profile politicians and D&Os of major private and public entities in Latin America have been forced from office, jailed, or are under investigation for corruption and there is a real perception that corruption is still increasing. One of the factors that has heightened awareness of corruption, which is in turn causing shockwaves in the international (re)insurance market in particular are judicial and administrative investigations.
Although no one would disagree that seeking accountability is an effective way to tackle corruption, the misguided efforts of a number of regulators/administrative authorities are in fact undermining the credibility and legal certainty required to encourage international players and investors to continue doing business in the region.
This issue is clearly evidenced by the disparity between the number of criminal and disciplinary judgments against those found to have engaged in corrupt behaviour versus the number of administrative decisions seeking purely reimbursement of the damage allegedly caused to the state’s purse. Impunity is still at its highest, with many criminal investigations (for example) advancing at such a slow pace that those under investigation are in many instances walking away on procedural technicalities, whereas proceedings establishing fiscal liability advance at a much faster pace, hitting the news headlines regularly because the findings at best are questionable and at worse wrong in law and contract. Either way the net effect is the same: international players are left unable to follow the legal and contractual rationale under which their local counterparts are asked to pick up the financial pieces irrespective of their contractual rights. This has become possible because administrative authorities are wrongly construing international policy wordings and effectively imposing wider or different insurance covers than those agreed and paid for by the insureds. There is a clear feeling amongst the international business community that those administrative authorities are coercing the insurance sector through their administrative powers (highlighting the general imbalance between private companies and States).
Recent administrative decisions have challenged international reinsurers’ confidence in local legal legitimacy. One administrative authority, for example, argued that a “claims made” condition is a “disproportionate clause imposed by the insurance company, creating in turn, an imbalance…” between the parties and, “…therefore it is ineffective for ignoring public order rules…”. This statement is not only contrary to the respective local legal system (which enacted specific legislation to incorporate claims-made provisions) but also negates a well-developed and tested (by expert international courts and tribunals) global commercial (re)insurance practice. Not to mention that most professional line insurance policies such as errors and omissions (E&O), directors and officers (D&O), and employment practices liability insurance (EPLI) around the world are written as claims-made policies.
In some cases, condemnation of such decisions (amongst other business and strategic reasons) has helped to harden the (re)insurance market, particularly for professional lines in Latin America, as appetite has ground to a halt even for the most loyal of market players (historically speaking) to the region.
It is imperative that regulators align anti-corruption measures with international market practices. Adopting legal frameworks but more importantly exercising reasonableness when exercising their governmental/administrative powers is a smart business decision, especially for countries interested in attracting international market players and investors. Sanctions matter, as punishing corruption is a vital component of any effective anti-corruption effort, but being perceived as unreasonably “punishing” the wrong party/sector not only fails to deter bad behaviour but is detrimental and inconsistent with the overriding commerical interest of developing economies such as those in the Latin American region. Governments need to reassess their efforts and seek qualified foreign assistance to promote good and sound technical knowledge and understanding within the entities entrusted to make decisions as ultimately these have a direct impact on governments’ broader goals. Those efforts should include strengthening the rule of law and tapping into private-sector knowledge.