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Costa Rica 2017 | FINANCE | REVIEW: INSURANCE

New entrants are increasing competition in the insurance market, but the National Insurance Institute (INS) remains the dominant entity.

The most critical event in the recent history of the Costa Rica insurance sector was the signing of the Central America Free Trade Agreement (CAFTA-DR), which ended the government monopoly of the sector. Since then, the transformation into a competitive sector has drawn foreign entrants to the market, reshaping the structure of one of Central America's largest financial industries. Foreign entrants faced initial difficulties dealing with regulatory issues and the vagaries of the Costa Rican market, but recent years have seen a wave of new insurance offerings that have benefited consumers.

The state-owned monopoly in the insurance and reinsurance industries was established in 1924 by the National Congress, granting exclusive right of coverage to the INS. The INS enjoyed a monopolistic insurance market for almost 90 years, until the signing of CAFTA-DR, a trade deal linking Central America and the US, which led to the opening of the sector to competition. One of CAFTA's conditions called for the elimination of government monopolies in the insurance and telecommunications industry. Although controversial—the agreement was ratified by a national referendum in which it got 51.56% of the vote—CAFTA has on the whole produced new growth in Costa Rican trade. Since CAFTA's ratification in 2009, the Costa Rican insurance industry has undergone shifts to adapt to a changing marketplace.

Costa Rica's insurance sector is regulated first by the National Council for the Supervision of the Financial System (CONASSIF), and then the Superintendent of Insurance (SUGESE), which oversees all insurance operators. The state-owned INS remains the dominant firm in the market, holding market share of over 80%. Unsurprisingly, it had a major advantage over market newcomers in the first years after the dissolution of the monopoly. By early 2011, there were six insurance companies licensed to operate in Costa Rica, but new entrants faced difficulties; the licensing and compliance process was long and costly, and INS lowered its premiums and offered to undercut all competitors. INS also enjoyed massive infrastructure advantages, name recognition, and workforces. Despite this, competitors arrived looking to benefit from Costa Rica's well-developed populace. Spanish insurers Mapfre and Caser Seguros, American firm Alisa, and Panamanian firm Assa Compañía de Seguros all moved to join the market. Independent brokers, permitted for the first time, entered as well. Banco Nacional and Banco de Costa Rica were two early brokers, and were later joined by Garrett Brokers and dozens of foreign entrants. The brokers faced similar problems—INS already had a network of brokers all over the country and had threatened consequences to those who would switch—but Banco Nacional and Banco de Costa Rica had a built-in advantage in that they could piggyback on their existing bank infrastructure, thus opening up markets where it would not be financially feasible to open up a dedicated brokerage office. Today, there are 13 insurance companies and more than 314 brokers in Costa Rica.

Auto and fire insurance were the two sectors that saw the most competition after the opening of the market, and, as expected, those sectors saw premiums fall. Costa Rican law mandates that all 1.2 million cars on the road be covered under obligatory automobile insurance (SOA) availble only through INS, but private plans for additional coverage exist as well. The voluntary insurance market has posted strong growth since the elimination of the monopoly, with SUGESE reporting growth of 19% in 2014 and 5% in 2015. As of October 2015, insurers offered 34 policies for automotive insurance. INS' 11 offerings were the most on the market, but they were closely followed by Mapfre, which has eight instruments registered. Assa, Quálitas, Oceánica, and Lafise Seguros are the other firms currently offering plans on the Costa Rican market. INS still remains the dominant firm in the sector, with 87% market share, but the newcomers have posted strong growth in recent years. Quálitas, for example, increased its income by 62% in 2014, taking a 3% market share. Total market revenue reaching a new high of more than USD269 million in 2015, and participants believe there is plenty of room for further penetration. The majority of Costa Ricans purchase insurance as part of their vehicle financing plan, but the percentage of customers who voluntarily subscribe to additional policies is increasing. Insurers are keen to increase this second population, because these customers outperform those mandated to purchase insurance.

Voluntary insurance is making strides in other parts of the market as well. SUGESE reported in 2015 that the voluntary insurance market rose to a total of USD1.1 billion due to greater demand from the Costa Rican population. Voluntary insurance accounts for 74.4% of premium income, with 24% of that coming from private companies. Compulsory insurance from programs like the SOA makes up the remaining 24.6%. Overall, US insurer Pan American Life is the largest private insurer on the market, with a 6% market share. Private insurers as a whole offer more than 600 policies across all sectors, while INS continues to offer 209 on its own.
A 2015 Fitch Ratings report on the Costa Rican insurance industry noted that privately owned companies had increased their premiums by 17% since 2014 on the strength of their innovation and alternative distribution channels. The challenge of competing with INS has driven private insurers to be creative in searching for new customers, offering previously unavailable services and new plans aimed at Costa Ricans who would previously have been unable to find private insurance. Banco Nacional, for example, has found success offering comprehensive packages that link insurance to its other financial offerings. Private insurers have also been aggressive in letting consumers know that they can offer better service than the INS, which is hampered by a bloated bureaucracy and regulatory requirements. The increased competition has only helped consumers. Facing new challenges, INS has implemented changes including cutting waste, reducing premium levels, and offering new insurance products such as family protection policies and cancer coverage policies. The changing regulatory scheme has also let INS diversify its investments, which should generate better returns and let the market leader remain competitive in the face of foreign competition.

Despite these improvements, there are still challenges facing the industry. Private companies are just now beginning to overcome the high startup costs of joining the market, but the industry's operating performance has remained weaker than in other regional insurance industries. Fitch reports the industry had a ratio of 116.7% as of midway through 2015, meaning that firms were on average paying out more in claims than they were receiving in premiums. This was an improvement over 2014's ration of 121.1%, but still obviously well above optimum levels. However, there is reason for optimism that this will improve. As firms gain a better understanding of the Costa Rican market, better pricing should improve the loss ration. Fitch also sees the increase in car insurance products as a boon to the industry, since these policies are easy to sell and a reliable source of income.