History of Insurance in Costa Rica

Insurance really started in Costa Rica in 1924, when Instituto Nacional de Seguros(“INS”) was founded as a wholly owned Government entity.

It was protected by legislation which precluded all competition from within or from abroad. Exception to this was SegurosdelMagisterio, which dates from 1920 and provides insurance exclusively for members of the various teachers´ unions.

As pretty much the only general insurer in Costa Rica and therefore enjoying a captive market, over the years INS grew into by far the largest insurer in Central America. A fair portion of its activity derives from Workers´ Compensation and Obligatory Auto insurance.

There have been several landmark decisions affecting the service given by INS.

From the start, insurance was sold over the counter or by exclusive in-house agents. In the late ´50s a so-called “ethical code” was passed, which made it difficult – practically impossible – for a client to change agents. This led to some agents giving cavalier service to clients. Sometimes clients were unable, without aid from an agent, to overcome bureaucratic barriers and receive payments for claims– in detriment of the good reputation of INS.

In the mid ´90s INS made an important change: those in-house agents who so decided could resign from INS, receive their severance pay - and keep their portfolios of clients. They would then establish and capitalize “insurance agencies” to work their portfolios. The immediate advantage was that the new agencies were not subject to restrictions of the “ethical code” and could compete freely with agents and other insurance agencies, and as a result the quality of service improved.The number of agencies peaked at 82 in 2005.

In 2009 Costa Rica subscribed to the Central American Free Trade Agreement (“CAFTA”) one of whose covenants was that the insurance market should be opened up to competition, and the laws which protected INS as a monopoly should be reversed.

Another covenant was that Costa Rica should get serious about anti money laundering controls, and dire consequences were posed for financial institutions which did not fully comply. Strictly speaking, insurance companies are indeed financial institutions, and therefore they and their intermediaries were bound to comply – even though it is hard to imagine how money can be laundered through insurance.

In July 2009 the Insurance Superintendency(“SUGESE”) was set up, and shortly thereafter laws and regulations were passed to ensure that the insurance market developed in an orderly manner. Up to this point INS was self-regulating.

The laws and regulations, which encompass insurers, reinsurers and intermediaries (agents, agencies, brokers and brokerages) establish the conditions to set up these organizations, the conditions under which they may operate, and the details of the products which may be offered on the market. The licensing process for all parties is meticulous, detailed and time consuming.

In the first quarter of 2011 there are six insurance companies licensed to operate, and none except INS has a full spectrum of products on offer. Also, at this time there are only six brokerages open for business, not because of lack of interest but because the law makes it practically impossible to transform an insurance agency into an insurance brokerage.

It is expected that by the end of 2011 there will be eleven insurance companies selling their products in Costa Rica, and there will no doubt be several more brokerages.

The effect of the opening of the market is as expected. INS entered the fray by lowering its premiums in the lines of insurance where there is competition, and offering to undercut all quotes from competitors. At the same time, it is striving to reduce bureaucracy and improve its products and service to its clients – payment of claims suffers fewer delays. Premiums for Auto and Fire insurance, the main lines where there is now competition, have been reduced - and further reductions are expected. When other products are authorized by SUGESE in competition to INS, it is foreseen that INS will also reduce those premiums. It is expected that INS will improve all its products and continue to dominate the marketfor the next few years.


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