Best’s Commentary: Argentina Capital Controls May Create More Uncertainties for Insurers

Business Wire

MEXICO CITY--(BUSINESS WIRE)-- Capital controls imposed by Argentina’s government to combat economic instability could limit growth prospects and business opportunities for domestic insurance companies, as well as undermine the efficiencies of these carriers’ operations, according to a new AM Best commentary.

The new Best’s Commentary, titled, “Argentina Capital Controls: More Uncertainties for Insurers,” notes that the new restrictions on foreign currency (USD) transactions to stop money from flowing out of the country is an attempt to stabilize reserves, which are being depleted as Argentina supports the peso. However, for Argentina’s insurance industry, the capital controls could lead to economic contraction, and the industry already is dealing with high inflation levels and foreign exchange rate volatility that are impacting insurers’ underwriting performance. Capital controls also may increase management expenses, as well as lead to higher capital requirements and solvency ratios for several insurers.

Short-term public debt restructuring resulting from the decision to deploy international reserves to contain peso volatility poses an additional issue for the insurance industry, according to the commentary. Property/casualty companies with significant exposures to government-backed obligations, including Argentinian LETES (i.e., treasury bills), may have to contend with declining market values, asset-liability mismatches and liquidity issues resulting from debt tenor extensions.

AM Best believes the negative impact of capital controls on the insurance industry could be offset partly by recent changes on taxation of the life industry. Higher tax deductibles on premiums, safeguarded by new inflation-indexed instruments could promote policyholders’ savings capacity while increasing the industry’s organic growth and investment base. This may help boost financing for small and medium-sized enterprises on infrastructure and construction projects. AM Best will continue to monitor company decisions in light of the recent restrictions enacted in Argentina.

To access the full copy of this commentary in English and Spanish, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=291046.

AM Best is a global credit rating agency and information provider with an exclusive focus on the insurance industry. Visit www.ambest.com for more information.

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