Global Insurance Companies and the Privatisation of Pensions and Health Care in Latin America. The case of Peru.

Transcription

1 Global Insurance Companies and the Privatisation of Pensions and Health Care in Latin America. The case of Peru. Maria Amparo Cruz-Saco Professor of Economics Connecticut College New London, CT 06320, USA with the collaboration of Anil G.C Connecticut College New London, CT 06320, USA Presented at the GASPP Seminar no. 5 organized in collaboration with the ILO-SES Programme and WHO, at the University Centre (IUC) September 2002 in Dubrovnik, Croatia. Please, do not quote without permission of the authors. 1 Introduction It has been argued that the market allocates resources in an efficient manner. Therefore, the argument has been made that privatising the coverage of social risks such as work injuries, health care and old-age can bring about net gains. Following this view, in the last decade 2, many countries in Latin America and in other emerging market regions dismantled their publicly managed social security systems admittedly inefficient and with low coverage in hopes that private insurance schemes would render efficiency gains and eventually, higher coverage. Pension and health care institutional reforms in fact reduced government participation in both the financing and the delivery of services predominantly for employment-related or social security programs. One fundamental impetus for these reforms was the most wanted one-and-for all reduction of government personal transfers and social expenses and the ensuing long-term reduction of publicly supported social protection programs that were deemed too excessive. Pension reforms however because of the acknowledgement of workers years of contribution ( recognition bonds ) were expected to have a high fiscal cost during a transition period of approximately two generations. Reduction of social expenses was expected to immediately relieve public finances although at a very expensive long term price in terms of human capital sacrifices and social integration. Insurance activity did indeed flourish in the nineties. It increased faster than economic growth in emerging markets including Latin America. This growth was dominated by the expansion of life insurance due to a combination of factors including privatisation of formerly publicly managed pension systems, liberalisation of insurance activity, new health care insurance mechanisms and increase in the income and wealth of middle and upper income groups (mostly skilled workers). Certainly with regard to life insurance, companies were deeply interested in tapping into the long-term savings of emerging economies. While growth of life insurance was remarkable in some Latin American countries, Chile and Mexico for example, the relative penetration of insurance activity in general is still extremely low representing only 1 A research trip to Lima in the summer 2002 was partially funded with the Lenore Tingle Howard 42 Associate Professor of Economics Chair research funds at Connecticut College. 2 With the exception of pioneer Chile that fully privatised its pension system and introduced a mixed health care system in

2 1.6 per cent of the world s total insurance premiums. So the question arises: Will private social protection schemes including life and health insurance grow competitively and strongly enough to cover the majority of the population in Latin America? What restrictions exist and how can they be dealt with? In this paper we look at the insurance industry globally, regionally and in the case of Peru. An assessment of the insurance industry s role shows that in the presence of major market failures (lack of competition, large incidence of poverty and weakness of the institutional framework to respond to economic and social needs of the majority of the population) a system of social risk management that is based on private and for-profit managers and insurers will limit coverage to the better-off segment of the population. Economic growth has slugged and the expected trickle down effect has not taken place. Thus, vulnerability to social risks that were partially covered in the past by social security for a large proportion of the population remains unchanged or worse, may be increasing. The traditionally excluded working population in rural areas, in the informal sector, and disadvantaged groups such as the elderly, poor women, children, ethnic minorities and people with disabilities remain uncovered and it is apparent that funding of their coverage will not be market-based. The country case study for Peru suggests that the emerging social protection pattern characterized by reliance on market forces in the provision of social services is inadequate in protecting the assets and the integrity of a large majority. There are other options available. But their analysis and consideration go beyond the scope of the present paper. The next two sections show that life insurance has indeed dominated insurance penetration in emerging markers and in Latin America in particular. It is generally the case that domestic insurance industries are fairly oligopolised and dominated by a few foreign insurance companies. Although vigorously expanding, the size of the regional insurance market remains on average very small. Sections three and four target the issue of social security reform both in the region and in Peru respectively. Two main ideas are considered: inadequate coverage and excessive transaction costs of private schemes. Section five shows insurance penetration and nature of the market in Peru. Conclusions follow. 1. Worldwide insurance environment and emerging markets In 2000, the annual premium volume of the worldwide insurance industry amounted to approximately 8 percent of the world s annual gross domestic product (GDP). The world average for insurance penetration for life insurance was around 3 per cent in life insurance and 4.9 per cent in non-life insurance (Swiss Reinsurance Company, 2002, p.8). 3 Figures also show that the industrialised countries of North America, Western Europe, Japan and Oceania are the foci of the world s insurance business, accounting for more than 90 percent. In contrast, the insurance industries of the emerging markets (Latin America, Central and Eastern Europe, South Africa and Asia excluding Japan) represent approximately 9 percent of the world s insurance premium volume. 4 Although the growth of the insurance industry mostly outpaced general economic growth throughout the world in recent years, the industrialized countries insurance industry grew at a rather sluggish pace in comparison to its counterpart in the emerging markets. In fact, in the 1990s, mature insurance markets in industrialized countries grew at half the growth rates of the latter. 5 Another important trend in the worldwide insurance environment is the remarkable gap in the average growth rates of life insurance and non-life insurance lines. While growth of the global non-life insurance business has been on the whole rather modest in the last few years, the global life insurance business has grown by leaps and bounds (Swiss Reinsurance Company, 2000b, p.3 and Swiss Reinsurance 3 This can be read online in [read on 15 th July, 2002]. 4 In 1999, the industrialized countries accounted for 91.3 percent of the global insurance business. See Swiss Reinsurance Company, 2000, various issues of Sigma). 5 See Swiss Reinsurance Company, 2000a, p.3. The average growth rates for life insurance in the emerging markets and industrialized countries were 7.2 per cent and 3.2 per cent in the period , while the corresponding average growth rates in the non-life insurance sector were 13.3 per cent and 6.7 per cent respectively in that period. See Ibid., p. 8. 2

3 Company, 2001a). Life insurance business has particularly benefited from the reform of erstwhile public pension schemes in many countries, including those in emerging market regions such as Central and Eastern Europe and Latin America. As life insurance products are particularly well-suited to pension provisions (especially annuity products as retirement provisions), they are bound to profit from reforms in publicly managed pension systems. Even countries with welfare systems that have upheld state-owned public pension schemes are in the threshold of pension reform. For this reason, it is expected that the role of private insurance companies will expand substantially in countries that privatise social security (in particular, pension and health care coverage). Among the emerging markets, the non-life sector is fairly well developed in many Central and European countries, with relatively higher insurance penetration than in most emerging countries in other regions (see table 1). Penetration in life insurance is however considerably low in the former. South Africa stands out for the highest life insurance penetration in the world, and, by world standards, it also has a fairly well established non-life insurance penetration. The emerging countries of East- and Southeast- Asia generally trail both South Africa and the Central and Eastern European region in terms of non-life insurance penetration, with most of them recording lower non-life insurance penetration than the worldwide average for comparable per-capita incomes. But, life insurance is fairly well-developed in Eastand Southeast- Asia, certainly more so than in Latin America and Eastern Europe. 6 The high life insurance penetration in Asia can be primarily attributed to lack or poor condition of state-sponsored retirement schemes, emergence of a vibrant middle class in tandem with rapid economic growth in the region for most of the 1990s, the tradition of frugality which has helped boost the region s household savings and the nascent stage of development of the region s financial intermediation capability (Swiss Reinsurance Company, 1998a, p.3 and 2000a, p.19). In Latin America, the non-life insurance penetration (measured as a per cent of GDP) is approximately at par with the average for countries that have similar per-capita incomes, albeit considerably less than penetration in industrialized countries. Barring Chile and Panama (not included in the table below), life insurance penetration in Latin America does not match up to even the average of countries with similar per-capita incomes, and fares badly vis-à-vis all other emerging market regions. However, growth of life insurance in the nineties has been quite impressive in several emerging economies including some Latin American countries (Peru in particular), see table 1 below: Emerging Market Regions Central and Eastern Europe Table 1 Insurance Penetration in Emerging Market Regions, 1998 Countries Penetration in Non-Life Insurance (%) Penetration in Life insurance (%) Real Growth of Life Insurance per annum ( ) (%) Croatia Poland Russia Slovakia Slovenia Czech Republic Hungary In 1995, average life insurance penetration in Asia was 3.2 per cent of GDP, while the corresponding figures for Latin America and Eastern Europe were 0.4 per cent and 0.6 per cent of GDP respectively (see Swiss Reinsurance Company, 1998a, p.3). 3

4 represent 5.5 per cent of the total population, a selective minority or the better off. This simple exercise is illustrates the complete inability of current private insurance to become a major social protection scheme for health care in the country. A similar exercise for premiums paid for survivors and disability: Assume a 1.2 per cent pay roll fee. Total premiums for survivors and disability are equal to 572 million dollars * 11 per cent = 63 million dollars. We know that these premiums are paid by 1.1 million affiliates that are current on their contributions. That means that each affiliate pays dollars a year for their life and accident policies. Since this payment represents 1.2 per cent of their pay roll, their average annual salaries are 4,767 dollars or 397 dollar a month. It is clear that this group belongs to the richest tenth decile (refer to table 4) that lives in the urban sector. Again the private pension system and its insurance complement constitute an expensive social protection scheme although affordable for the richest social group in the country. An overall assessment of the net gains of insurance activity in the area of life (both accidents and life products) shows that if insurance penetration were stronger and extensive, the potential for financial stability and for facilitating trade and commerce would be probably large. If this were the case, insurance activity could mobilise savings and allocate resources in an efficient manner. However, this is not the case. Health care insurance and private pensions combined with private life and disability insurance have only partially substituted for government security programs. Workers in the highest income brackets have transferred to privately managed social risks and are paying high transaction costs. This is inefficient because if markets were truly globalized and integrated, the law of one price would be in effect and workers in the region should be able to benefit from competitive premiums. Workers who are not in the highest income brackets have lost social protection from publicly administered programs either voluntarily or because they did not have a choice. Workers who did not have social protection before a majority of the labour force still do not have any and are probably indifferent to the reform. A final observation. Foreign presence was expected to improve the efficiency and effectiveness of insurance markets. As the case of Peru shows, this process has not taken place. Despite co-ownership in the property of private pension fund managers and insurance companies, markets remain non-competitive and prices have not fallen. Coverage is stagnant and on the contrary, these agencies are tapping into people s savings for corporate benefit. Thus, it seems quite pertinent that the rhetoric used to rationalize foreign investment is amended. Markets need to be truly competitive to render the efficiency and effectiveness that is necessary to attain maximum coverage at the least possible cost. A summation of market failures (poverty, non-competitive markets, agency problems and lack of information) is enough reason for the formulation of alternative routes to the social protection dilemma in this part of the world. 6. Conclusions In the last decade, insurance penetration in emerging markets grew at a faster pace than in developed economies. For the most part, this penetration was led by life insurance activity due to privatisation of pension systems, liberalisation measures, introduction of new health-care and life products, and increased incomes of the better off skilled wage-earners. While the size of life insurance is still very small in Latin America it grew very vigorously. Foreign insurers rushed into the Latin American insurance market in a highly predatory manner characterized by a flurry of mergers, acquisitions and takeovers of local insurers. In many instances they established partnerships with local banks by the prospects banks provide as alternative distribution channels for insurance products. Privatisation of pensions and health care in Latin America was the natural boost for life insurance expansion. However, sustained penetration is facing structural impediments. The first impediment is poverty and inability to pay by the large majority of the people who are poor. The second impediment is the high cost of insurance due to the combined effect of lack of competitiveness of insurance markets and high reinsurance fees due to the high level of risk of the regional market. Foreign co-ownership of insurers 17

5 and pension fund managers have not raised competitiveness as was expected. On the contrary, companies are rent-seekers and enjoy the benefits of setting prices above international levels. Regulators are unable to change the nature of markets. In Peru, it is quite obvious that privatisation of pensions and health care has not been an adequate way to expand coverage and to reduce cost. In pensions, the correct understanding that transactions costs are excessive fuels evasion and non-compliance. In health care, private insurance is restricted to the salaried and formal labour force usually through occupational schemes. Individual affiliation requires a steady income flow that is generally difficult to secure. It is possible that the boost of insurance activity is coming to an end and that further growth will be more closely associated to sustained economic growth. Since structural adjustment and globalisation have not produced job and income security, most probably insurance activity will now face a less exuberant future. References Aflotin, Michael, Peru: Market Report Life and Health, Unpublished Paper (April). Ball, Don, Wendell McCullock, and Harold Skipper, Jr., The Global Environment of Insurance. (New York, The McGraw-Hill Companies, Inc.) Baur, Esther, World Target Practice, in A. M. Best, Best s Review (February 2001, Vol. 101, Issue 10). Borzutzky, Silvia Vital Connections. Politics, Social Security, and Inequality in Chile. (Notre Dame, University of Notre Dame). Comisión Especial Encargada de Estudiar la Situación de Los Regímenes Pensionarios de los Decretos Leyes No y No y Otros a Cargo del Estado, DSN Lima, June 15, Cruz-Saco, Maria A Labour markets and social security coverage: the Latin American experience. (Geneva, ILO, ESS Paper no. 2) The Pension System Reform in Peru: Economic Rationale Versus Political Will, in Cruz Saco, Maria A., and Carmelo Mesa-Lago, Do Options Exist? The Reform of Pension and Health Care Systems in Latina America (Pittsburgh, University of Pittsburgh Press). and Carmelo Mesa-Lago, Do Options Exist? The Reform of Pension and Health Care Systems in Latin America (Pittsburgh, University of Pittsburgh Press). Informe Desempeño de Los Fondos Administradoras por el Directorio del FCR, Lima, May 5, Instituto Nacional de Estadística e Informática (INEI), La Pobreza en el Perú. Una Visión Departamental (Lima, INEI)., 2000b. Impacto de los Servicios Públicos de Salud sobre la Productividad y Pobreza. (Lima, INEI). James, Estelle Averting the Old Age Crisis. (New York, Oxford University Press). Mesa Lago, Carmelo and Fabio Bertranou, Manual de Economía de la Seguridad Social (Montevideo: Centro Latinoamericano de Economía Humana). Nef, Jorge Health Security and Insecurity in Latin America and the Caribbean, in: Macalester International, vol. 11, Summer (St. Paul, Macalester College). Skipper, Harold, Jr., Foreign Insurers in Emerging Markets: Issues and Concerns. Center for Risk Management and Insurance. Occasional Papers Stiglitz, Joseph Globalization and its Discontents. (New York, W.W. Norton and Co.) Superintendencia de Banca y Seguros, SBS, 2002b. Información Financiera del Sistema Asegurador. (Lima, SBS, April 30, 2002)., 2002a. Boletín Mensual del Sistema Privado de Pensiones, July. Swiss Reinsurance Company, Insurance in Latin America: Growth Opportunities and Challenges to Increase Profitability, Sigma (No. 2)., 2001b. World Financial Centres: New Horizons in Insurance and Banking, Sigma (No. 7)., 2001a. World Insurance in 2000: Another Boom Year for Life Insurance; Return to Normal Growth for Non-Life Insurance, Sigma (No. 6)., 2000b. World Insurance in 1999: Soaring Life Insurance Business, Sigma (No. 9)., 2000a. Emerging Markets: The Insurance Industry in the Face of Globalisation, Sigma (No. 4)., Asia s Insurance Markets After the Storm, Sigma (No. 5). 18

6 , 1998b. Life and Health Insurance Markets Benefit from Reforms in State Pension and Health Systems, Sigma (No. 6)., 1998a. Life and Health Insurance in the Emerging Markets: Assessments, Reforms and Perspectives, Sigma (No. 1)., The Insurance Industry in Latin America: A Growing Market in a Competitive Environment, Sigma (No. 2). Taylor, Lance External Liberalization, Economic Performance, and Social Policy. (New York, Oxford University Press). Thorp, Rosemary Progress, Poverty and Exclusion. An Economic History of Latin America in the 20th Century. (Washington D.C., InterAmerican Development Bank). World Bank World Development Report 2000/2001. Attacking Poverty. (New York, Oxford University Press). 19