Inciso K strikes again as government increases investment limits for insurers

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Thursday, February 13, 2014

The Argentine insurance regulator (SSN) has issued new rules under the controversial Inciso K measure requiring insurers to increase the portion of their capital that they must invest in government-approved infrastructure projects and productive investments.

Inciso or subsection k was first introduced in October 2012 in section 35.8.1 of the general regulations of insurance activity and was aimed to force insurers to initially invest over 7bn pesos (US$870mn) in medium and long-term production and infrastructure projects.

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In particular it set out to expand domestic credit and address investment in the Argentine oil sector as part of the core concepts outlined in the government-mandated investment plan, known as Planes (Plan Estratégico Nacional de Seguros).

The update to the measure released last week in resolution 3907 sees the minimum investment amounts as a percent of available funds raised by a further 5.7bn pesos, according to local press reports, with a deadline set by the resolution for September 2014.

The minimum investment level (excluding real estate) for general insurance, life insurance and reinsurance companies now stands at 18% of total investments, with a maximum of 30% in instruments to finance so-called productive projects or infrastructure.

For retirement insurance companies, the minimum now stands at 14% with the maximum unchanged at 30%.

For work risk insurers the minimum now stands at 8% with the maximum at 20%.

IMPACT

While the number of allowable instruments for investment in the mandated sectors has risen steadily in the past year, the point remains that Inciso K continues to restrict the ability of insurers to meet their obligations, reduces diversification and increases concentration in the portfolio of insurers in what are highly illiquid instruments.

The increase mandated by the latest resolution thus amplifies the risk to insurers.

As per usual, however, the views of the government representative were somewhat different. John Bontempo, the head of the SSN, was quoted in the local press as saying that the measure will boost the virtuous circle of the economy in credit, investment, growth, employment, consumption and new investments.

The reprivatization of management of the Argentine rail system and steps taken by the government to thaw its relations with the Paris Club of Creditors and the IMF have offered a glimpse of a change of direction by the Argentine administration.

This latest development, however, sends out more confusing signals as to which economic direction the Argentine government is now favoring as it moves to increase the role of the state in private enterprises once again.

The full resolution is available in Spanish from the following link.