With the Peruvian economy growing, insuring the country’s future is not just for its residents. Developing new business ventures has generated opportunities for foreign insurance companies, and the clear regulations each must adhere to
Peru’s economy continues to grow at a strong rate, attracting lots of attention from overseas investors. At the end of July 2012 the Wall Street Journal named Peru the ‘New South American Tiger’. Not surprising, as economic authorities reported a 7.07 percent growth for July and issued a conservative projection of 8.7 percent annual growth to be reached by the end of the year.
Growth is driven by finance, and Peru has developed a solid financial system in only a few years. One of the most important pillars of this system is the insurance industry. When new businesses start and substantial loans are made to financial institutions, corporations and individuals, creative risk management becomes indispensable; it is for this reason that Peru has streamlined its insurance system.
Opportunities for foreign insurance companies in Peru have increased considerably, especially in the reinsurance business. With many other areas of economic activity, Peru has enacted clear and brief regulations as part of a national strategy designed to spur growth, and avoid excessive regulatory burdens.
Insurance and finance matters in Peru are governed by the Ley General del Sistema Financiero y del Sistema de Seguros (Banking and Insurance Law) and its complementary regulations – the ‘Banking and Insurance Regulations’. Peru’s Superintendence of Banking and Insurance (SBS) is the agency charged with regulating financial entities, insurance companies, and pension funds.
Only insurance companies duly authorised by the SBS may write insurance business in Peru. An important exception to this general rule, however, is the freedom Peruvian residents experience when contracting insurance abroad, that is, outside Peru, with foreign insurance companies.
Article 2(14) of the Peruvian Constitution states ‘any person has the right to contract with lawful purposes, provided no rule of public order is breached.’ In turn, Article 10 of Peru’s Banking and Insurance Law expressly denotes that ‘residents in the country may enter into agreements to contract insurance and reinsurance abroad’. The word ‘abroad’ in this provision is generally understood and applied in practice to enable Peruvian residents to purchase insurance and reinsurance policies issued by foreign companies, not as a reference to the location of the resident purchasing the policies, who may or may not be in Peru.
Neither the Banking and Insurance Law nor the Banking and Insurance Regulations establish any restriction or limitations addressing non-residents. Currently the SBS does not regulate the sale of life insurance policies by brokers issued by foreign companies to
Peruvian residents or non-residents.
In contrast to the regulation of insurance activities, reinsurance business may be written in Peru by qualified non-admitted reinsurers or NARs. Under the Banking and Insurance Law, foreign reinsurance companies may write reinsurance business without registering with the SBS, if they have the required credit rating; or by registering with the SBS and complying with certain specific requirements.
A foreign reinsurance company may write reinsurance business in Peru if it has one of the following credit ratings issued by a recognised international credit rating agency:
If the foreign reinsurance company has not been issued one of the minimum credit ratings, it may still write reinsurance business in Peru by registering with the SBS. Registration with the SBS requires an application attaching the following documents:
- A certificate issued by the competent authority (usually the insurance department) of the company’s country of origin. This must show the company is validly incorporated and existing, and that reinsuring risks abroad is within the scope of its corporate purpose.
- The date in which the company was authorised to commence operations in its country of origin, and the types of risks it reinsures. The certificate must state that the company has no impediment to pay covered risks in freely convertible currency and must be issued 90 calendar days before the application is filed with the SBS.
- A copy of the company’s last balance and financial statements, duly audited by an independent accounting firm. These documents may be in English or Spanish.
- A legalised copy of the company’s Articles of Incorporation and bylaws, certified by the competent authority of the company’s country of origin.
- A Certificate of Good Standing or a similar document issued by the competent authority of the company’s country of origin.
- A copy of the last report issued by a credit rating agency of international reputation.
- A legalised copy of the power of attorney granted by the company to a Peruvian resident or attorney, and duly registered with the Public Registry of Lima, granting him or her full power and authority to act as the company’s legal representative in Peru before the SBS. A copy of the individual’s résumé showing relevant experience in insurance matters must be attached to the power of attorney.
- A sworn statement of the company’s legal representative of not being under any of the impediments listed in the Banking and Insurance Regulations.
- A list of the individuals or companies with which the company is economically related (only major relationships, such as holding companies and controlling ownership).
- Proof that the company has net assets of at least $10m issued by the competent authority of the company’s country of origin.
All documents listed herein must be apostilled or legalised by the Peruvian Consulate with appropriate jurisdiction, and translated into Spanish by a certified public translator.
Cut through clauses
Peruvian law recognises that local insurance companies may need the support of foreign reinsurers embedded in their agreements. Therefore, there is no law or regulation in Peru that would limit or prohibit the payment by a reinsurer of reinsurance proceeds directly to the original insured.
Under Peruvian law there is no privity of contract between the reinsurer and the original insured. The reinsurer, however, is free to include a cut through provision in the reinsurance agreement providing for direct payment to the original insured. Payment of reinsurance proceeds directly to the original insured or a third party beneficiary, if provided for in the Reinsurance Agreement and accepted by the insurance company, would constitute valid payment and relieve the reinsurer from any further payment obligation.
Taxation of insurance premiums
Peru has simplified the tax treatment of premiums payable to foreign insurance and reinsurance companies, making investments in Peru’s insurance industry even more beneficial. Peru’s income tax law establishes a ‘presumption of income’, where seven percent of the insurance premium value is deemed to come from a Peruvian source, taxable at 30 percent, which is applied only to the seven percent of presumed income.
Peru’s income tax law deems the Peruvian payor a withholding agent, and charges it with the obligation of withholding the Peruvian income tax – paying it to Peruvian National Tax Authority (SUNAT). If this tax treatment were not useful, under Peruvian law it is possible to negotiate a gross-up clause that would increase the premiums to include the payment of Peru’s income tax.
Legal expert: Victor Marroquín
Born in Lima, Marroquín attended the Naval Academy of Peru and the Pontificia Universidad Católica. He received his Juris Doctor degree from the University of Miami School of Law, where he was editor-in-chief of the International and Comparative Law Review, and his Master of Laws degree magna cum laude from Harvard Law School.
Marroquín was invited to join the legal department of the IMF in Washington DC, where he worked on various international projects involving legal and financial issues in Europe and Latin America. He then joined Baker & McKenzie as a member of its Latin America Practice Group. Living in Chicago he acted as project leader of the team representing the Peruvian government in the privatisation of the country’s airports, ports, railroads, and energy facilities. This included the granting of a master concession for Lima’s International Airport, the BOOT contract for Peru’s main electricity transmission line, and the master concessions for the Camisea Gas Field, one of the world’s largest deposits of natural gas.
Now a senior partner at Marroquín & Merino, his most recent transactions include advising Swiss Re in its reinsurance activities in Peru; representing Guidewire in negotiations with Peru’s Pacífico Seguros; advising Level 3 communications in the acquisition of Global Crossing’s Peruvian operations; the successful defence of PepsiCo Inc in litigation with a former bottler in Peru and New York; counselling Google in the establishment of its Peruvian subsidiary and operations; the acquisition of 56 mining concessions in northern Peru by Sezar Russia Investments; and the successful defence of Cisco Systems in litigation with Peru’s National Tax Authority (SUNAT). Marroquín’s practice involves M&A, finance, insurance, insolvency, taxation, and complex civil litigation.