Changes to the Minimum Capital Regime

Resolution No. 36,350 (the “Resolution”) sets forth new parameters to be used to calculate the required minimum capital as of the financial statements beginning on July 1, 2012.

In the case of insurance companies, the Resolution maintains the approach of requiring the higher capital arising from the three parameters under the previous regime established: “line of business”, “premiums and surcharges” and “losses”.

The Resolution increases the amounts required for each line of business and readjusts the minimum capital requirements for the new groupings of lines that it establishes.

In addition, the Resolution introduces new capital requirements for the two types of mandatory environmental coverage currently available in connection with article 22 of the General Law of the Environment (Law 25,675), that is, environmental liability insurance or environmental performance bond, for which there were no specific capital requirements in the previous regime.

Regarding the “premiums and surcharges” parameter, in view of the recent amendments in the Reinsurance Regulatory Framework, the Resolution sets forth new standards for calculating the minimum capital required of insurance companies operating in active reinsurance. In this sense, insurance companies charging active reinsurance premiums in excess of 10% of their total premiums should calculate their minimum capital, on the one hand, considering only the premiums for direct insurance operations, and, on the other hand, for purposes of complying with the requirements applicable to local reinsurers, considering only the premiums for active reinsurance.

The “losses” calculation parameter remains unchanged in Resolution.

In the case of “local reinsurers”, the Resolution provides that they must evidence a minimum capital arising from the higher of the following two parameters: (i) an amount not lower to AR$ 30,000,000 (equivalent to approximately USD 6,976,000, at the current exchange rate); or (ii) the amount determined on the basis of premiums and surcharges. To calculate this last amount the Resolution will take into account the net premiums retained for active reinsurance and retrocessions, plus administrative charges, issued in the 12 months prior to the close of the relevant fiscal year (which amount may not be less than 40% of total issued premiums, net of cancellations) and applies a 16% to such sum.

Another amendment introduced by the Resolution is that for new insurance and reinsurance companies (in the case of the latter, for those authorized as of July 1, 2012), the capital to be required at the time of their incorporation must be twice the required for established companies, although the Resolution establishes a mechanism for gradually reducing it in stages.

The companies applying for insurance or reinsurance licenses until June 30, 2012, or to operate in new lines of business, must comply with the capital requirements in force prior to the Resolution. However, as of July 1, 2012 they must comply with the conditions and amounts specified in the Resolution for each line-of-business parameter (insurers) or the minimum capital amount (reinsurers).

The Resolution sets forth a gradual adjustment regime for insurance and reinsurance companies that found it “more demanding” as of July 1, 2012 to meet the new minimum capital requirements based on the line-of-business parameter (insurers) or the minimum capital amount (reinsurers). Companies applying for insurance or reinsurance licenses, or to operate in new lines of business, between the issuance of the Resolution and June 30, 2012, however, may not resort to this gradual adjustment regime.