Joaquín Cortez spoke yesterday in the Senate on the impact of the second advance of the pension product, warning that seven insurance companies do not have the liquidity to face the process.
After the Central Bank exposed on Tuesday about the impact of a fourth withdrawal of 10% of pension funds in the Senate, yesterday it was the turn of the Financial Market Commission (CMF) which, through its president, Joaquín Cortez, made observations on the proposal for a second advance payment of life annuities that is being discussed in the Constitution Commission.
Although Cortez provided well-known information regarding the negative consequences that a new advance could have on the insurance industry and its clients, he also provided fresh background to the debate, contained in the annexes to his presentation.
One of the new warnings from the CMF was that to face the second advance, in the worst scenario, the insurance industry will have to liquidate assets of up to US $ 5,331 million, that is, if all annuity pensioners anticipated the maximum possible that allows the project.
In that sense, he specified that seven out of 15 life insurance companies today do not have the necessary cash to face the process, so they must liquidate longer-term assets to be able to make payments, a situation that will mean an additional cost.
“This motion has a significant impact on the liquidity of insurance companies. The estimates made by our technical team say that in this case there are seven life insurance companies that would not have enough liquid assets to pay the advance ”, he warned.
“We have not considered in these estimates the equity impact that is generated by the financial cost of generating liquidity by going out and selling assets in a market that today is quite illiquid,” he added.
The patrimonial impact
In addition to the liquidity analysis, Cortez also released projections on the effect on the equity of insurance companies.
Previously, in a minute, the CMF had anticipated that up to 57% of the assets of life insurers could be affected by the constitutional reform that would allow the second advance, but yesterday Cortez was more precise regarding the impact on the solvency levels of these, those who would be hit hard.
Considering the worst scenario, the indicator that measures the level of indebtedness of the life annuity industry would go from 10.4 times the equity to 34.2 times, in a context in which the maximum allowed by the CMF regulations is 20 .
In addition to the above, the asset strength ratio of insurers would fall from 1.94 times to 0.93%, when the minimum is 1.
That is why, Cortez pointed out, that insurers will need US $ 1 billion to meet the minimum of their solvency obligations.
It should be remembered that at the beginning of last week the CMF had warned that up to nine life insurance companies could fall into insolvency if the current bill that is being discussed in the Senate is approved.
“As the capital base weakens in the face of possible new stress events, the risk that companies will not be able to pay for pensions or other insurance increases. In other words, capital is a ‘cushion’ that companies have for unexpected events ”, he explained.
The blow to pensioners
Beyond the impact that life insurance companies could receive, Cortez also exposed the effect that would occur on annuity pensioners.
For this, the regulator exemplified with an average retiree of this type of pension, 72 years old, an average family group and a technical reserve of $ 53 million and a pension of $ 310,200.
“After the first advance, and since we are assuming that he withdrew 10%, his pension fell to $ 283,200. And when you make the second advance, given that the fall in the pension is limited to 5%, your pension would drop to $ 269,000, ”he said.
“God forbid, but if the life insurance company becomes insolvent and the bankruptcy guarantee becomes effective, this pension would fall to $ 243,224. In other words, in a year this person would stop receiving $ 804,000 from lower income, which, in our opinion, is quite dramatic, “he said.
Like the president of the Central Bank, Mario Marcel, Senator Alfonso de Urresti was critical of Cortez about his comments on the second advance.
The socialist parliamentarian pointed out against the long labor passage by the insurance industry and Cortez’s AFPs and his warnings about the fiscal cost and the country’s reputation in the event that the insurers decide to sue the State if the advance is approved.
“I have a long career of 40 years at least in the financial market and not only in insurance companies and AFPs, but I was also a director of banks. I think it is because of that trajectory that they invited me to be part of the Council of the Commission (CMF) ”, replied Cortez.
“When you are abroad you have to defend the country, but this makes it more difficult,” added the regulator.