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Fitch: El Salvador's proposed pension system reform poses challenges for local insurers

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Fitch: El Salvador's proposed pension system reform poses challenges for local insurers

A proposedreform of El Salvador's pension insurance system could create challenges for localinsurers in terms of profitability, Fitch Ratings said.

Underthe country's current pension system, the private pension fund managers, or AFPs,contract disability and survivor's insurance for their clients from separate localinsurers, which in turn contract reinsurers for these policies, the rating agencysaid in an April 28 report.

However,under a reform proposal being considered by the government, which would be basedon a mixed public-private pension system, an important number of existing clientsof the AFPs would move to the state-funded pension system, which would mean theywould lose their disability and survivor's insurance coverage, Fitch noted.

The pensionsystem currently provides an important cash flow for the local insurance businessof around $76 million in annual premiums, or 13% of the total market; but if thereform is approved this would be reduced by $24 million, or 4.1% of the total market,according to Fitch's estimates.

Fitchconsiders that the adoption of a mixed pension system would "significantlyreduce" the volume of written premiums in the pension insurance business byabout 75% of the current portfolio, which means it would reduce total premiums inthe country's insurance sector by around 10%.