Training Committee

5. When investigating into the characteristics of bonds, we find that first demand is one of the conditions in many countries. This is not so in Venezuela. In your opinion, why is it that we have this advantage?

This has been a long fight from which the insurance industry always came out victorious arguing that, in the case of a construction covered by a bond, the obligee cannot wait for the debtor to comply, and, if the oblige understands that there is no compliance, simply require payment of the economic part and leave the surety and the debtor agree on what first demand implies. A bond is a contract; ethics requires both parties to comply with their commitments and carry out all actions. The obligee must notify delays, construction defects and any other thing that may imply a possibility of default so that the surety may intercede and not simply turn into the issuer of a check upon default. With the first demand, we would be attacking a culture of respect, responsibility towards the activity and the functions of each of the parties. The insurance industry has upheld that first demand implies waiving the unavoidable right of the debtor also having to comply with their obligations to society and not becoming an obligee that receives payment upon first demand, in order to abide by the social commitment in which all of us have responsibilities, rights and duties. That is my interpretation, and with that argument we have managed to make the first demand nonexistent in Venezuela. In addition, if the insurance sector accepts and issues on-demand bonds, it waives the right of defense, the right to search for the truth, and the recovery actions would go against it.

6. What do you attribute the increase in losses during these last two years to?

To improvisation, because it is only by walking a long path that one can become a creditworthy constructor in the execution of works, or an equipment or service provider that ensures an adequate satisfaction and an impeccable performance. The scenario has undergone very important changes as to who are the providers of goods and services. When one works with a traditional provider that has been fulfilling their commitments adequately for thirty, forty or fifty years, there is a great tendency to maintain that relation, because in some way one takes into consideration that provider's proven experience.

This has to do with underwriting. During my years as a bond underwriter, there was a rule that we would apply every time there was a change in government: restrict or reinforce underwriting, for a great number of new companies began to appear, and great caution was taken when underwriting bonds for companies that, in some way, belonged to the previous government. If there were political continuity in the State's works -regardless of the political party in government-, there wouldn't be so many problems, because all players would have their experience and quality recognized. But, when there are changes and -in our case- a profound change of national perspective, players change in some way for contextual and practical reasons; many inexperienced players appear, traditional contractual rules are not abided by and defaults occur that would otherwise not have occurred. This is the consequence of losing, up to a certain point, the experience previously gained in handling contracts. Moreover, in cases of emergency, when there are no calls for tenders for the granting of contracts, the insurance company wonders whether the company selected will have the skills and capabilities required for carrying out the project. This causes a huge number of problems, such as subcontracting, which we have frequently seen. If the debtor does not have the capacity, why not seek a provider that does? This marks the beginning of the increase in the work's costs, distribution of results and extension of deadlines, and of problems.

7. What are the measures you think insurance companies and other institutions should take?

The most important issue is underwriting. Underwriting a bond requires experience, because it is easy to have the book and the checklist. But very little will be done if the experience needed to make the adequate decisions regarding the acceptance or rejection of bond applications. I think that, just like in all other activities, you do not learn by a spontaneous generation but by transmission of that subjective element of underwriting -that is perhaps the most important one- from those who already have the experience to the newcomers who still do not have it.

Books tell you about the assets, the equipment, the contracts, a number of issues that are very subjective and refer to the history and performance record of the bond applicant. There must be a record of works satisfactorily completed for the underwriting analysis to include the element that ensures good results. This leads to something I have said before, because, being the insurance industry active in bonding, there are two types of reactions: those regarding claims and those regarding losses. When there is a fire claim because a shop was struck by lightning and burnt or a transport claim because a gondola was overturned and its shipment disappeared, the risk underwriter takes it simply as an event for which they were prepared, because that is why the fire or transport policy is issued.

However, when a bond claim occurs, the bond underwriter starts suffering because he feels that claim should not have existed. His link to underwriting is too emotional, and the claim makes him feel an anguish that should not be felt, but it is so. Then, his level of suffering is too high because he is very involved in the underwriting, there is a subjective element. In the case of fire or transport, an external random fact produces the harm. In the case of bonds -even though this does not necessarily apply to all bonds- the subjective element has a great importance. So, I conclude that the issue is the underwriting.

Don't you think there should be more control by the regulator?

Personally, I prefer as little intervention as possible in all activities. As more efforts are done towards the strengthening of values, devotion, respect and solidarity, the less need there is for authority intervention, control and penalties. Unfortunately, the world has changed. If we review history, in the insurance activity there used to be an expression of commitment called "provisional coverage", which was granted over the telephone, and which has come to an end for reasons we all know: "If you do not put it in writing and sign it, I have no coverage". Simply put, those expressions are the result of the diverted evolution of social behavior or commercial conduct.

8. What do you think of the new insurance activity law in terms of bonds?

I am not very familiar with the new insurance law in terms of bonds, because it has somehow maintained the previous rules, except for the one related to the granting of bonds limited by client to the insurance company's paid in capital. The insurance superintendent made a very accurate interpretation, safeguarding the activity; in some way, telling those who wrote the law that they totally forgot about the existence -in the case of bonds (I do not know about other lines)- of that which is intrinsic to insurance, i.e. reinsurance. Insurance is probably (and certainly to a larger extent than banking) the only human activity that has settled a network, a universal web. For instance, a laboratory produces a drug, sells it and that is all; it is limited to one, two or three markets. Insurance, however, due to the requirement to spread the risk, throughout its many years of development, has led to the global participation of players in the risk. If you insure the bridge over the Maracaibo Lake, probably, to say it in colloquial terms, half of the first stilt is insured or covered by African, Australian or Russian reinsurers, and the other half by others. What I mean to show is that the superintendent understood that reinsurance is the umbrella that allows the insurance activity to exist in the whole world, in its catastrophic exposures as well as in large risks, because an earthquake or any of nature's catastrophic manifestations, is not possible without reinsurance. The same thing happens with bonds, which can have catastrophic consequences if for any reason there is a debacle at any given time: With a protection of this kind, the continuity of the activity is therefore ensured.

This situation has led to a series of consultations by the industry to the regulator, in order to present their position. The work of the Chamber through the Bond Advisory Committee, the opportunity to raise the issue at the international insurance meeting and explain the consequences, finally arouse the concern of the legislator and, some days ago, there was an article on the press mentioning the modification to this limitation in the law ruling insurance.