By most measures, Chile is considered the third largest insurance market in Latin America. It is widely considered to have the most stable market and political environment in the region. These advantages, however, are significantly counterbalanced by the relatively high costs of doing business in the nation and the advanced development of the country's insurance market, as reflected by the region's highest insurance penetration rate (6%). Given the maturity of Chile's insurance market and regulatory scheme, it is not surprising that the market's two most significant trends mirror efforts underway in the United States and Europe: (1) legislative efforts to modernize the nation's insurance laws; and (2) regulatory initiatives to reform the insurance regulator's solvency scheme.
Market Trends and Characteristics
With the exception of fairly minor regression in 1998 and 2001-2002, total premiums for the Chilean insurance market have increased steadily since 1985 from less than US $500 million to more than US $11 billion in 2008. Although life insurance remains by far the largest sector in the market (total premiums of more than US $7 billion in 2008), the property and casualty market is robust as well (nearly US $4 billion in total premiums in 2008). This growth has outpaced the overall Chilean economy, as direct written premium as a percentage of GDP has grown from approximately 2% in 1985 to more than 4% in 2008.
The Chilean market is also relatively open to foreign participation, with fairly minor regulatory impediments. This has resulted in a significant foreign presence in the market, with foreign companies collecting the majority of total premium in 2008 in both the life and non-life sector. Indeed, foreign companies were responsible for nearly 70% of total non-life premiums and nearly 54% of total life premiums in 2008.
At a recent presentation, the Chilean insurance regulator, the Superintendencia de Valores y Seguros (the "SVS"), attributed the steady positive development of the Chilean insurance market to a positive macroeconomic environment in the country, development of a long-term capital market, a stable and well-organized pension system, freedom of contract among participants in the insurance market and sound, prudent regulation. As to the macroeconomic environment, the SVS noted in particular the country's "prudent fiscal policy," inflation targeting, the floating exchange rate and "conservative financial regulation with strong enforcement." As to market freedom, the SVS noted the importance of permitting companies to set insurance rates, freely develop insurance products and freely contract for reinsurance.
Recent Regulatory Developments
The SVS considers its regulation of the Chilean insurance market to be based in two primary areas: solvency and market conduct. As to the solvency, the SVS identified its responsibility to be to ensure that insurance companies operating in the Chilean market maintain sufficient financial resources to fulfill their obligations to policyholders in a "stable and competitive financial system." As to market conduct, the SVS considers its duty to be to establish a system of regulation and supervision sufficient to protect the rights of policyholders. In recent years, these parallel goals have led the SVS to concentrate on two initiatives: (1) the modernization of the Chilean insurance and reinsurance laws and regulations; and (2) the implementation of a new solvency supervision model based upon Solvency II principles.
Proposed Modernization Legislation
In July 2008, the Chilean legislature was presented with a draft law designed to modernize the insurance and reinsurance provisions contained within Chile's Code of Commerce. If enacted, the legislation would have replaced Chile's current laws concerning private insurance and reinsurance in their entirety. Particular areas of reform include: (a) the required contents of an insurance policy; (b) insured's obligations; (c) ramifications of errors, omission and inaccuracies in policy applications and disclosures; (d) bad faith denial of coverage; (e) subrogation; (f) arbitration; and (g) third party rights under liability insurance; and reinsurance. Of particular note to foreign companies operating in Chile are the proposed law's provisions concerning extra-contractual liability, third party rights, arbitration of coverage disputes and reinsurance:
- Article 529 (Indemnification Obligation/Bad Faith): The insurer's principal obligation is to indemnify the insured for covered loss. The indemnification obligation of the insurer shall never exceed the policy limit. However, where the insurer fails to indemnify, the insured may be entitled to interest. Furthermore, if the failure to indemnify is due to the insurer's bad faith, the insured may recover additional damages in addition to indemnification.
- Article 543 (Arbitration): Arbitration is mandatory for coverage disputes exceeding a certain amount (approximately $200,000), while coverage disputes for less than that amount can be submitted to arbitration or the ordinary courts of Chile.
- Article 572 (Third Party Rights Under Liability Insurance): Third parties may pursue a direct action against the liability insurer for damages allegedly caused by the insured and covered by the policy. In such situations, the insurer shall have the right to appoint defense counsel and control the defense of the insured.
- Articles 585-589 (Reinsurance): Like the existing code, the proposed legislation provides little regulation as to reinsurance. However, the reinsurance sections of the proposed law do establish certain guiding principles: (1) the terms of the reinsurance contract shall prevail over legal norms, except to the extent such norms concern public order; (2) international customs and usages concerning reinsurance shall assist in the interpretation of reinsurance contracts; (3) reinsurance shall have no effect upon the scope of the insurer's obligations pursuant to the underlying insurance contract; (4) reinsurance contracts may call for the insurer's indemnification payments to be made directly by the reinsurer; and (5) any disputes regarding the reinsurance contract shall be submitted to an arbitrator in Chile who shall apply national law to the dispute unless the parties agree that the arbitrator is to resolve the dispute in accordance with international business arbitration norms recognized in the laws of Chile.
Although the legislation was originally expected to obtain quick approval from the legislature, it was not passed during the 2008 legislative session. Nonetheless, most observers still view the passage of the legislation as a question of when, not if.
Ongoing Solvency Supervision Overhaul
Since 2005, the SVS has also been engaged in reviewing and considering means to improve its solvency supervision scheme. Prompted by the 2002 failure of a Chilean life insurer and external and internal reviews of the SVS solvency supervision model, the proposed modifications mirror many of the concepts underlying the European Union's Solvency II initiative. In particular, the SVS intends to move from a solvency scheme based upon uniform solvency requirements to a company-based, risk-driven scheme emphasizing corporate governance, risk management and transparency between companies and the regulator. The initial research and planning stages of the initiative were completed by 2006 and the SVS has indicated that it expects to complete implementation and required legal reforms in 2009 and 2010.
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