ChileInsurance Solvency Reform

Guillermo LarrainSuperintendent

Superintendencia de Valores y SegurosApril 2009

Agenda

1. Market evolution

2. The reasons behind success

3. The dynamic regulatory framework

4. The Impact of the International Financial Crisis

(Millions of USD of each year)

Market evolution: Premium

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

P&C Life Market

Premiums per capita and direct written premium as a percentage of GDP

Per capita premium

(USD)

0

50

100

150

200

250

300

350

400

450

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Per capita spending on premiums Direct written premium as a percentage of GDP

Direct written premium

(% GDP)

2,0%

4,1%

26,2

415,4

Asset Evolution(In million 2008 CLP )

Market evolution:

Assets of the Insurance Industry

Total assets amounted to USD 29,6 bn in 2008

Premium Distribution by product type: Non Life

Fire12,5%

Earthquake17,3%

Motor vehicle18,4%

Liability insurance9,2%

Transportation5,1%

Other insurances26,1%

Personal Accidents Compulsory Insurance

3,1%Credit Insurance

2,1%

Personal Accidents6,4%

Cumpulsory

December, 2008

Premium Distribution by product type: Life

Related to the Pension System

Individual APV (Voluntary

retirement saving)4,5% Credit Life

14,4%

Others7,0%

Life Annuities42,5%

Universal life7,1%

Temporary life7,2%

Disability and Survivors Insurance

11,2%

Health6,0%

December, 2008

The Chilean Insurance sector is open to foreign competition: premium in Non Life

Non Life

7,3%9,3%

12,9%15,7%

22,2%

30,8%

1,8%

0,0

100,0

200,0

300,0

400,0

500,0

600,0

700,0

Chile USA England Spain Switzerland France Germany

The Chilean Insurance sector is open to foreign competition: premium in Life

Life

3,3%5,8%

11,1%13,5%

19,7%

46,6%

0,1%0,0

200,0

400,0

600,0

800,0

1.000,0

1.200,0

1.400,0

1.600,0

1.800,0

2.000,0

Chile USA Holland Spain Switzerland France Brazil

Chilean Insurance Market: The reasons behind success

• Positive macroeconomic environment. Relatively high growth and a more stable framework based on

– prudent fiscal policy (structural balance policy), – inflation targeting, – floating exchange rate and – conservative financial regulation with strong enforcement.

• Development of a long term capital market. Role of institutional investors: mutual funds, investment funds, pension funds and insurance companies.

• Pension system Annuities Disability and survivors insurance Electronic market for annuities (SCOMP)

Voluntary savings (individual and collective)

• Freedom for - setting insurance rates- developing insurance products - contracting reinsurance

• Sound, prudent regulation…

Million USD % Portfolio Million USD % PortfolioDomestic Fixed Income 20.957 76% 746 82%

Securitized bonds 439 2% 16 2%Mortgages 5.389 19% 48 5%

Domestic Variable Income 1.342 5% 47 5%Real Estate 2.948 11% 44 5%

Other 853 3% 73 8%

Foreign Investments 1.640 6% 3 0%Structured Notes 524 2% 0 0%

27.740 100% 913 100%

Life Insurance Companies General Insurance Companies

Impact of the International Financial Crisis: Industry portfolio

Impact of the International Financial Crisis: Solvency in Life

Available capital / Required Capital (Market)

0

1

2

3

20

03

-09

20

03

-12

20

04

-03

20

04

-06

20

04

-09

20

04

-12

20

05

-03

20

05

-06

20

05

-09

20

05

-12

20

06

-03

20

06

-06

20

06

-09

20

06

-12

20

07

-03

20

07

-06

20

07

-09

20

07

-12

20

08

-03

20

08

-06

20

08

-09

20

08

-10

20

08

-11

20

08

-12

20

09

-01

Industry Average

AIG subsidiary

Industry Minimum

Impact of the International Financial Crisis: Leverage in Life

Leverage (Mercado; Vida)

0

5

10

15

20

2003

-09

2003

-12

2004

-03

2004

-06

2004

-09

2004

-12

2005

-03

2005

-06

2005

-09

2005

-12

2006

-03

2006

-06

2006

-09

2006

-12

2007

-03

2007

-06

2007

-09

2007

-12

2008

-03

2008

-06

2008

-09

2008

-10

2008

-11

2008

-12

2009

-01

fecha

Industry Average

AIG subsidiary

Industry Maximum

The Insurance Regulatory System in Chile

The Chilean insurance supervisory and regulatory system rests in two key concepts:

Insurers have sufficient financial resources to fulfil

their obligations with policyholders within a stable

and competitive financial system

To establish a regulation and supervision allowing the

protection of policyholders rights

SOLVENCY MARKET CONDUCT

The dynamism of the solvency regulatory system in Chile

• Until 2005 the solvency supervisory approach was focused in – establishing prudential rules, – the supervision of the fulfilment of these rules, – and the review of financial statements and others financial and

technical information.

• Rules and supervision focus in:i) Technical Provisions (SVS standards)ii) Capital Requirements (leverage and solvency margin)iv) Investments (restrictions and limits for diversification of market and credit risk)v) Reinsurance (minimum risk rating) vi) Financial and technical information.

• However, few attention was given to governance and risk management of the insurers

Drivers for Solvency Regulatory Change

1. 2002: Bankruptcy of a Chilean life insurance company due to corporate governance and control system problems

2. 2004: FSAP, finding of weakness in the supervision model

3. 2004: Strict self assessment of compliance of IAIS Core Principles (2004)

Revision of compliance of ICPs in several dimension where Chile was partially or no observant. There were improvements across the board

All this suggested the need to advance towards a

Risk Based Supervision approach.

New SVS Risk Based Supervision Approach

• Risk Based Capital

• New Investment Regime

• IFRS (new assets and liabilities valuation

considering economic value)

Level 1

Regulatory level

Minimum Solvency

Requirements

Level 2

Supervisory level

Risk Assessment and Mitigation Activity

Process

• Risk-based Supervision Focus

• Corporate Governance

• Market Conduct

• Market Disclosure

Since 2005 SVS has been working in the implementation of a new RBS model.

The process has been divided in two phases:

• Phase I: Research and Planning (2005-2006):

– International case studies and IAIS recommendations

– Adapting the model to the Chilean reality

– Planning and definition of the activities for the implementation process.

New RBS Model. Implementation Process

This Phase was done with the support of the Canadian Financial Supervisor (OSFI) and completed according the plan.

• Phase II: Implementation (2007-2009):

– Creating Working Groups for the development of the different aspects of the model (EWS, risk matrix, supervisory manuals, RBC, investment regime, etc.). Completed

– Reorganization of the supervision and regulation areas Completed

– Special training program for the SVS Staff Completed

– Strengthening external auditors and actuaries responsibilities in course

– Development of a specific methodology for a RBC standard model in course

– Procedure of legal amendment in course

– Development of a special information system to support the new supervisory approach in course

– Implementation of IFRS norms and assets and liabilities valuation at economic value in course

New RBS Model. Implementation Process

TODAY

Working groups for the development of different aspects of the model

Reorgnization of the supervision and regulation areas

Special training program for SVS staff

PHAS

E II

Strengthening external auditors and actuaries responsabilities

Development of a sprecific methodology for a RBC standard model

Legal amendment

Development of a special information system to support the new supervisory approach

Implementation of IFRS norms and asset and liabilities valuation at economic value

International case studies and IAIS recommendations

PHAS

E I

Adapting the model to the Chilean reality

Planning and definition of the activities for the implementation procces

2005 2006 2007 2008 2009 2010

New RBS Model. Implementation Process

• Chile has a dynamic and solid insurance sector that has faced well the current crisis. The system is well capitalized, solvent.• The chilean insurance sector displays some unique characteristics: its developed annuities sector, the original blind electronic system for annuities (SCOMP) and the development of massive distribution channnels for insurance products.• From a regulatory perspective, this has been the outcome of a rule based regulatory approach which is gradually becoming binding for the development of the industry.• The growing payout phase of the pension system represents a major push for the life annuities industry.• Chile needs a new approach for solvency regulation. We are in the middle of that process.

Final words

Chile – Insurance Solvency Reform

Guillermo LarrainSuperintendent

Superintendencia de Valores y SegurosApril 2009