Chile Insurance Solvency Reform

Guillermo Larrain Superintendent Superintendencia de Valores y Seguros April 2009

Agenda

1. Market evolution 2. The reasons behind success 3. The dynamic regulatory framework 4. The Impact of the International Financial Crisis

Market evolution: Premium (Millions of USD of each year) 5.000

4.500

4.000

3.500

3.000

2.500

2.000

1.500

1.000

500 0 P&C Life Market 8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

0

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

Per capita premium (USD)

450

415,4

400

26,2

350 300 250 200 150 100 50 0

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

1,5 1,0 0,5 0,0 3,5 3,0 2,5 2,0

Direct written premium

4,5

(% GDP)

4,0

4,1% 2,0%

Market evolution: Assets of the Insurance Industry Asset Evolution (In million 2008 CLP ) 20 000 000 18 000 000 16 000 000 14 000 000 12 000 000 10 000 000 8 000 000 6 000 000 4 000 000 2 000 000 0 LIFE P&C MARKET Total assets amounted to USD 29,6 bn in 2008 20 000 000 18 000 000 16 000 000 14 000 000 12 000 000 10 000 000 8 000 000 6 000 000 4 000 000 2 000 000 0

Premium Distribution by product type: Non Life Personal Accidents Compulsory Credit Insurance Insurance 2,1% 3,1% Personal Accidents 6,4% Other insurances 26,1%

Cumpulsory

Fire 12,5% Earthquake 17,3% Transportation 5,1% Liability insurance 9,2% Motor vehicle 18,4%

December, 2008

Premium Distribution by product type: Life

Life Annuities 42,5% Others 7,0% Individual APV (Voluntary retirem ent saving) 4,5% Credit Life 14,4% Universal life 7,1% Health 6,0% Tem porary life 7,2% Related to the Pension System Disability and Survivors Insurance 11,2% December, 2008

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

Non Life

700,0 600,0 500,0 400,0 300,0 200,0 100,0 0,0

30,8% Chile 22,2% USA 15,7% England 12,9% 9,3% 7,3% 1,8% Spain Sw itzerland France Germany

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

Life

2.000,0 1.800,0 1.600,0 1.400,0 1.200,0 1.000,0 800,0 600,0 400,0 200,0 0,0

46,6% Chile 19,7% USA 13,5% Holland 11,1% 5,8% 3,3% Spain Sw itzerland France 0,1% 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…

Impact of the International Financial Crisis: Industry portfolio Domestic Fixed Income

Securitized bonds Mortgages

Domestic Variable Income Real Estate Other Life Insurance Companies Million USD % Portfolio 20.957

439 5.389

76%

2% 19%

1.342

2.948

853 5% 11% 3% Foreign Investments

Structured Notes

1.640

524

27.740

6%

2%

100% General Insurance Companies Million USD % Portfolio 746

16 48

82%

2% 5%

47 44 73 5% 5% 8%

0

3 913 0%

0%

100%

Impact of the International Financial Crisis: Solvency in Life

Available capital / Required Capital (M arket)

3 2 1 0

AIG subsidiary Industry Average Industry Minimum

Impact of the International Financial Crisis: Leverage in Life

Leverage (M ercado; Vida)

20 5 0 15 10

fecha Industry Maximum Industry Average AIG subsidiary

The Insurance Regulatory System in Chile The Chilean insurance supervisory and regulatory system rests in two key concepts: SOLVENCY

Insurers have sufficient financial resources to fulfil their obligations with policyholders within a stable and competitive financial system

MARKET CONDUCT

To establish a regulation and supervision allowing the protection of policyholders rights

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) iv) v) vi) Capital Requirements (leverage and solvency margin) Investments (restrictions and limits for diversification of market and credit risk) Reinsurance (minimum risk rating) Financial and technical information.

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

Drivers for Solvency Regulatory Change 1.

2.

3.

2002: Bankruptcy of a Chilean life insurance company due to corporate governance and control system problems 2004: FSAP, finding of weakness in the supervision model

All this suggested the need to advance towards a Risk Based Supervision approach.

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

New SVS Risk Based Supervision Approach

Level 2 Level 1 Supervisory level Risk Assessment and Mitigation Activity Process Regulatory level Minimum Solvency Requirements

•

Risk-based Supervision Focus

•

Corporate Governance

•

Market Conduct

•

Market Disclosure

•

Risk Based Capital

•

New Investment Regime

•

IFRS (new assets and liabilities valuation considering economic value)

New RBS Model. Implementation Process 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.

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

New RBS Model. Implementation Process • 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

International case studies and IAIS recommendations Adapting the model to the Chilean reality Planning and definition of the activities for the implementation procces 2005 2006 2007 TODAY Working groups for the development of different aspects of the model Special training program for SVS staff Reorgnization of the supervision and regulation areas 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 2008 2009 2010

Final words • 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.

Chile – Insurance Solvency Reform

Guillermo Larrain Superintendent Superintendencia de Valores y Seguros April 2009