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Risk-based capital and governance in Latin America: Implications of risk-based capital on Argentine insurers - EY - Global

Risk-based capital and governance in Latin America

Implications of risk-based capital on Argentine insurers

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The current framework does not seem to indicate that an extended application of the Solvency II methodology will be feasible in the near future.

The Argentine insurance market in light of Solvency II differs significantly from that of other Latin American countries. Under the current economic and regulatory framework, applying Solvency II methodology does not appear to be feasible in the near future.

Argentina’s existing regulation

The industry is tightly regulated and the life and pension insurance market is nationalized. The current solvency system is based on traditional measurement methods and indicators. It is not sensitive to risk, and requirements are consistent for all insurance products.

  • Far from being a priority, Solvency II has only been included superficially in the regulatory agency’s list of initiatives in recent years.
  • Insurance activity is impacted by conditions that could be deemed as traditional within the Argentine economic framework.
  • The high inflation rate has a strong influence on the increase in costs of material damages and compensation claimed for personal damages.
  • The large number of lawsuits (particularly in automobile and workers’ compensation) is having an impact on many companies’ loss reserves.
  • Insurance resolutions cover most activity including unearned premiums and methods of mathematical reserve valuation – mechanisms that insurers use to value their payables.
  • Under local regulations, insurers should evidence compliance with minimum capital requirements on a quarterly basis. Of 155 insurers, only 4 carried minimum capital deficit as of 30 June 2011 (last fiscal year-end).

Adopting Solvency II or its equivalent

Solvency II has not been adopted and no clear initiatives have been defined in the past few years.

  • The regulatory agency, the Superintendencia de Seguros de la Nación (SSN), has only addressed Solvency II in Argentina through public statements at seminars or insurance industry publications.
  • The only resolutions to date (issued in May 2010) are aimed at reviewing and, possibly, establishing new capital requirement criteria and a good management practice code around principles of corporate governance.

The way forward

The local regulatory agency has launched a strategic insurance plan that addresses elements of Solvency II methodology. So far, there has been little progress.

  • Some players believe the plan should include adopting a risk-based capital system.
  • The rest of the market would be willing to accept a model that takes into account and is adapted to local market conditions.
  • Certain resolutions cover corporate governance issues in a scattered fashion; however, they include the role of the regulatory agency in providing a minimum methodology.
  • The current framework indicates that an extended application of Solvency II methodology will only be feasible in the near future for the offices and branches of European-based companies.

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