Risk-based capital and governance in Latin America

Implications of risk-based capital on Chilean insurers

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To successfully implement Pillar l, Chilean insurers and the local regulator will need to invest significantly in IT, finance and actuarial systems.

Most companies do not have a robust risk management infrastructure. Nevertheless, the local regulator is working to move to risk-based regulation (and perhaps a Solvency II framework) that better captures current risks faced by the industry.

Chile’s existing regulation

The insurance market is quite stable, primarily because of factors such as tight controls over insurance products and asset portfolios. Adopting a Solvency II Pillar II-type approach would benefit insurers through improved governance, more informed decision making and enhanced risk management.

  • Most companies do not have a well-defined risk appetite or risk function, relying on supervisory limits that apply a holistic approach to risk management.
  • The regulator has been working since 2005 on implementing a Solvency II framework to move the industry to a more sophisticated state. A new law requiring insurance companies to withhold risk-based capital was introduced in 2011; approval is expected in 2012.
  • The current state of risk management among insurers suggests the need for a more forward-looking cultural shift, and investment in time and resources, to adopt Pillar II initiatives.
  • There is a limited pool of talent from which to hire risk professionals who understand insurance.
  • Some aspects of the business might transform significantly as a consequence of changes to the relative importance of performance measures.
  • One hurdle will be getting the appropriate granularity of data to perform credible analysis; investment will be required in IT, finance and actuarial systems.

Adopting the risk-based capital framework

The methodology for calculating risk-based capital has yet to be made public; however, it is expected to be very similar to Solvency II.

  • Local regulators have made it clear that, for the time being, there intend not to adopt a full economic framework for annuity products.
  • A consultative white paper with details around the calculation of risk-based capital is expected to be published in Q3 2012.
  • The first Quantitative Impact Study is to be performed by the end of 2012.

The way forward

For the next few years, many companies will start implementing initiatives to improve their risk management practices to achieve a more robust risk strategy.

  • Insurance company efforts will be focused on developing a risk policy which must be submitted to the regulator by the end of September 2012.
  • Local regulators intend to reward companies that have implemented better risk management practices, which will be reflected indirectly in capital requirements.
  • The consequences of having a poor solvency assessment are directly correlated to the soundness of the company’s risk management practice.

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