Risk-based capital and governance in Latin America
Implications of risk-based capital on Mexican insurers
There is a major consensus that different aspects of Solvency II will be applied in one way or another.
In the last decade, insurers have been moving to a higher level of sophistication in applying certain aspects of Solvency II. Proposed law advocates stronger corporate governance and risk management within a well-defined and integrated organizational structure.
Mexico's existing regulation
The regulator has pushed for stricter solvency requirements, including establishing effective and permanent internal control, audit and actuarial functions that promote regulatory compliance. Embedding the risk culture, and having sufficient and updated documentation to use as evidence of compliance of Pillar II requirements are two major challenges.
- A proposed law with a Solvency II-type regime was introduced; however, it has not yet been approved by the Mexican Congress.
- Given the uncertainty of when the proposed law will be approved, some insurers have delayed their progress until there is more clarity about the start date.
- Larger companies are preparing for the new regulation, but have slowed their pace and are cautious about where and how much to invest. European subsidiaries expect that the approved local requirements will be equivalent.
- The law addresses decision-making processes, policy performance, and a mandatory code of conduct for employees and officials.
- Processes must be supported by efficient internal controls, with implementation and monitoring by management and the board of directors. Consistent application of standards, policies and procedures throughout the organization is critical.
- The risk management system must include the risks set forth for calculating the Solvency II Capital Requirement, and other risks identified by the insurer that are not included in this calculation.
Adopting a Solvency II-type regime
As part of the corporate governance system, insurance companies should establish an effective and permanent internal control system.
- There must be an effective system of internal audit, as well as an actuarial function that is performed by persons with sufficient knowledge and experience in financial and actuarial mathematics and statistics.
- Insurers need to define policies and procedures related to procurement of services with third parties.
- The actuarial methodologies used to calculate reserves must be approved by the regulator.
- Internal models are expected to be embedded in the ERM framework.
- Calculations for both internal and standard models must be performed simultaneously two years after the internal model has been approved.
The way forward
Strong steps, agreements and actions have been taken toward a Solvency II-type regime and certain aspects of the standard will likely be applied in one way or another.
- In the short term - stronger requirements for corporate governance and risk management are expected.
- It is uncertain when the proposed law will be approved.
- Goals have been set for insurance premiums to surpass the threshold of 2% of GDP.
- The greater challenge for the industry will be to have new regulation and a co-existing market growth strategy.
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