Risk-based capital and governance in Latin America
Implications of risk-based capital on Brazilian insurers
A more pragmatic and less-demanding framework than Solvency II may be a feasible regulatory strategy for Brazil.
There is a growing interest in implementing modern enterprise risk management techniques. A more pragmatic and less-demanding framework than Solvency II may be a feasible regulatory strategy for the future.
Brazil's existing regulation
Industry consolidation and sharper competition is being driven by regulatory activity and market dynamics. Sound and effective risk management may be the best strategy for insurers to gain a competitive edge in saturated markets and venture into new ones through innovation.
- Implementation costs and capital requirements associated with the new risk-based framework may induce consolidation waves and hamper small and mid-sized company growth.
- Survival may require merging, purchasing existing portfolios or entering new partnerships to maintain profitability, realize economies of scale and stronger market position.
- Insurers may be forced into investing in riskier assets to achieve higher returns and supply more appealing life and pension products with longer-term guarantees.
- In a challenging environment driven by reduced interest rates and lower return on invested assets, major insurance providers are implementing clearer risk appetite measures and reinforcing internal audit, actuarial and risk management functions.
- Attention is shifting to measures that could enhance sustainable underwriting profit.
- One question life insurers should consider: How can you increase capital efficiency while financial assets decrease returns, risk-based capital requirements become more demanding and competition continues to grow?
Adopting Pillar I and Pillar II initiatives
The Brazilian Regulatory Authority is taking a consistent and gradual path toward risk-based supervision.
- A defined set of principles and rules was established regarding insurance contracts and validation of liabilities.
- Insurers adopted IFRS as the guiding standard for producing statutory financial statements.
- As a result, Brazilian GAAP moved toward a more fair value-oriented approach, requiring greater disclosure about insurers' financial condition.
- Standard risk-based capital requirements were introduced that generally increases the required capital for operating in the Brazilian insurance market.
The way forward
The Supervisory Authority's agenda in the next few years appears to be consistent with the paradigm of risk-based supervision. Simultaneously, initial proposals are being drafted for the standard formula for capital charges based on operational risk.
- Implementation of standard risk-based capital requirements for longevity, mortality, and disability, expense and benefit revision risks arising from long-term life and pension contracts is planned for later this year or 2013.
- Other proposals to improve enterprise governance and address Own Risk and Solvency Assessment-like regulatory requirements are being addressed.
- Growing demand for improved ERM is increasingly present on the agendas of regulators and insurance companies.
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