CHILE: An Introduction to Insurance
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The Chilean insurance market has maintained steady growth in recent years with a remarkable penetration parameter compared to other countries in the region. According to the latest report on the insurance market in Latin America prepared by the Fundación MAPFRE (2019), the Chilean insurance market grew slightly, reaching a premium volume of USD12.762 billion, a volume that decreased to USD11.021 billion in December 2020 according to a report issued by the Chilean Financial Supervisory Agency, hereinafter referred as CMF (Comisión para el Mercado Financiero).
On the other hand, the foreign investment incentives that have characterised our country have been an attraction for the arrival of new insurers. There are currently 69 insurance companies operating in Chile (8 with special guarantee and credit lines; 26 with non-life lines only; and 25 with life lines only).
We also note that the Chilean insurance market, although well capitalised, is operationally strongly supported by foreign reinsurance schemes.
In terms of the regulatory structure that governs the Chilean insurance sector, we can identify four main bodies of law: the Commercial Code and Law 19.496 on consumer rights protection, which regulate the different insurance contracts; the Decree Law 3.538, which regulates the institutionalism of the financial supervisory agency (CMF); and the Decree with Force of Law 251 on Insurance Companies, which regulates the operations of insurers and the activity of intermediation and settlement or adjustment of claims.
It is important to note that this panoramic legal framework that we have described is the result of a series of substantial legal reforms introduced in the Chilean legal system in recent years. In 2012, Law 19.496 was amended, emphasising the adhesion nature of insurance contracts with consumers; in 2013, the major reform introduced by Law 20.667 fully replaced the regulations on insurance contracts in the Commerce Code; and finally, in 2017, Law 21.000 created the Financial Market Commission as a new integrated financial supervision institution in Chile (including the securities, banking and insurance markets).
Comisión para el Mercado Financiero (Financial Market Commission)
In recent years, the regulator has considerably increased regulatory requirements. Within the regulations issued by our supervisory agency, and in the framework of the implementation of the Risk-based Supervision system, there are two rules of great importance that establish the industry's principles on corporate governance on the one hand, and market conduct on the other (General Rules 309 and 420 respectively). Although these rules establish principles and are not mandatory as such, there is no doubt that compliance with them is a minimum standard for the insurance market in its business and especially with its clients, and they require companies to implement self-assessment systems for the degree of compliance with them, the results of which must be reported to the FSA.
In this same context, last May the CMF published NCG 454, which establishes a new standard for the management of operational risk and cybersecurity that will come into force in September 2021. The main objective of this standard is for companies to implement operational and cybersecurity risk management systems that translate into an effective tool for mitigating these risks and, on the other hand, to provide greater transparency to the market with respect to incidents that may affect the quality or continuity of service to customers.
Finally, it is relevant to note that in January 2021, the Financial Market Commission, following IMF recommendations, launched a new internal structure along the lines of the Twin Peaks model, which divides the two main objects of supervision into a prudential pillar and a market conduct pillar. This is likely to lead to more intensive regulation and supervision of the banking, insurance and securities sectors.
An analysis of insurance dispute resolution must consider two fundamental and initial factors. On the one hand, the distinction between large-risk insurance and consumer insurance and, on the other hand, the technical component of insurance contracts, which is present in both cases but is of greater complexity in large-risk insurance. Thus, insurance dispute resolution mechanisms must be viewed in the light of this duality and technical complexity.
Historically, insurance disputes in Chile have been resolved through arbitration; however, the major reform of the Commerce Code in 2013 has promoted, albeit somewhat slowly, other means of dispute resolution. In the framework of this reform, although legal arbitration was introduced as a general rule, it also provided for the possibility for the insured to opt for recourse to the ordinary courts in the case of claims of less than 10,000 UF. For their part, major insurance disputes involving large risks are still being heard in arbitration.
In addition to the above, the insurance industry in the implementation of self-regulation policies, in order to address the problems of market conduct and provide it with greater transparency, implemented a few years ago the figure of the Insurance Ombudsman, which has provided an efficient mechanism for resolving conflicts between insurers and insurance consumers.
Also, in the consumer sphere, the National Consumer Service (Sernac, a kind of financial ombudsman) has taken a more prominent role in insurance disputes in specific cases.
Special Circumstances: COVID-19 and "Estallido Social" (social outburst)
In this legal regulatory state, Chile was faced with two events that affected the insurance market. The first of these was the so-called social outburst, which resulted in extensive damage to infrastructure and private and public property as a result of criminal acts in the context of popular unrest. This has led to a change in the conditions of the so-called political risk coverage, namely an increase in exclusions, premiums and reinsurance rates. The second event is the COVID-19 pandemic, which had two effects that we would highlight as relevant for the Chilean insurance market. The first of these is the paralysis of various productive activities and the consequent losses due to actions by the authorities as a result of the health emergency and the quarantines decreed. This, to a greater or lesser extent depending on the terms contracted, could affect the coverage of losses due to stoppage, something that remains to be seen. Other branches affected have been credit and guarantee insurance, whose loss ratio has increased as a result of the economic consequences of the pandemic and the political situation the country has been going through recently.
The second effect of interest for the insurance market is the legislative activity due to the pandemic. On the one hand, ongoing contracts have been modified, as in the case of unemployment insurance and life annuities, and on the other hand, protection systems have been created that include compulsory insurance, as in the case of the COVID-19 insurance for workers.
Roberto Ríos Ossa
Stefanie Ramdohr Montgomery
Alonso García Echegoyen