A number of publications on insurance supervision in Chile indicate that the country has been making efforts to improve regulation and supervision in the insurance sector. In 2004, the Financial System Stability Assessment (FSSA) conducted by the International Monetary Fund (IMF) identified flaws in the regulatory framework as well as in the supervisory approach of the Superintendency of Securities and Insurance (SVS). The FSSA, therefore, recommended Chile to introduce risk-based supervision, increase provisions, modify regulatory capital requirements, and strengthen off-site and on-site monitoring. The FIRST Initiative website also notes that the heavily compliance-based supervisory approach in the insurance sector is not in accordance with the International Association of Insurance Supervisors (IAIS) principles. With the assistance of the FIRST Initiative, a two phase project for Chile was started as a follow up on the FSSA in 2005 with an expected completion date of 2008. The project aims at strengthening the regulation and supervision of the insurance sector by introducing risk-based supervision. The SVS website also mentions a new model of risk-based supervision in preparation in Chile. The scheme, called Supervision Based on Risk, aims at focusing on solvency supervision with minimum solvency requirements and a risk assessment process in line with the IAIS standards. The 2007 Markets II Reform Law, per an IMF report of the same year, also involves certain improvements in the licensing and investment limits of insurance firms, indicating progress on some fronts. A 2008 IMF report recommends Chile to have an IMF Financial Sector Assessment Program Update to assess the viability of further reforms and their bearing on the supervisory and regulatory framework as well as market stability.

General Overview

There is insufficient information available in the public domain that directly addresses Chile's adherence to the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors (IAIS). However, the sources cited point strongly towards Chile's efforts to improve regulation and supervision in the insurance sector. The Superintendency of Securities and Insurance (SVS) is the insurance sector supervisor and is "an autonomous corporate body affiliated with the Chilean Government through the Ministry of Finance," notes the SVS website. The SVS supervises all activities and entities associated with the insurance markets in Chile. The supervised entities include insurance companies, reinsurance companies, insurance brokers, insurance adjusters, insurance agents, and endorsable mortgage mutual fund administrating agents. The SVS is also charged with maintaining the registry of foreign insurers, and national as well as foreign reinsurance brokers. Further, the SVS enforces compliance with all applicable laws, rules, regulations, and by-laws that collectively govern the insurance market operations. Its enforcement authority encompasses applying sanctions for breaches and infringement of rules and regulations. In addition, the SVS issues rules and regulations to establish a regulatory framework for insurance markets. Lastly, its responsibility includes market development and promotion, wherein it undertakes different initiatives to develop the market through the introduction of new products and services. The SVS is listed as a member on the IAIS website.

In 2004, the IMF conducted a Financial System Stability Assessment (FSSA) for Chile and concluded that the country has a sound financial system that is resilient to shocks. The FSSA, however, observes weaknesses in the insurance sector pertaining to the rules-based supervisory approach, the sector's resolution framework, the under provisioning of risks, the anti-money laundering/combating the financing of terrorism (AML/CFT) framework as applicable to the insurance sector, and the management of heightened competition in the sector. The rules-based supervisory framework, per the FSSA, "has led insurance companies to devote considerable energy to "managing rules," rather than "managing risks"" (p. 23). The 2004 FSSA also criticizes the segmented, sectoral approach to supervision, with separate superintendencies for banks, insurance and securities, and the pensions sector. Further, considerable interference is accorded by the Central Bank of Chile (BCCh) and the Ministry of Finance (MdH) in the areas of financial stability and financial sector development policy, respectively. The IMF faults the inter-agency cooperation/coordination framework in Chile, which has no legal basis spelling out respective roles and responsibilities of the participants. Also, insurance companies have not fully factored in many risks in their provisioning. For instance, future improvements in life expectancy; prepayment, credit and interest rate risks; and updates to the mortality tables have not been factored in. Once provisions are appropriately made, a majority of the companies are in the danger of falling below their minimum capital requirements, resulting in huge government losses related to its annuity performance guarantee. Further, increased competition due to more players in the markets will lead to a greater squeeze on profits and increased incidences of failures. Insurance failures have seen weak resolutions especially with respect to the orderly transfer of obligations and dealing with asset deficiencies. The FSSA therefore recommends Chile to work towards: (1) introducing risk-based supervision; (2) increasing provisions and modifying the regulatory capital requirements; (3) strengthening off-site and on-site monitoring to capture risks early on; and (4) containment of spillovers from weak insurance firms to the general financial conglomerate and the financial sector as a whole.

The Financial Sector Reform and Strengthening Initiative (FIRST Initiative) website comments that though the supervisory system in the insurance sector "has performed well overall," it is not in line with the ICPs promulgated by the IAIS. The FIRST Initiative criticizes the "excessively restrictive" regulation and "heavily compliance-based" supervisory approach of the SVS, noting that the approach hampers the full development of the capital markets as well as the unleashing of the vast potential of growth in the insurance sector. In May 2007, the FIRST Initiative approved a project titled "Chile: Implementation of Risk-based Supervision Model for Insurance Industry," with a budget of USD 249,000. The nine-month project was due to be completed in January 2008. However, the FIRST Initiative website provides no further information on the completion of the project. The project, per the website, aims at strengthening the regulation and supervision of the insurance sector by the SVS by introducing risk-based supervision in Chile, and bringing it closer to the IAIS standards. The project output will include implementation of risk-based supervisory approach to both life and non-life insurance companies; introduction of an insurer solvency risk methodology assessment, the Risk Matrix; enhancing the roles and functions of the company actuaries and external auditors in keeping with the new model; strengthening corporate governance in insurance firms; and training the SVS supervisory staff. Under the aegis of the project, the baseline supervision model created for the SVS will be analyzed and critiqued; the Canadian risk matrix developed by the Canadian financial sector supervisor, the Office of the Superintendent of Financial Institutions (OSFI), will be adapted to suit the Chilean requirements; and the criteria and procedures to put the new system into place will be developed.

As the FIRST Initiative website states, the above project is actually the second phase of a larger, more comprehensive project that was approved in March 2005, and started in August 2005. The project was proposed by the World Bank on behalf of the Chilean authorities to implement some of the recommendations of the 2004 FSSA. The first phase of the project was "Chile: Roadmap for Strengthening Solvency Control in the Insurance Industry," and it was undertaken by the International Advisory Group of Canada's OSFI. The key outputs of Phase I were an agreed model on which to base Chile's risk-based supervisory framework, and an action plan for the due implementation of the framework. The project reached a successful completion with the final report submitted to the SVS in May 2006.

The SVS website also mentions a new model of risk-based supervision in preparation in Chile. The scheme, called Supervision Based on Risk, aims at focusing on solvency supervision with minimum solvency requirements and a risk assessment process for companies with good management principles and practices that will be in line with the standards set by the IAIS. The new regulations, per the SVS website, focus on solvency and market behavior to ensure sufficient financial resources at the disposal of the insurance companies to fulfill their obligations as well as protection of the customers and policyholders, while placing equal importance on transparency and equality of treatment.

The 2007 Article IV consultation report by the IMF mentions a Capital Markets II Reform Project that aimed, inter alia, to further refine the licensing and investment limits of investment firms. The report notes that the reform project was enacted into law in June 2007, with the passage of the Capital Markets II Reform Law No. 20.190 of 2007. A more recent (2008) IMF report recommends Chile to have an IMF Financial Sector Assessment Program (FSAP) Update "to review the scope for further market reforms and implications for financial sector stability and the supervisory and regulatory setup" (PIN, p. 3).

As of 2007, states the Chile's Insurer's Association website, there are 41 insurance companies in Chile (of which 18 are non-life insurance companies and the remaining 23 are life insurance companies) employing over 13,000 people. Insurance penetration (measured in terms of premiums as a percentage of GDP) is 3.5 percent. The 2004 IMF FSSA finds that the Chilean financial sector is characterized by consolidation and conglomerations. A few large conglomerates dominate the sector with banking, securities, insurance, mutual funds, and pensions fund management businesses in their fold.

The Principles

ICP 1 Conditions for effective insurance supervision

II

The preconditions for effective regulation, per the 2004 FSSA, leave much to be desired. Importantly, the effectiveness of the judicial system is stymied by inordinate delays, and inadequately trained judges to adjudicate complex financial cases. This adversely affects the enforcement program of the SVS due to the perceivably non-credible deterrence offered by the judiciary. There is little further information publicly available as to Chile's compliance with this principle.

ICP 2 Supervisory objectives

II

There is insufficient information publicly available as to Chile's compliance with this principle. The SVS website, however, spells out its mission as follows: "to promote the economic development of the country, to achieve reliable and efficient securities and insurance markets through skillful supervision and modern regulation which protects the rights of investors and policy holders, and to simplify the role of other agents in the market. Our efforts are guided by the principle of good faith and the desire to maintain strong public confidence in our actions."

ICP 3 Supervisory authority

II

There is insufficient information publicly available as to Chile's compliance with this principle. The SVS is the insurance sector supervisor and it is "an autonomous corporate body affiliated with the Chilean Government through the Ministry of Finance," notes the SVS website. The SVS supervises all activities and entities associated with the insurance markets in Chile. The supervised entities include insurance companies, reinsurance companies, insurance brokers, insurance adjusters, insurance agents, and endorsable mortgage mutual fund administrating agents. The SVS is also charged with maintaining the registry of foreign insurers, and national as well as foreign reinsurance brokers. Further, the SVS enforces compliance with all applicable laws, rules, regulations, and by-laws that collectively govern the insurance market operations. Its enforcement authority encompasses applying sanctions for breaches and infringement of rules and regulations. In addition, the SVS issues rules and regulations to establish a regulatory framework for insurance markets. Lastly, its responsibility includes market development and promotion, wherein it undertakes different initiatives to develop the market through the introduction of new products and services. The 2004 FSSA finds that the SVS still "requires additional legal powers and more resources" (p. 39). The FSSA, therefore, recommends increased staff and financial resources to the agency.

ICP 4 Supervisory process

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 6 Licensing

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2007 IMF report mentions the completion of the Capital Markets II Reform Project that aimed, inter alia, at centralizing the insurance companies' license application review process in the SVS. The report notes that the reform project was enacted into law in June 2007, with the passage of the Capital Markets II Reform Law No. 20.190 of 2007.

ICP 7 Suitability of persons

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 9 Corporate governance

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 10 Internal control

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 11 Market analysis

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 13 On-site inspection

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2004 FSSA notes that "off site analysis (including a monitoring of market values and pricing, the development of early warning systems, and risk focused capital assessments)...will need strengthening" (p. 23). The SVS website states that "independent external auditors shall review accounting, inventory, balance sheets, and other financial statements of insurance companies." As explained in the 2004 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing in Chile, entities regulated by the SVS, including insurance companies, follow SVS-issued accounting regulations. The Corporations Law mandates all corporations to prepare annual financial accounts in accordance with the Chilean Generally Accepted Accounting Principles (GAAP) that, per the ROSC, differ from the International Financial Reporting Standards (IFRSs). Furthermore, the ROSC notes that although Chile has been converging Chilean GAAP (which were previously based on the U.S. accounting standards) with IFRSs since 1997, the national standards are "significantly less demanding" than their international counterparts. The World Bank, therefore, recommends adoption of IFRSs for all public interest entities, including insurance companies. In line with the World Bank recommendations, per the July 2008 Deloitte IAS Plus website update, Chile will be adopting IFRSs for all SVS registrants over a three-year period beginning 2009 and ending 2011. Under the plan, insurance companies have until December 31, 2010 to comply with IFRSs. With regard to enforcement, the World Bank ROSC notes that although the SVS has made commendable efforts to improve compliance with financial reporting requirements, there is room for further improvement. Under the Corporations Regulations, the SVS has wide enforcement powers over financial reporting requirements of registered corporations and insurance companies.

ICP 14 Preventive and corrective measures

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2004 FSSA notes that "on-site reviews (to gain a better understanding of companies' management and strategies looking ahead) will need strengthening" (p. 23).

ICP 15 Enforcement or sanctions

II

There is insufficient information publicly available as to Chile's compliance with this principle. Per the SVS website, the SVS Charter grants enforcement powers to the SVS. The insurance entities found committing infractions of applicable laws and regulations or non-compliant with SVS instructions and orders may be subject to censure, fines, or cancellation of their authorization, if deemed appropriate by the SVS. The first two sanctions may apply to insurance firms as well as their directors, managers, employees or account inspectors or liquidators. Entities other than those listed above but nevertheless supervised by the SVS are also subject to the SVS's enforcement powers, including censure, fines, suspension or cancellation or authorization.

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 17 Group-wide supervision

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 18 Risk assessment and management

ID

The 2004 FSSA recommends the SVS to place emphasis on risk-based supervision and move away from a rules-based supervisory framework. The FIRST Initiative project "Chile: Roadmap for Strengthening Solvency Control in the Insurance Industry" that was approved in March 2005 aimed at implementing the FSSA recommendations and introducing risk-based supervision in Chile. The model selected was the Asset-Liability Modeling approach to determine capital requirements for the life insurance sector, states the FIRST Initiative website. The project reached completion in May 2006.

The SVS website also mentions a new model of risk-based supervision in preparation in Chile. The scheme called Supervision Based on Risk aims at focusing on solvency supervision with minimum solvency requirements and a risk assessment process for companies with good management principles and practices that will be in line with the standards set by the IAIS. The new regulations, per the SVS website, focus on solvency and market behavior to ensure sufficient financial resources at the disposal of the insurance companies to fulfill their obligations as well as protection of the customers and policyholders, while placing equal importance on transparency and equality of treatment. The SVS website spells out the main objectives of the new risk-based supervision to be "to strengthen the risk management systems of insurance companies, to perform preventive compliance monitoring, to have more flexible regulation with emphasis placed on principles, as well as a supervision system in line with international standards and proper distribution of supervision resources."

ICP 19 Insurance activity

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 20 Liabilities

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 21 Investments

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2007 IMF report mentions the completion of the Capital Markets II Reform Project that aimed, inter alia, at increasing the investment limits for insurance firms. The report notes that the reform project was enacted into law in June 2007, with the passage of the Capital Markets II Reform Law No. 20.190 of 2007.

ICP 22 Derivatives and similar commitments

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2004 FSSA observes that the use of derivatives is limited in the Chilean insurance market. This situation points to regulatory constraints on trading as well as weaknesses in market infrastructure and information. The FSSA, therefore, recommends a cautious removal of regulatory restrictions as well as development of the market infrastructure.

ICP 23 Capital adequacy and solvency

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2004 FSSA recommends the SVS to place emphasis on risk-based supervision and move away from a rules-based supervisory framework. The FIRST Initiative project "Chile: Roadmap for Strengthening Solvency Control in the Insurance Industry" that was approved in March 2005 aimed at implementing the FSSA recommendations and introducing risk-based supervision in Chile. The model selected was the Asset-Liability Modeling approach to determine capital requirements for the life insurance sector, states the FIRST Initiative website. The project reached completion in May 2006.

The SVS website also mentions that a new scheme called Supervision Based on Risk aims at focusing on solvency supervision with minimum solvency requirements and a risk assessment process for companies with good management principles and practices that will be in line with the standards set by the IAIS. The new regulations, per the SVS website, focus on solvency and market behavior to ensure sufficient financial resources at the disposal of the insurance companies to fulfill their obligations as well as protection of the customers and policyholders, while placing equal importance on transparency and equality of treatment.

ICP 24 Intermediaries

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 25 Consumer protection

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 27 Fraud

II

There is insufficient information publicly available as to Chile's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

There is insufficient information publicly available as to Chile's compliance with this principle. Chile is lagging behind in bringing its AML/CFT regulation in line with international standards, per the 2004 FSSA. However, subsequent sources point towards material improvements in Chile's anti-money laundering/combating the financing of terrorism regime. The 2005 IMF ROSC relating to the Financial Action Task Force (FATF) recommendations on AML/CFT comments that "Chile has moved to set in place an integrated legal and institutional framework to comprehensively address AML/CFT matters" (p. 1). Law No. 19.913 of 2003 substantially strengthened Chile's AML/CFT framework, and particularly in the area of preventive measures for the financial institutions, including insurance companies, it imposed stricter reporting obligations and created a Financial Intelligence Unit, the UAF, to issue regulations, monitor compliance and receive and analyze reports filed by supervised entities. However, the ROSC notes that a subsequent Constitutional Court ruling diluted the 2003 Law by seriously undermining the powers of the UAF. The Financial Action Task Force of South America Against Money Laundering (GAFISUD) mutual evaluation notes, for instance, that Chile is non-compliant with the FATF Special Recommendation relating to suspicious transactions reporting linked with terrorism. The GAFISUD attributes this to the fact that the UAF does not have the legal capacity to receive, analyze or disseminate suspicious transaction reports (STRs) related to the financing of terrorism.

The insurance sector falls under the domain of SVS's Circular No. 1680 of 2003, notes the ROSC. This Circular provides instructions to all insurance companies to control and prevent movement of illicit funds through their channels. Firms are required to maintain retrievable data on all relevant operations, customer background information and supporting documents either manually or electronically. In addition, Law No. 19.913 mandates reporting entities to keep records for five years, and inform the UAF of any suspicious cash transactions exceeding a prescribed threshold, as also any suspicious acts, transactions or operations. However, as noted by the ROSC, the Law does not impose sanctions on reporting entities for non-compliance with their reporting obligations. A 2008 report by the U.S. Department of State (DoS), however, mentions Law No. 20.119 enacted in 2006 that imposes sanctions on entities found non-compliant with their AML/CFT obligations or their suspicious/cash transactions reporting requirements. Though the UAF has not been granted regulatory powers, it is authorized to issue general instructions on entities' reporting obligations, including reporting on suspected terrorism-linked activities. In relation to Chile's CFT efforts, the report mentions that the SBIF circulates the United Nations Security Council Resolution No. 1267 Sanctions Committee's consolidated list to banks and financial institutions. The list is also available on the UAF's website, and reporting entities are instructed by the UAF to report any activities/transactions by those on the list. A law further addressing the drawbacks in Chile's AML/CFT regime has been drafted and introduced in the Congressional Commission since May 2007; however no progress has been reported ever since. The U.S. DoS report avers that the passage of the draft law "would bring Chile closer to compliance with...FATF recommendations."