Latin American insurance regulators are making slow progress towards embracing Solvency II, with Chile
and Mexico the most committed to the framework, according to research conducted by Life Insurance International (LII).

As at October 2012, the list of countries formally applying for Solvency II equivalency failed to contain any from Latin America, says James Littlewood, Latin American business development director at Ernst & Young’s Global Insurance Center.

However, he says Chile and Mexico are in advanced discussions with the EU about Solvency II equivalency.

Meanwhile, Bolivia, Brazil, El Salvador, Guatemala, Paraguay, Peru and Venezuela, while not seeking Solvency II equivalency, are aiming to adopt some aspects of Solvency II in their regulations, adds Littlewood.

Littlewood says: “Many Latin American regulators don’t like the term ‘Solvency II’ for nationalistic reasons.

They prefer to use a term such as ‘risk-based regulations.’ Louis Mercedes, a partner at Edwards
Wildman Palmer, and Stephen Ixer, an associate at the US-based law firm says most Latin American countries recognize that international standards are getting more robust, and several have launched
reviews of their existing solvency and reserves regulations with the aim of adapting to the new standards.

Littlewood says: “Many Latin American regulators don’t like the term ‘Solvency II’ for nationalistic reasons. They prefer to use a term such as ‘risk-based regulations.'”

Louis Mercedes, a partner at Edwards Wildman Palmer, and Stephen Ixer, anassociate at the US-based law firm says most Latin American countries recognize that international standards are getting more robust, and several have launched reviews of their existing solvency and reserves regulations with the aim of adapting to the new standards.

“However, only a minority of countries already has well-defined plans in place to strengthen solvency and reserves legislation,” note Mercedes and Ixer. Argentina, for example, which is the fourth largest Latin American insurance market, shows no sign of moving to Solvency II.

“Far from being a priority, Solvency II has only been included superficially in the list of initiatives by the Argentine National Insurance Supervisor (SSN) over the past few years,” says the Ernst & Young report
Risk-based Capital and Governance in Latin America: Emerging Regulations.

“However, only a minority of countries already has well-defined plans in place to strengthen solvency and reserves legislation,” note Mercedes and Ixer.

Argentina, for example, which is the fourth largest Latin American insurance market, shows no sign of moving to Solvency II.

“Far from being a priority, Solvency II has only been included superficially in the list of initiatives by the Argentine National Insurance Supervisor (SSN) over the past few years,” says the Ernst & Young report.
Risk-based Capital and Governance in Latin America: Emerging Regulations

“The SSN has made very little mention of Solvency II and doesn’t appear to have any clearly defined goals [for Solvency II],” say Mercedes and Ixer.

“It opened a discussion with insurers in 2010 about Solvency II implementation, but there’s been little follow-up since then.”

Meanwhile, the Peruvian Insurance, Banking and Private Pension Fund Supervisor is currently in the process of evaluating international solvency models, including Solvency I I, with a view to adopting
best practices for the local market, note Mercedes and Ixer.

“A risk-based supervision handbook has been developed, but implementation dates for Solvency II-style requirements in Peru haven’t been announced yet.”

In contrast to their neighbours, Mexico and Chile are more advanced on the path to Solvency II.
Manuel Aguilera Verduzco, president of
Mexico’s National Insurance and Surety Commission (CNSF), says: “Mexico plans to adopt Solvency II in 2014.”

Mercedes and Ixer add that Chile’s Securities and Insurance Supervisor (SVS), is actively working to introduce Solvency IIstyle reforms, and has been doing so since 2005.

“It recently published new regulations on corporate governance and enterprise risk management that fall under Pillar II of the Solvency II framework. The SVS is currently working on a framework for voluntary
implementation of risk-based capital calculations under Pillar I of Solvency II,” say Mercedes and Ixer.

Over in Brazil, Mercedes and Ixer explain that instead of adopting Solvency II, Brazil is implementing changes in accordance with the International Association of Insurance Supervisors ( IAIS) guidelines.

They say: “Several of the principles are similar, however, and Supervisor of Private Insurance (SUSEP) also draws influence from Solvency II and other solvency regimes when implementing policies.”

Luciene Magalhaes, a partner at KPMG Brazil, says: “I expect Brazilian regulations to converge with Solvency II over the next two to three years. “In 2013, SUSEP will introduce regulations for measuring operational risk. Some domestic Brazilian insurers are already investing in the systems and governance needed to comply with Solvency II, although there is no mandate from the SUSEP for them to do this.”

Argentina Review

The Argentine government announced in October 2011 that Argentine insurers had to repatriate almost all funds that they had invested abroad as of 27 October 2011.

It also required them to subsequently hold their funds and financial assets in Argentina, says the Ernst & Young report. “The recent regulatory changes in Argentina have been designed to try to retain as much capital within Argentina as possible,” say Mercedes and Ixer.

“From 1 January 2012, it has been mandatory for publicly-quoted Argentine companies, except banks, insurers and other specially-regulated entities, to adopt international financial reporting standards”
(IFRS), say Mercedes and Ixer.

“The intention is to apply IFRS also to the insurance market, but no timetable for such a development has been established,” the IMF report, Argentina: Detailed Assessment of Observance of Principles
for Insurance Supervision, says.

“Insurance companies are not explicitly obliged to present their financial statements in accordance with IFRS.”

Insurers in Argentina also have to provide evidence of compliance with minimum capital requirements established by the SSN on a quarterly basis, the Ernst & Young report says.

Furthermore, according to the KPMG report Evolving Insurance Regulation: Time to Get Ahead, the SSN has introduced a requirement that insurers appoint an individual to be responsible for internal controls, and an internal control committee that monitors the firm’s internal controls on an ongoing basis.

Meanwhile, in February 2011, the SSN announced the Reinsurance Regulatory Framework, a rule banning Argentine insurers from using foreign-domiciled reinsurers, with certain exceptions.

The rule, which came into effect in September 2011, requires Argentine insurers to only use Argentine reinsurers or the Argentine subsidiaries of foreign insurers.

According to Lloyds of London, Argentine insurers may use a foreign reinsurer only for large – above $50m – or complex risks which cannot be placed with a local reinsurer, and prior approval must be gained from the SSN. The foreign reinsurer must be registered with the SSN.

In terms of Brazil, insurers in the country are regulated by the National Council of Private Insurance (CNSP), which is a division of the Finance Ministry and sets policy, state Mercedes and Ixer.

This means that the Supervisor of Private Insurance (SUSEP) implements the CNSP’s policy and supervises the market.
Only Brazilian-domiciled companies can sell insurance in Brazil, but there is no restriction on foreign ownership, explain Mercedes and Ixer.

They explain that insurers must maintain a minimum fixed base capital of BRL15m ($7.4m) and a minimum variable additional capital.

“The additional capital is required to guarantee the company’s risks and varies depending on its book of business,” they say.

“Reinsurers must maintain a minimum base capital of BRL60m.” The Ernst & Young report notes that in 2004 SUSEP introduced a requirement for insurers to provide detailed monthly reporting of individual
policy and claims data.

“Insurers have been encouraged to make greater investments in data governance in order to comply with the requirement,” says the report.

In 2004, SUSEP also introduced a requirement that insurers produce an annual actuarial valuation report demonstrating the adequacy of all their technical provisions as of the close of their financial year.

Over recent years, a Fitch Ratings report on the outlook for the Brazilian insurance sector says insurers have been required to implement new risk controls and use more sophisticated techniques to strengthen their technical reserves and capital bases.

This means Brazilian insurers have to keep all their liabilities and assets in Brazil’s currency, the Real.

“Although the current investment rules allow investment and diversification in a broad list of instruments, large insurers’ investment portfolios are still dominated by allocations to [Brazilian] government securities; [Brazilian] bank deposits; and deposits with special guarantees [DPGEs], guaranteed by the deposit insurance fund,”says Fitch.

When it comes to distribution channels, insurance products have to be sold via brokers in Brazil, and brokers must be registered with the SUSEP, says Magalhaes.

In May 2012, the SUSEP published a circular setting out the rules for a self-regulatory entity to monitor insurance brokers and establish a mandatory code of conduct.

According to Brazilian law firm Tozzini Freire, the rules include mandatory affiliation for all brokers with the self-regulatory entity, strong governance (including the power to fine brokers for non-compliance
with the code of conduct) and overall supervision of the entity by SUSEP.

In August 2012, the Brazilian government approved a law creating a state-owned guarantee agency called the Brazilian Agency for Fund Management and Guarantees (ABGF).

The new entity will provide insurance and surety bonds for government works projects. Business News Americas reports that ABGF will be allowed to compete in other insurance sectors and to buy stakes in existing privately held insurers.

Chile
Chile’s Superintendencia de Valores y Seguros (SVS), a department of the Chilean Ministry of Finance, sets the regulatory and accounting standards for all Chilean insurers.

In 2011, the Chilean government prepared a draft law, for submission to Congress in 2012, which envisages improving the governance of the SVS by converting it to a Commission managed by a five-member council.

The members of the council would be protected from dismissal for political reasons, according to an IMF
country report on Chile.

The draft law also proposes to enhance the SVS’s enforcement powers and to create the Securities and Insurance Prosecutor, an autonomous body in charge of investigation and enforcement proceedings.

Penalties would be imposed by the Commission, upon conclusion of the Prosecutor’s investigation, the IMF says.

In September 2011, a new law requiring insurance companies to maintain risk-based capital was sent to Chile’s Congress for approval.

According to the Ernst & Young report, capital is currently calculated as a factor of reserves, premiums or claims, depending on the insurance product. The law is expected to be approved by Congress before the end of 2012.

“Onc e t h i s l aw is approved, insurers will have two to five years to implement changes and prepare for risk-based supervision,” says Ernst & Young’s Littlewood.

“Meanwhile, the SVS published two regulations in 2011 regarding corporate governance and enterprise risk management. The first regulation became effective on 31 December 2011 and the latter on 30 April
2012. Both regulations fall under Pillar II of Solvency II,” says Littlewood.

Apart from introducing a requirement for risk-based capital, the new law will also introduce a system for assessing the solvency of insurers, according to the KPMG report.

The law draws on the approaches adopted by the IAIS; Solvency II; Canada’s Office of the Superintendent of Financial Institutions (OSFI); the US National Association of Insurance Commissioners (NAIC);
and the Australian Prudential Regulatory Authority (APRA), KPMG says.

According to the Moody’s Investor Services report Moody’s Outlook for the Chilean Insurance Market, Chilean insurers have to establish subsidiaries or affiliates that focus separately on the life/retirement,
general, and credit insurance segments.

However, personal accident and health insurance can be written either by P&C or life insurers, according to Moody’s. Franklin Santarelli, managing director, Latin American Financial Institutions at
Fitch Ratings, says that insurers cannot invest more than 30% of their assets outside Chile.

“If a firm does have foreign investments, it has to hedge them against foreign-currency exposure, as all liabilities are denominated in Chilean Pesos,” Santarelli says.

In December 2010, it was announced that Chilean insurers would migrate to IFRS from their domestic accounting standard.

Colombia

“Colombia has no restrictions on foreign ownership of local insurers, but companies must have a local presence to sell most types of policies,” say Mercedes and Ixer.

“The Colombian Financial Supervisor sets minimum capital requirements for insurers each year.”

Colombia has not formally adopted Solvency II , but the regulator and insurers are working on gradually
implementing some aspects of the regime in order to improve solvency rules, Mercedes and Ixer say.

The minimum capi t al requirement for an insurer is COP 5.5bn ($3.1m), subject to annual adjustments by the regulator, plus technical reserves to operate different lines of business which varies from COP1.12bn for life insurance to COP2bn for auto insurance and COP2.7bn for pensions.

Colombia approved the adoption of IFRS in 2009, but is s till in the process of implementing full convergence. “Early adoption was due to begin in 2013, but it was announced in September 2012 that mandatory IFRS application will not be introduced until 2015,” Mercedes and Ixer say.

Mexico
“Mexico’s insurance regulations are more advanced than other Latin American countries’ regulations, due
to a greater level of detail in terms of technical reserves requirements and investment guidelines,” says Santarelli.

Mexican insurers have to comply with two insurance laws. The Insurance Contract Law (LCS) regulates the sale and distribution of insurance policies, while the General Law of Insurance Institutions and
Mutual Insurance Companies (LGISMS) stipulates who can be licensed to sell insurance
products, and how insurers must invest their assets.
“LGISMS also addresses corporate governance issues, and defines what reserves insurers must hold,” says Yves Hayaux-du-
Tilly, a partner at UK-Mexican law firm Nader, Hayaux & Goebel.

A new law, the Insurance and Surety Law (LISF), which is expected to be submitted to Mexico’s Congress before the end of the current legislative session on 1st December 2012, will provide a legal framework for implementing Solvency II in Mexico.

Insurance companies are regulated by Mexico’s Ministry of the Treasury and Public Credit (SHCP), through the CNSF.

“Mexican insurers can buy reinsurance from foreign reinsurers, and there is no requirement for foreign reinsurers to post collateral in Mexico,” says Hayauxdu-
Tilly.

“But, before they can operate in Mexico, foreign reinsurers must apply for registration with the SHCP in its Register of Foreign Reinsurers. They have to be rated by an international credit rating agency, and their credit rating must exceed the minimum level set by the SHCP (currently BBB-).”

Insurers are required to maintain a minimum solvency margin, which measures the difference between an insurer’s regulatory risk capital and its liabilities.

According to Adriana Rubio, PwC Mexico’s Insurance Practice leader, and Emma Gabriela Gasca, PwC Mexico’s Insurance Practice senior manager, the solvency margin is based on an insurer’s operating risks as well as factors such as its last 12 months of written premiums, its last 12 months of technical reserves, its last 12 months of total claims, its last 36 months of incurred losses, and the credit rating of its reinsurer.