The Chiliean Insurance Market
October 2001
With a real annual average growth of 10.5
percent between 1990 and 2000, Chili's insurance market has experienced remarkable
growth. George Keller and Juan Pablo Bragadin explain Chili's insurance market
-- its structure, regulatory environment, how various coverage lines are handled,
and its profitability.
by George
R. Keller
Winterthur International
America Insurance Company
and
Juan Pablo Bragadin
Winterthur International
Argentina
The Chilean economy has been growing for more than 10 years at an average
rate over 6.6 percent. Unemployment and inflation were reduced dramatically,
savings and investments rated at 25 percent (comparable to those of the "Asian"
economy). Twenty-two years of market-led reforms have resulted in 11 years of
uninterrupted economic growth. An increasingly diversified economy and strengthening
ties with buyers and suppliers in Europe, Asia and the Americas have given Chile
a wide range of options for further growth and continued prosperity. Prudent
economy policy-making has also secured stability.
The Chilean political system is responsible for that success. In 1990 Chile
emerged from 17 years of military government with a broad overall consensus
about the general parameters of economic management. The institutional and legal
systems have been modernized. The political center appears to have gained at
the expense of the extreme left and right.
Chile has the simplest and most transparent regulatory system in the region
to deal with trade and business activities. The tax and labor reform bills have
now begun to move through Congress, showing that the political environment is
becoming more supportive of economic growth.
Although the current unfavorable external environment slowed the economic
growth, as might be expected for 2001, the economic perspective for the coming
years is the best in the continent.
| Population: |
15 million |
| Area: |
756.950 sq. km. |
| GDP (2000): |
USD 70 billion |
| GDP per capita: |
USD 4,600 |
| Exports (2000): |
USD 18.2 billion (FOB) |
| Imports (2000): |
USD 16.7 billion (CIF) |
| Inflation (y-o-y, eop) |
4.53% |
| Unemployment (INE, average, 2000) |
9.2% |
| Life expectancy: |
75 years |
| Language : |
Spanish |
| Literacy: |
95% (1995) |
| Urban population: |
86% |
Facts and Figures for the Insurance Market
With a real annual average growth of 10.5 percent between 1990 and 2000,
the expansion of the Chilean insurance market surpassed economic growth. In
line with the modernization of the institutional and legal systems, the insurance
industry has evolved from a state-based system to a wholly private one, governed
by clear and stable rules where the market has a preeminent place. Increased
competition among insurance and reinsurance companies has been one of the most
important developments in the last few years. Better services, introduction
of new technologies, and reductions in prices were some of the consequences
of the highly competitive market environment.
The impact of an increasingly competitive and sophisticated market is also
visible in the development of a broader range of insurance products. In addition,
new forms of marketing are being developed, and the industry has focussed on
a much broader market (mass risk) involving individuals and small firms against
the limited group of large firms (large risks).
The Chilean insurance market had its turnaround in 1980. From 1927 to 1980,
the insurance system was basically controlled by the government. The public
authorities fixed the premium amounts, established policy wording, set reinsurance
commissions and brokers and agents fees together with insurers' investment options.
Only Chilean insurance companies owned by Chileans had access to the national
market. A state-owned company had the insurance monopoly to cover all of the
state-owned properties and other risk exposures, which were at that time the
bulk of the Chilean market. The supervisory authority, "Superintendencia de
Seguros y Valores," was entrusted with broad powers to ensure compliance with
the applicable laws and administration decisions.
In 1980 the system was completely revised, and it has been subsequently improved
by a number of amendments to the relevant laws. Essentially the 1980 revision
liberalized the insurance industry and changed the focus toward the private
sector. In 1980 the non-life market contributed 80 percent of premiums, in 1990
the figure dropped to 40 percent, and to 25 percent in 2000. At the same time,
the number of non-life insurance companies between 1980 and 2000 decreased from
64 to 23. The life insurance segment had 19 companies in 1980, 25 in 1990, and
now has 33 companies.
Most of insurance companies that are responsible for 68 percent of premiums
are owned by foreign companies, which produced a strong increase in capacity
as well as a contribution to international knowledge.
Development of the Insurance Industry
Total revenues in 1999-2000 increased to USD 2.65 billion which represents
3.8 percent of 1999 GDP. Non-life insurance contributes 1 percent and is still
very low compared with other Latin American countries, although Chile presents
a high exposure to earthquake. This is explained by the relative small damage
that was caused by the last great earthquake in 1985 and the continued reluctance
of the population to purchase insurance.
During the 1990s, insurance premium registered an average growth of 5 percent,
but the period between 1995 and 1999 was characterized by a drop in price due
to fierce competition and the soft international market. As a result of strong
demand in 1999-2000 for earthquake capacity, and dependence for this capacity
on international insurers, the cat pricing increased 6.8 percent in real terms.
Life insurance is very developed as far as products and knowledge concerns,
showing a penetration of 2.8 percent, the highest in Latin American. In 2000
the real growth was 18 percent and generated up to USD 2 billion in premium.
The market demonstrated a steady growth with a two-digit figure.
Graph
1
Graph
2
The Chilean market shows a great dependence on foreign insurance companies.
Seven of the 10 main insurance companies in non-life are owned by foreign insurers
(AIG, Allianz, AXA, ING, Mapfre, Royal & Sun Alliance, and Zurich). They account
for 65 percent of total premiums. However, the biggest insurance company, Cruz
del Sur, belongs to a local Chilean conglomerate, Angellini Group. The concentration
in the market has descended lightly in the last years. In 1990 the first 5 insurers
had a market share of 56 percent, and in 2000 that figure dropped to 51 percent.
In life insurance, the local company Consortium leads with a 14 percent market
share, followed by ING Aetna after the merger. The top 10 insurers are responsible
for 68 percent of market share. The market concentration compared with the market
share of the 5 main offerers dropped from 70 percent in 1990 to 45 percent currently.
Number
Of Insurance Companies Graph
Composition of the Insurance Market
The Chilean insurance market is split in two major components: Non-Life or
General Insurance, which includes fire, earthquake, vehicles, transport, hull,
robbery, engineering, compulsory personal accident insurance (SOAP), and others
(homeowners, civil liability, multiple risks, personal accidents, fidelity,
credit, agriculture, traveling attendance, glassware) and Life and Pension Insurance,
which includes individual life (ordinary life, annuities and endowment, mixed,
health, credit life), group life, and social security-related insurance (AFP
insurance, retirement annuities, disability and survival annuities).
Chilean
Insurance Market 2000 Graph
Development of Results
In contrast to the overall expansion of the insurance industry, net profit
in the industry fell substantially. The premium growth in non-life in 2000 was
accompanied by losses of USD 7 Mio (11 of 23 insurers showed red figures) which
indicates that premiums are still insufficient.
In non life insurance the cost ratio has increased in the last 10 years from
32 percent to 43 percent, not only because of low premiums but also because
of higher administration and acquisition costs (between 1990 and 2000 they increased
more than 14 percent). During the same period, the net loss ratio was between
54 and 70 percent, and at present is 62 percent with a combined ratio of 105
percent
Life insurance also showed negative figures in 2000: 17 of the 33 insurers
reported a loss. This loss is due to the increased sale of life annuities and
the change in the methodologies used to account for technical reserves.
Graph
5
Regulatory Environment
Supervisory Authority. The Superintendence of Securities and Insurance "Superintendencia
de Valores y Seguros (SVS)", is the authority that governs industry practices
(insurance and reinsurance) and monitors and regulates the financial solvency
of insurance companies. The Superintendence may ask companies to submit reports
on their business, inspect their offices, examine their documentation, regulate
the format and contents of balance sheets, financial statements, and accounting
procedures. It may designate external auditors to report on their general account,
and the Superintendence itself may designate external auditors in order to perform
specific activities to the inspected companies. The SVS is linked to the government
through the Ministry of Treasury.
Insurance Law. The insurance contract is regulated
by the Commercial Law, which sets forth the general rules applicable to insurance
contracts, the Law on Insurance Companies (D.F.L. 251) of 1931 and their modifications,
the Legislation on Mutual companies and the Law on Compulsory Personal Accident
Insurance caused by motor vehicles, Law 18.490 of 1986. The Commercial Law contains
the rules applicable to insurance contracts, including contract features and
obligation of parties to insurance in general and land insurance in particular
(art. 521 to 601) and maritime insurance (art. 1158 to 1202)
The insurance and reinsurance business in Chile requires authorization from
the supervisory authority (SVS) to operate. Companies must be legally founded
in Chile in compliance with legislation on stocks companies including having
a public deed, the SVS approval of the articles of incorporation, registering
with the register of Commerce, and publishing the certificate issued by the
Superintendence in the official Gazette.
Legislation limits engaging in insurance activity to corporations founded
in the country with that sole purpose. As a result, foreign insurance companies
cannot offer or write insurance in Chile directly or through an intermediary.
The infringement of this prohibition constitutes a criminal act. All insurance
and reinsurance companies are required to be Chilean corporations with a minimum
capital of USD 3 million and USD 4 million, respectively. An insurance company
can operate either as a Life or Non-Life insurer. There is no mixed insurance
except for personal accident and health. Insurance companies can only reinsure
risks from the group in which they are authorized to operate. Insurance and
reinsurance are subject to the supervisory control of the SVS. Only companies
registered and duly authorized can operate in the Chilean market.
The law requires companies to meet a specific solvency margin that encompasses
defined limits on debt exposure. It is further required that Companies establish
technical reserves to ensure that they can meet their obligations. Insurance
companies may invest in Chilean government bonds, fixed rent instruments issued
by Chilean banks and financial institutions, mortgage loans, obligations of
public or private companies, mutual funds, equity, including shares from certain
authorized open stock companies, foreign investments (subject to specific conditions
set forth by the law), and real state. Foreign investors in Chile receive the
same treatment as nationals. There are no restrictions or conditions applicable
only to foreigners.
To improve the information available to the insured, Chilean law stipulates
that insurance companies contract continuous and uninterrupted ratings of the
obligations they hold vis-à-vis their insured with at least two different and
independent rating agencies registered by a special Superintendence registry.
The ratings will be granted in categories A (for companies with the lower risk)
through D (the highest risk operations). Category E is reserved for insurers
without enough information available to permit classification.
Language and Policy Wordings. The official
language is Spanish, and policies must be written in Spanish. A standard wording
of policies and clauses used by companies to draw up contracts must be registered
in advance with the SVS. The SVS will proceed with the registration as long
as such wording does not lead to error or confusion or in any way breaches the
law. Registered policies and clauses may be used by any company. This registration
procedure is not necessary for non-life insurers where the insured and beneficiaries
are corporate entities and the annual premium is over USD 6,500.
Premium and Taxes. Premiums for insurance policies
are freely set by insurers. Similarly, commissions for intermediaries are also
freely set between insurer and broker and are stipulated in the respective policy.
According to Insurance Law, policies are in force when premiums are effectively
paid. Installments may be offered depending on the line of business (generally
up to 10 installments for homeowners, automobile, or individual life policies,
subject to a premium surcharge). Premiums can be paid either to the Insurer
or to the intermediary/broker. Premium payment is accounted for as an expense
and therefore is tax deductible.
The activity carried out by insurance entities is classified as "services
rendered" under the Value Added Tax (VAT) code, thus all insurance policy premiums
are subject to an 18 percent tax paid by the insured to the insurer with the
following exceptions: (a) premiums for adjustable life insurance contracts;
(b) premiums for import and export transportation risk; (c) premiums that cover
risks of ship hulls; (d) premiums that cover property risk abroad, whether belonging
to Chileans or foreigners; (e) premiums for insurance that cover risk of earthquake;
(f) premiums or payments for reinsurance contracts; (g) premiums for compulsory
personal accident insurance for motorized vehicles.
Currency
The local currency is the Chilean PESO $ (CLP). Chilean law requires that
monetary value of premiums and indemnities must be stated in Unidad de Fomento
(UF). This reference currency allows the insured to keep the sum insured updated
daily in relation to inflation, internal consumer prices, and the variation
of USD. Most policies are written in UF, but Chilean policies can also be written
in foreign currency. The UF rate of exchange is 1 UF = 25 USD. The insured can
pay premium either in local CLP $ at the exchange date of the UF or in foreign
currency and claims can be settled at the same currency.
Non-Admitted Insurance
Any individual or corporation can freely write insurance abroad and is thus
subject to the legislation on international exchange rates. Although there are
no prohibitions with respect to insuring abroad risks located in Chile, it is
subject to payment of applicable taxes and to certain exceptions relating to
motor vehicles and pensions. The insurance companies have to operate in foreign
countries and be registered by the SVS unless they are established in Chile.
All insurance policies underwritten abroad are subject to an additional 22 percent
premium tax.
Compulsory Insurance
Compulsory insurance in Chile is related to the following.
SOAP. Personal accident Insurance related to
motor vehicles under Law 18.490. This law establishes that compulsory insurance
is required to obtain and renew motor license plates. This insurance covers
the risk of death and injury suffered as a consequence of accidents caused by
the insured vehicle, its trailer, or load. It includes the driver of the vehicle,
others transported in it, as well as any other affected third parties. This
insurance operates under a no-fault system. It is sufficient to prove that the
deaths and/or injuries involved are the result of an accident. The driver's
negligence does not have to be the cause. Regulations for the contract are determined
by law, and the contract is compatible with all other insurance that covers
the same risks partially or totally and with any other medical insurance the
victim may carry on. Limit of the coverage is UF 150 (USD 4,500)
Social Security-Related Insurances. These include
the A.F.P. insurance, retirement annuities, disability, and survival annuities
for retirement pension funds (D.L. 3.500 of 1980)
Reinsurance
Reinsurance contracts written in Chile must be effected between insurance
and reinsurance companies incorporated and authorized to operate in the country.
Only foreign entities that meet the following requirements to perform reinsurance
operations can operate in Chile: registration in the Superintendence's Registry,
equity of minimum USD 10 Mio, ability to operate in reinsurance ceded abroad
and to pay obligations with freely convertible currency, submission of an authentic
copy of the current statutes, an annual report with audited financial statements,
and a copy of the power of attorney granted to a resident of Chile who represents
the company with broad authority and may be summoned to appear in court.
During 2000, non-life reinsurance premiums increased after more than 7 years.
The reinsurance premium reached USD 322 million, representing a real growth
of 11 percent compared to 1999. The increase was attributable to international
prices on property damage, which represented more than half of the non-life
reinsurance premiums. Non-life insurance premium ceded represents 48 percent
of direct premium, a high level compared with international standards but reflecting
the high exposure on earthquake. In life reinsurance, premiums increased to
USD 154 Mio, almost less than half of non-life. At year-end 1999 there were
almost 90 registered reinsurers in Chile.
Export of reinsurance out of Chile is possible and subject to a reinsurance
tax of 2 percent. Pure fronting business is available depending on the line
of business. Insurers are allowed to place reinsurance contracts with non-registered
reinsurers via brokers, subject to minimum qualification made by the international
surveyor.
Auxiliaries in the Insurance Market
Insurance may be underwritten directly with the insurance entity or through
sales agents or by means of independent insurance brokers.
Sales Agents. Sales agents are people who market
and sell insurance on behalf of a company. They may provide such services to
only one insurer in each group. These agents must be registered in a special
registry at the SVS and may be required to comply with the same obligations
as insurance brokers. The insurance company is responsible for any transgressions,
errors, or omissions incurred by the sales agents during the course of their
professional activities.
Insurance Brokers. The objective of insurance
brokers is to advise people who wish to be insured, instruct them as to the
contract's coverage and conditions, assist them during the term of the contract
and at the moment that a claims occurs. They must also verify the identity of
the contracting party, the existence of the insurable goods, and report all
information compiled about the proposed risk to the insurer. To perform such
activities, insurance brokers must be registered in the Registry of the Superintendence
and comply with the requirements contained in current regulations. In addition,
managers, legal representatives, or employees of an insurance brokerage company
(legally constituted entities) are barred from performing such activities outside
the company.
Non-life insurance is written mainly through insurance brokers. All major
international insurance brokers are represented in Chile (Aon, Marsh, Willis).
Brokers are compensated via commissions. The average rate is 15 percent. In
some cases they receive fees for large industrial risk consulting.
Life insurance is written mainly through agents. Life insurers have their
own sales force. Insurers have started new distribution channels such as bank
assurance and telemarketing.
Claims Adjusters. The law states that the adjustment
of claims may be carried out by companies directly or through a claim adjuster,
e.g., an independent professional tasked, primarily, with determining what happened,
the coverage involved, and the amount of indemnity to be paid.
Natural Perils
Chile is situated in the west of the Southern Zone, bordering the Pacific
Ocean and across from Andean Mountains. As such, Chile is a country heavily
exposed to the earthquake risk.
The country is divided into 5 main zones:
- Zone 1: North includes Tarapaca, Antofagasta, Atacama and Coquimbo
- Zone 2: Valparaiso/Aconcagua
- Zone 3: Santiago
- Zone 4: Central, O'Higgins, Colchagua, Curico, Talca, Maule, Linares,
Nuble, Concepcion, Bio-Bio, Arauco
- Zone 5: Southern: Malleco, Cautin, Valdivia, Osorno, Llanquihue, Chiloe,
Aisen, Magallanes, Tierra del Fuego, Antartica Chilena
Insurance Coverage
Property Damage. Medium and small commercial
risks as well as homeowners are insured with package policies (multiple risks)
on a named perils basis, including fire, lightning, explosion, aircraft, vehicle
impact, strike, riot, civil commotion, terrorism, malicious damage, lock-out,
smoke, burglary and theft, and water damage. Whereas assets are generally covered
on full-basis value (cost to repair or replace), sublimits for theft (mainly
in values in transit and in safebox), water damage, electronic equipment (computers,
laptops, etc.), and civil liability (comprehensive liability) apply.
Large industrial risks are insured on an all-risk basis to include property
damage for all assets. Machinery breakdown and inland transit can also be included
with sublimits. There are no uniform wordings, and each insurer uses its own
version. Business interruption is usually covered under the Gross Profit Form.
Earthquake can be included as additional coverage in order to have an accumulation
control of the exposure. Individual rating according to the region is applicable,
and deductibles of 2 percent of the sum insured with a minimum of 50 UF (USD
1,500) and maximum UF 10,000 (USD 300,000) are market standards.
Marine (imports and exports) follows the international standards dictated
by Institute Cargo Clause forms. Carrier liability can be included as an additional
clause to the cargo insurance.
Engineering/Construction. Policy wordings follow
European form (Munich Re). Smaller projects (betterments and small construction)
can be included under the property policy for large industrial risks. Knowledge
of insurer staff prevails when approached to provide coverage.
Civil Liability. Coverage available in the
market includes civil liability, product liability, construction liability,
professional liability, stevedores liability, D&O, cross-liability, private
liability, hotel-restaurants bar liability, transport (freight forwarder) liability,
and employers liability. Standard forms and wordings vary by insurer.
Workers Compensation. Workers compensation
is part of the social system. The employer contributes 0.9 percent plus 1.7
percent to 3.4 percent of payroll depending on risk level of the industry. The
employee receives up to 70 percent of the last 10 years' average salary for
medical discharge, disability pension, or death. The risk is covered by mutuals
and the Instituciones de Salud Previsional (ISAPRES) which includes health and
labor risk.
Automobile. The standard policy includes the
property damage (hull) and the compulsory SOAP.
Special Products. Chile exports a large amount
of fish. As a result, there is a major market for aquaculture insurance in Chile.
Few insurers have knowledge of this product. Coverage including death, loss
or destruction of fishing, as well as all risk for equipment in the production
both at the sea or in lakes inside the country are only developed by few companies.
One new potential market will be agriculture. As of September 2000, the Chilean
government will subsidize between 30 to 50 percent of the crop insurance premium
for certain regions. It is expected that the insurance will be extended to cover
fruits and wines as well.
Life and Pension Insurance. This coverage has
been the driver of the Chilean market growth for the last 20 years. The Chilean
privatized pension model, which began in 1981, became so successful that private
pension funds are now the nation's most powerful institutional investors. The
relative high volume of premium in life insurance, 75 percent of total premium,
is attributable to the high revenues of pension insurance. The workers pay their
obligatory taxes to the Management Pension Funds (AFP) and, when reaching the
pension age, they can leave the savings accumulated in the AFP or transfer the
funds to a private life insurance company. The AFP pays an annuity (based on
life expectancy) and, in the event of death, the remaining capital passes to
their heirs. The life insurance company guarantees a fixed payment. AFP also
covers disability and death risk within private life insurers. On the whole,
70 percent of life premiums belong to AFP.
The remaining life business (individual, group, and credit) corresponds to
the complementary products of the obligatory health insurance (privatized partially)
that at the moment enjoy great success.
- Individual insurance: Those policies that
give coverage to individual persons which includes ordinary life covering
death and disability, annuities, and endowments (assures payments of an
annuity in case the insured survive beyond a stated period), mixed products
(combination of life and annuities/endowments), health (to cover expenses
caused by insured's illnesses or accidents), and credit life (policies that
work upon death of an insured who has outstanding debts).
- Group life: Policies that cover simultaneously
a group of people or homogenous groups.
Social Security-Related Insurances. These include
the following.
- AFP insurance: Insurance that private
Pension Fund Management Companies (AFP) must contract with insurers in order
to finance the acquisition of life annuities by affiliates who become disabled,
as well as pensions to survivors of affiliates who die. This AFP insurance
covers the premium cost of these pensions and annuities in excess of the
amounts accumulated in the individual account of the affiliate.
- Retirement annuities: these are life annuities
contracted by AFP affiliates who retire.
- Disability annuities: Life annuities contracted
since January 1988 by disabled AFP affiliates.
- Survival annuities: Life annuities and
pensions contracted since January 1988 by the surviving relatives of AFP
affiliates who died. All these annuities can also be deferred in time (deferred
annuities).
- Disability and survivor: A pension contracted
by disabled affiliates and survivors of dead affiliates, prior to December
31, 1987.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.