Session 098 PD - Latin American Update: Insurance & Pension Regulatory Topics Moderator: Edward L. Robbins, FSA, MAAA Presenters: Marcela Abraham Carlos Arocha, FSA Ramon D. Galanes, ASA, MAAA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer
2017 SOA Annual Meeting & Exhibit MARCELA ABRAHAM CARLOS AROCHA, FSA 98 Latin American Insurance Regulatory Update October 17, 2017
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Agenda Market Overview Regulatory Trend Landscape and Market Impact Concluding Remarks 4
Market Overview
PREMIUM VOLUME BY REGION IN 2016 (USD b) CENTRAL/EASTERN EUROPE MIDDLE EAST/CENTRAL ASIA AFRICA OCEANIA 54 54 61 92 LATIN AMERICA/CARIBBEAN 149 EMERGING ASIAN MARKETS 619 ADVANCED ASIAN MARKETS 821 WESTERN EUROPE US/CANADA 1 417 1 467 Source: Sigma 3/2017, Swiss Re Institute 6
INSURANCE DENSITY AND PENETRATION IN 2016 Density in premium dollars per capita, penetration in premiums as % of GDP 0% 2% 4% 6% 8% LATIN AMERICA/CARIBBEAN 3.2% Non-life Life ASIA 5.6% EUROPE 6.7% US/CAN 6.3% OCEANIA 7.3% Source: Sigma 3/2017, Swiss Re Institute 0 1 000 2 000 3 000 4 000 7
PREMIUM VOLUME BY COUNTRY IN 2016 (USD b) PERU 3.33 COLOMBIA 7.8 CHILE 11.7 ARGENTINA 14.3 MEXICO 24.4 Focus group countries represent 90% of regional premium BRAZIL 72.6 Source: Sigma 3/2017, Swiss Re Institute 8
INSURANCE DENSITY AND PENETRATION IN 2016 Density in premium dollars per capita, penetration in premiums as % of GDP 0% 1% 2% 3% 4% 5% PERU $105 1.7% COLOMBIA $161 2.7% MEXICO $190 2.3% Focus group averages: density: $294 penetration: 3.0% ARGENTINA BRAZIL $326 2.6% $346 4.0% Regional averages: density: $257 penetration: 3.2% CHILE 4.8% $634 Source: Sigma 3/2017, Swiss Re Institute 9
REAL PREMIUM GROWTH VS. REAL GDP GROWTH IN 2016 REAL % PREMIUM GROWTH Brazil(L) Brazil(NL) Colombia(L) Colombia(NL) Chile(L) Mexico(L) Mexico(NL) Chile(NL) Peru(L) Argentina(NL) Peru(L) Argentina(L) Non-life Life Source: Sigma 3/2017, Swiss Re Institute REAL % GDP GROWTH 10
PREMIUM CONCENTRATION IN 2016 % of market share of five largest insurers 96% 85% 83% 73% 68% 51% 55% 55% 56% 52% 38% 33% Focus group averages Non-life: 58% Life: 66% 11
INSURANCE PROTECTION GAP IN 2015 current market size as % of assumed market potential 57% 38% 38% 33% 26% 23% Source: Latin American Insurance Markets in 2015, Mapfre Foundation 12
Drivers of insurance growth in Latin America More awareness/knowledge, derived from natural disasters Growing middle class, increasing demand for products, particularly saving products Compulsory insurance, life annuities derived from social security, workers compensation, health and third party liability (automobiles) Microinsurance, through various channels, including microfinance Bancassurance, use of banking infrastructure to reach the unattended population, credit-related insurance and as a way to reduce acquisition costs Mass marketing and new distribution channels, to penetrate new market segments and new generations Important commercial insurance demand, SMEs products, micro-enterprises, and of the unsatisfied demand in terms of infrastructure and durable goods 13
Growth potential Potential market Low penetration 550 million people Emerging middle class interested in investing in education and savings Economic and political stability Investment in infrastructure Structural reforms that boost and guarantee growth Expectation of a stable economic environment in most countries Evolution towards global regulatory and financial systems Adoption of best practices Closing gaps vs. developed economies Alternative distribution channels and underpenetrated markets InsurTech - Millennials Micro insurance
Regulatory Trend Landscape and Market Impact
Insurance Supervision G-20 POLITICAL AUTHORITY FINANCIAL STABILITY BOARD (FSB) FINANCIAL REGULATION POLICY INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS) INSURANCE CORE PRINCIPLES JURISDICTIONAL AUTHORITIES E.G., EIOPA, NAIC & 56 US JURISDICTIONS, 13 LATAM COUNTRIES, ETC. SUPERVISORY AND REGULATORY STANDARDS AND LAWS 16
IAIS / ASSAL Balance sheet approach to solvency Recognition of all relevant risks Calibration of solvency capital requirements Disclosure and transparency Working committees: Microinsurance (Peru) Education (Argentina) Solvency (Mexico) Information Exchange (Chile) LATIN AMERICAN ASSOCIATION OF INSURANCE SUPERVISORS 17
Insurance Supervision Revisions to ICP 1 18
Proportionality test FOUR STAGES there must be a legitimate aim for a measure the measure must be suitable to achieve the aim the measure must be necessary to achieve the aim the measure must be reasonable, considering competing interests of different stakeholders
Country Classification in Terms of Solvency Modernization SOLVENCY MODERNIZATION IS WELL UNDERWAY OR HAS ALREADY BEEN ENACTED INTO LAW SOLVENCY MODERNIZATION PROCESS HAS BEEN INITIATED LITTLE OR NO ACTIVITY REGARDING SOLVENCY MODERNIZATION Brazil Chile Mexico Colombia Costa Rica Peru Rest of Latin American countries 20
Brazil SUPERINTENDENCIA DE SEGUROS PRIVADOS (SUSEP) CURRENT SITUATION New regime has been gradually introduced The insurance risk module is factor-based There is a capital requirement to mitigate credit and operational risk Market risk requirements have been gradually introduced Supervision activities have been strengthened, and aimed to be consistent with Solvency II SUSEP may be understaffed 21
Chile SUPERINTENDENCIA DE SEGUROS Y VALORES (SVS) CURRENT SITUATION Solvency modernization project launched in 2004 Approach analogous to Solvency II Quantitative Impact Study No. 5 issued in May, 2017 Quantitative requirements have been approved by Congress, but qualitative and supervisory requirements require no approval It is foreseen that insurers will have to appoint a Chief Risk Officer 22
Mexico COMISIÓN NACIONAL DE SEGUROS Y FIANZAS (CNSF) CURRENT SITUATION Solvency modernization project launched in 2014 A mix between Solvency II, Switzerland s Swiss Solvency Test, NAIC methodologies, and organic development Qualitative requirements in place as of April 2015, including solvency and financial condition reports and quantitative requirements in place as of January 2016 Compulsory dynamic solvency requirement and stress tests Shift to an economic balance sheet for compliance reporting, which together with the new solvency requirements, has increased financial statements volatility 23
Colombia SUPERINTENDENCIA FINANCIERA DE COLOMBIA (SFC) CURRENT SITUATION Gradually shifting from a factor-based model to a risk-based model Underwriting risk is measured by a Solvency I type formula Credit and market risk capital charges already in place Companies may use an internal model upon approval by the SFC 24
Peru SUPERINTENDENCIA DE BANCA, SEGUROS Y AFP CURRENT SITUATION Solvency modernization project launched in 2008 Solvency is factor-based with additional capital charges for credit, market and operational risk In 2014, the SBS implemented a capital charge for asset concentration risk Debt for insurance companies cannot exceed the total solvency capital 25
Concluding Remarks
1 2 3 4 The Insurance Core Principles of IAIS have set the tone for industry regulation There is an enormous gulf between highly developed economies and emerging markets Insurance superintendents and industry face substantial challenges The principle of proportionality is now more relevant In general
Uninsured or underinsured populations Broker-dominated markets that emphasize production over risk-based returns Regional challenges Significant concentration on a few (local) players, however a sound solvency market requires a minimum company size Increase in operational cost difficult to justify given current industry size Small and midsize carriers still depend on a few large policies, exacerbating volatility problems Superintendents of insurance may experience lack resources
Likely responses from the insurance sector Increased pressure on monoline insurers and smaller players Multinationals may lose interest, owing to complex environments, but M&A activity may be spurred Business mix may change to optimize regulatory capital utilization Increased demand of reinsurance as a capital management tool Should supervisors support market development?
Each market is unique Markets should engage in modernization projects at their own pace A full-blown risk-based solvency regime may not be the answer a copy/paste approach is not suitable viable alternatives are simplified factor models, scenario models, or stress tests Our views
2017 SOA Annual Meeting & Exhibit RAMÓN GALANES Session 98, Chilean Pension System October 17, 2017
Width: 177 Km Lenth: 4.300 Km Divided in 15 Regions Capital: Santiago Population: 17.819.054 (2014) Men: 49 % Women: 51 % Urban: 87 % Rural: 13 % 2
1950. 1980 2001 2050 projection 3
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Towards the end of the 19 th there is a start to the Cuestión Social or Social Issue. The workers organized into groups destined to provide protection in case of accidents, sicknesses and deaths. That gave way in 1924 to the start of the Social Security associations called Cajas for dependent employees and labourers. Through the years more Cajas were organized in accordance to work type groupings. 5
The active workers finance the benefits of the retired or inactive ones The objective was to maintain a similar standard of living as the one the worker had during his/her last active working years. 6
14 12 10 Number of active workers per pensioner 12,2 Labourers Private workers 35 working years Age 65 years 8 Public workers 30 working years 6 4 2,5 Bank employees 24 working years 2 0 1955 1960 1965 1970 1975 1980 Member of Parliament 15 working years 7
Birth Rates Life Expectancy 38 34 90 85 80,2 80 33 75 28 70 65 60 54,8 23 18 14 55 50 45 13 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Both Men Women 8
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With the exception of a couple, in 1980 all of the Cajas were grouped into a single entity known as INP, later changed to IPS, but keeping the contributions and benefits of the original Caja. The new voluntary Capitalization System mandated a lower 10% contribution and also recognized the participation in the prior system by providing a bond called Bono de Reconocimiento. 10
Scheme of individual savings into personal retirement accounts. Administrated by private entities called AFP s (Pension Funds Administrators). AFP s had only one investment fund for the savings In 2002 additional investment fund types, with different risk profiles and expected returns, were added 11
Individual capitalized savings accounts Stress individual responsibility Freedom components Election and change of desired AFP Aditional voluntary contributions Early retirement option Transparency Non guaranteed returns 12
Pension modalities Scheduled withdrawals Immediate annuity With or without guanteed period Scheduled witdrawals with deferred immediate annuity 13
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Lack of information access by the pensioner and controlled by the sales agent. High sales commissions, commission quick backs. No commissions for scheduled withdrawals. 15
Started in 2004 An electronic system that inteconnects the AFP s, the insurance companies and the Social Security agents (advisors). The purpose is to provide complete and comparable information about the various annuity offers and scheduled withdrawals. 16
Commission Rates as % of Premium 17
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This insurance complements the savings in order to finance a disability or survivorship pension (annuity) The disability and the type is awarded by a public system of medical commissions. 19
Each AFP had to purchase its own insurance with the liberty of choosing its own insurer. Males and Females paid the same for the insurance. Each AFP had a large incentive to control benefit costs. AFP s participated in the underwriting margins. 20
The AFP s would pool the risk as a whole and put it up for bids. Diversication of the risk, increase competition and lower prices. Transparency in the effective insurance rate. Separate rates for males and females. 21
2.1 2 ONSV 1,98-1 1.9 MERCADO 1,87 1.8 1.7 1.6 1.5 MERCADO 1,49 MERCADO 1,41 1.4 1.3 ONSV 1,38-1 MERCADO 1,16 ONSV 1,42-1 1.2 1.1 ONSV 2-1,28 MERCADO 1,26 ONSV 1,19-2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 Contrato Nº1 Contrato Nº2 Contrato Nº3 Contrato Nº4 Contrato Nº5 22
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