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 & ExhibitMARCELA ABRAHAM | CARLOS AROCHA, FSA98—Latin American Insurance Regulatory UpdateOctober 17, 2017

SOCIETY OF ACTUARIESAntitrust Compliance Guidelines

Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants.

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There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures.

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• Do not discuss prices for services or products or anything else that might affect prices• Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers.• Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so.

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Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone’s responsibility; however, please seek legal counsel if you have any questions or concerns.

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Presentation Disclaimer

Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.

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Agenda• Market Overview• Regulatory Trend Landscape and Market Impact• Concluding Remarks

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Market Overview

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CENTRAL/EASTERN EUROPE

MIDDLE EAST/CENTRAL ASIA

AFRICA

LATIN AMERICA/CARIBBEAN

OCEANIA

EMERGING ASIAN MARKETS

ADVANCED ASIAN MARKETS

WESTERN EUROPE

US/CANADA

PREMIUM VOLUME BY REGION IN 2016 (USD b)

1 467

1 417

821

619

149

92

61

54

54

Source: Sigma 3/2017, Swiss Re Institute

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LATIN AMERICA/CARIBBEAN

ASIA

EUROPE

US/CAN

OCEANIA

0 1 000 2 000 3 000 4 000

3.2%

5.6%

6.7%

6.3%

7.3%

INSURANCE DENSITY AND PENETRATION IN 2016Density in premium dollars per capita, penetration in premiums as % of GDP

Non-lifeLife

Source: Sigma 3/2017, Swiss Re Institute

0% 2% 4% 6% 8%

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BRAZIL

MEXICO

ARGENTINA

CHILE

COLOMBIA

PERU

PREMIUM VOLUME BY COUNTRY IN 2016 (USD b)

Source: Sigma 3/2017, Swiss Re Institute

3.333.3

7.8

11.7

14.3

24.4

72.6Focus group countries represent 90% ofregional premium

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INSURANCE DENSITY AND PENETRATION IN 2016Density in premium dollars per capita, penetration in premiums as % of GDP

BRAZIL

MEXICO

ARGENTINA

CHILE

COLOMBIA

PERU 1.7%

2.7%

2.3%

2.6%

4.0%

4.8%

$105

$161

$190

$326

$346

$634Regional averages:density: $257penetration: 3.2%

Focus group averages:density: $294penetration: 3.0%

0% 1% 2% 3% 4% 5%

Source: Sigma 3/2017, Swiss Re Institute

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REAL PREMIUM GROWTH VS. REAL GDP GROWTH IN 2016

Mexico(L)Mexico(NL)Colombia(L)

Colombia(NL)

Brazil(L)

Chile(L)

Chile(NL)

Brazil(NL)

Argentina(NL)

Argentina(L)

Peru(L)

Peru(L)

Source: Sigma 3/2017, Swiss Re Institute

Non-lifeLife

REAL % PREMIUMGROWTH

REAL % GDP GROWTH

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PREMIUM CONCENTRATION IN 2016% of market share of five largest insurers

38%33%

51%

85%

55% 55% 56%

73%

52%

68%

96%

83%

Focus group averagesNon-life: 58%Life: 66%

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INSURANCE PROTECTION GAP IN 2015current market size as % of assumed market potential

38% 38%

57%

33%

26%23%

Source: Latin American Insurance Markets in 2015, Mapfre Foundation

Drivers of insurance growth in Latin America

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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

Growth potential

Potential market• Low penetration• 550 million people• Emerging middle class interested in investing in

education and savingsEconomic and political stability

• Investment in infrastructure• Structural reforms that boost and guarantee

growth• Expectation of a stable economic environment in

most countriesEvolution 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

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G-20

FINANCIAL STABILITY BOARD (FSB)

INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS)

JURISDICTIONAL AUTHORITIES

E.G., EIOPA, NAIC & 56 US JURISDICTIONS, 13 LATAM COUNTRIES, ETC.

POLITICAL AUTHORITY

FINANCIAL REGULATION POLICY

INSURANCE CORE PRINCIPLES

SUPERVISORY AND REGULATORY STANDARDS AND LAWS

IAIS / ASSAL

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Balance sheet approach to solvencyRecognition of all relevant risksCalibration of solvency capital requirementsDisclosure and transparency

Working committees:• Microinsurance (Peru)• Education (Argentina)• Solvency (Mexico)• Information Exchange (Chile)

LATIN AMERICAN ASSOCIATION OFINSURANCE SUPERVISORS

Insurance Supervision—Revisions to ICP 1

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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

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SOLVENCY MODERNIZATION IS WELL UNDERWAY OR HAS ALREADY BEEN ENACTED INTO LAW

• Brazil• Chile• Mexico

SOLVENCY MODERNIZATION PROCESS HAS BEEN INITIATED

• Colombia• Costa Rica• Peru

LITTLE OR NO ACTIVITY REGARDING SOLVENCY MODERNIZATION

• Rest of Latin American countries

Brazil

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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

Chile

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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

Mexico

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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

Colombia

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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

Peru

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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

Concluding Remarks

In general

The Insurance Core Principles of IAIS have set the tone for industry regulation

1There is an enormous gulf between highly developed economies and emerging markets

2Insurance superintendents and industry face substantial challenges

3The principle of proportionality is now more relevant

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Regional challenges

Uninsured or underinsured populations

Broker-dominated markets that emphasize production over risk-based returns

Significant concentration on a few (local) players, however a sound solvency market requires a minimum company sizeIncrease 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?

Our views

Each market is unique—Markets should engage in modernization projects at

their own pace

a “copy/paste” approach is not

suitable

A full-blown risk-based solvency regime may not

be the answer

viable alternatives are simplified factor models, scenario

models, or stress tests

2017 SOA Annual Meeting & ExhibitRAMÓN GALANESSession 98, Chilean Pension SystemOctober 17, 2017

Divided in 15 Regions

Capital: Santiago

Width: 177 Km Lenth: 4.300 Km

Population: 17.819.054 (2014)

Men: 49 %Women: 51 %

Urban: 87 %Rural: 13 %

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3

1950. 1980

2001 2050 projection

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• Towards the end of the 19th there is a startto the “Cuestión Social” or Social Issue.

• The workers organized into groupsdestined to provide protection in case of accidents, sicknesses and deaths.

• That gave way in 1924 to the start of theSocial Security associations called “Cajas” for dependent employees and labourers.

• Through the years more “Cajas” were organized in accordance to work type groupings.

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• The active workers finance the benefitsof the retired or inactive ones

• The objective was to maintain a similar standard of living as the one the workerhad during his/her last active workingyears.

0

2

4

6

8

10

12

14

1955 1960 1965 1970 1975 1980

Number of active workers per pensioner

Member ofParliament

Bank employees

Public workers

Private workers

Labourers

77

35 working years

30 working years

24 working years

15 working years

Age 65 years12,2

2,5

8

13

18

23

28

33

38

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Birth Rates

14

34

45

50

55

60

65

70

75

80

85

90

Life Expectancy

Both Men Women

54,8

80,2

9

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• With the exception of a couple, in 1980 all of the “Cajas” were grouped into a single entityknown as INP, later changed to IPS, but keepingthe contributions and benefits of the original “Caja”.

• The new voluntary Capitalization Systemmandated a lower 10% contribution and alsorecognized the participation in the prior system by providing a bond called “Bono de Reconocimiento”.

• 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 thesavings

• In 2002 additional investment fund types, withdifferent risk profiles and expected returns, were added

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• 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

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• Pension modalitiesScheduled withdrawalsImmediate annuityWith or without guanteed periodScheduled witdrawals with deferred

immediate annuity

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• Lack of information access by thepensioner and controlled by thesales agent.

• High sales commissions, commission quick backs.

• No commissions for scheduledwithdrawals.

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• Started in 2004• An electronic system that

inteconnects the AFP´s, theinsurance companies and the Social Security agents (advisors).

• The purpose is to provide complete and comparable information aboutthe various annuity offers and scheduled withdrawals.

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Commission Rates as % of Premium

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• This insurance complements thesavings in order to finance a disabilityor survivorship pension (annuity)

• The disability and the type is awardedby a public system of medical commissions.

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• Each AFP had to purchase its own insurancewith the liberty of choosing its own insurer.

• Males and Females paid the same for theinsurance.

• Each AFP had a large incentive to control benefit costs.

• AFP´s participated in the underwriting margins.

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• The AFP´s would pool the risk as a wholeand put it up for bids.

• Diversication of the risk, increasecompetition and lower prices.

• Transparency in the effective insurancerate.

• Separate rates for males and females.

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MERCADO1,87

ONSV 1,98 - 1

MERCADO1,49

ONSV1,38 - 1

ONSV2 - 1,28

MERCADO1,26 ONSV

1,19 - 2

ONSV 1,42 - 1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

2.1

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

MERCADO1,41

MERCADO1,16

Contrato Nº1 Contrato Nº2 Contrato Nº3 Contrato Nº4 Contrato Nº5

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24

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