Insurance solvency regulation in Latin America
The insurance industry is undergoing profound regulatory reforms aimed at strengthening the stability of the financial sector. The modernization of the solvency regimes is part of these reforms and many countries and regions, including Latin America, are bringing their regulations into line with the significant advances achieved in risk management and group supervision in recent years.
Three countries in Latin America are already in advanced stages of implementing economic risk-based capital models: Mexico, Brazil and Chile are expected to adopt frameworks similar in design to the EU’s Solvency II over the next one to three years. Colombia, Costa Rica and Peru are laying the groundwork for comprehensive regulatory reform while simultaneously incorporating risk capital requirements (RBC) in a piecemeal fashion. The remainder of the countries still operates on Solvency Margin regimes, which are akin to the EU’s Solvency I framework.
Implications for the insurance industry
The impact of the regulatory changes will vary from country to country depending on the final model designs. But some general inferences can be drawn from current trends and past precedents:
- the addition of risk-based charges is likely to lead to higher overall capital requirements.
- insurers will likely adjust their product and business mix in order to optimize their regulatory capital consumption.
- smaller, mono-line insurers will struggle under the new rules, being unable to benefit from diversification effects or economies of scale. Such pressures are expected to result in increased mergers and acquisitions in the region.
- efforts to achieve capital savings are also likely to generate increased demand for reinsurance.
How Swiss Re can help
Swiss Re has been exposed to changes of many solvency regimes around the world. The company has, therefore, a broad experience to deal with such changes and to share its international experience with stakeholders in the region, including clients, industry associations and regulators.
While reinsurance has so far not been widely used as a regulatory capital management tool in Latin America, it can offer significant capital relief under new solvency regimes. This way, reinsurance should not only be considered within the risk mitigation context, but can be used as a corporate finance tool complementing other sources of capital.
Swiss Re is fully determined to analyze the market implications of these new solvency regimes and offers tailored solutions to fit clients' specific needs throughout Latin America.
WANT TO KNOW MORE ABOUT SOLVENCY REGULATION?
Insurance solvency regulation in Latin America: modernizing at varying speeds: Latin America is steadily moving in the direction of economic risk-based solvency regimes for insurers, but at varying speeds. This recent publication analyzes this trend.
"What do you know about Solvency II?" A high-level introduction: This publication is a high-level introduction to EU's Solvency II framework, designed to provide a flavor of what Solvency II is about and trigger discussions on solvency related topics.