This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the Chile.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
The contract of insurance is regulated in the Code of Commerce. In addition, relevant norms regulating insurance and reinsurance activity are included in the Law of Insurance Companies. These legal norms are complemented by the rules issued by the insurance regulator, who has ample regulatory powers over insurance, reinsurance and intermediation activities, including the administrative interpretation of legal norms. The regulator has issued norms on several matters and has regulated in further detail the clauses that should be included in the insurance policies.
In addition, general norms on contracts contained in the Civil Code are applicable to those matters that are not specifically regulated by the special legal provisions on insurance.
From a formal point of view, the contract of insurance is perfected by the mere consent of the parties, although some kind of evidence in writing should exist. Once the contract has been concluded, the Insurer has the duty to issue the policy of insurance or a certificate within five days. The Code of Commerce establishes the matters that have to be included in the policy, and this has been further detailed by the regulator’s norms.
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Insurance companies can be formed to conduct only one of the following kinds of business: general and casualty, credit insurance (including fidelity and guarantee), and life. The norms of the Civil Code and the Code of Commerce are basically the same for them all, although the regulator has issued specific rules for each class of Insurance Companies.
Are insurance brokers and other types of market intermediary subject to regulation?
Insurance and reinsurance brokers’ activities are extensively regulated. In order to be included in the corresponding Registry of the Regulator, they have to comply with several requirements.
Insurance brokers need to prove that they have impeccable commercial antecedents, as well as knowledge of insurance and reinsurance (for which they have to approve a written test before the Regulator). In addition, they have to present a guarantee to the Regulator.
In respect of reinsurance brokers, in order to obtain their registration, they need to present the legal antecedents regarding the formation of the company, and present a policy for professional indemnity without deductible or coinsurance, in an amount equal to 1/3 of the premium intermediated in Chile in the previous year, but no lower than 20,000 Unidades de Fomento (the “UF”, is a unit of indexation), and according to rates on 16 April 2018, this figure amounts to approximately USD 906,000).
If the broker is foreign, in addition to the above they shall appoint a representative with residence in Chile, as well as evidence that the company has been duly formed in its country of origin, that it currently exists, and that it is authorised to intermediate risks ceded from abroad.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Insurance and reinsurance companies can legally exist with the regulator’s authorization. For that purpose, it is necessary to make a complete presentation of a Project of Formation, which shall include:
- Identity of its shareholders and controllers.
- Lack of legal incompatibilities regarding shareholders, controllers, members of the board and main managers.
- Evidence of an equity not lower than the legal capital required.
- Antecedents regarding management, business plan, risk management systems, and transactions with related parties.
On average it takes 6 months to obtain the regulator’s approval.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
There are no restrictions regarding nationality, domicile or other circumstances. Foreign capitals are not restricted to participate in the formation of a company of insurance o reinsurance or to take control thereof.
However, proof is required that the shareholders, the controlling parties and holders of 10 per cent or more of the shareholder equity have not been convicted of crimes or other criminal offences; that none of them has been subject to any prohibition or incapacity to conduct business, or subject to any sanction, fine or penalty imposed by the regulator.
In case of transference of 10% or more of the company’s shares, the above requirements as well as the equity requirement mentioned in No., 4 above, shall be met.
Foreign insurers may open a branch in Chile, but capital and other requirements are the same as those imposed upon Chilean insurance companies to be organized in Chile. Transactions between the local branch and its parent or related companies are deemed to have been effected between different entities, and therefore, do not affect the requirement of technical reserves. The parent company is not responsible for the obligations assumed by the Chilean branch office and may reinsure its risks without any limitation.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
The only risks that can be insured by insurers that do not have a license or authorization in Chile are the so-called MAT insurances, i.e., international marine transportation, International commercial aviation, cargo in international transit, and satellites and their cargo. These kinds of insurances may be commercialized in Chile by foreign insurance companies and intermediaries.
MAT is the exception to the general and mandatory rule that foreign insurers and brokers cannot offer or intermediate insurance in Chile.
Nonetheless, Chilean citizens or residents may buy insurance abroad, and approach foreign insurers or brokers for such a purpose. In such cases, foreign insurers may inspect the risks in Chile, participate in the loss adjustment process (if any), pay insurance indemnities, and collect premiums.
The premium to be paid to foreign insurance companies if insurance is bought out of Chile is subject to a 22% withholding tax. This tax would not be applicable in respect of the states that currently have a Tax Treaty Convention in force with Chile.
What penalty is available for those who operate without appropriate permission?
These actions may constitute a criminal offense. In the last two decades, there have been no criminal prosecutions for this potential offense.
How rigorous is the supervisory and enforcement environment?
The regulatory framework confers upon the insurance regulator ample faculties to supervise and enforce the regulation in respect of local insurers and intermediaries or brokers registered in Chile. The scope and thoroughness of this supervision has increased in the last years, and timing required to process submissions and requests has increased accordingly. The recently created “Comisión para el Mercado Financiero” (CMF), the regulator that replaced the Superintendence of Securities and Insurance, has contributed to this. In future, the CMF will also take over the supervision of banking and financial entities. Insurance supervision so far could be considered less demanding than securities and banking, and this trend may continue once the CMF absorbs banking and finance. This will take place once the new Banking Act, currently processed by the Senate, is enacted.
How is the solvency of insurers (and reinsurers where relevant) supervised?
Regulation is strict regarding minimal capital requirements and technical reserves, which is controlled by quarterly presentation of financial statements to the regulator (CMF). In addition, from time to time the regulator makes in-site inspections, and requests clarifications in respect of any queries regarding statements or any other antecedent. The CMF is implementing a new model for risk-based supervision, the main objective of which is to preserve solvency within the insurance market. For that purpose, it has sent to the insurance market for consultation, diverse drafts on methodology, and other aspects.
Under this same perspective of the new supervisory model, the regulator has recently established reinsurance management principles which are applicable without prejudice to the norms in force, under which companies shall only reinsure with local reinsurers or with foreign reinsurers with a risk rating not lower than BBB or its equivalent. Accepted classification houses are Standard & Poor’s, FITCH, MOODY’S and A.M. Best. Otherwise, reinsurance is not considered for the purposes of establishing the technical reserves of the insurance company.
What are the minimum capital requirements?
To form and obtain an authorization, an insurance company (regardless of whether it is general and casualty, life, or credit insurance) requires a minimum capital in the amount of UF 90,000 which amounts to approximately USD 4,077 million; said capital has to be fully underwritten and paid.
Is there a policyholder protection scheme?
The norms of the Code of Commerce envisage two kinds of insurance contracts. One is what could be called “large risk” insurances, in which there is ample freedom of contract. Large risks are those in which the policyholder is a juridical person that pays an annual insurance premium inferior to UF 200 which amount to approximately USD 9,060. Also, regardless if the policyholder is a natural person or a legal entity, or the annual insurance premium involved, cargo insurance and marine and hull insurance are always deemed to be “large risks”, and freedom of contract is not restricted. The policy forms commercialised in the market for these classes of insurances, are not subject to any scrutiny by the regulator.
The second kind of insurance contract is the so-called regulated contract, to which the substantive regulations of the Code of Commerce apply. These are mandatory provisions that cannot be derogated by the parties’ consent, and provide a minimum standard that protects policyholders and beneficiaries. Any stipulation that breaches such standards is null and void. However, stipulations that favour the policyholder above the minimum standards are valid and enforceable. Insurers and brokers may only offer and commercialise policy forms that have been deposited in a Registry of Policies kept by the regulator. The regulator may eliminate from such a Registry any policy form that does not comply with the minimum standards established in the law and regulations, or which contains ambiguous or unclear clauses.
How are groups supervised, if at all?
There are rules regarding collective insurance which applies to insurance companies, brokers and other commercialization channels, including banks in respect of insurances associated to loans secured with mortgages. Policies shall establish the duty of informing policyholders about the terms of the insurance with the basic information regarding the insured and coverage and its amendments.
In respect of their portfolio of insurances associated to mortgaged loans, creditors or banking entities shall follow a bidding process, which is monitored by the regulator. The broker always has a duty to serve policyholders.
Do senior managers have to meet fit and proper requirements and/or be approved?
There are no specific provisions establishing requirements or approval for senior managers, other than presenting their CV to the regulator (this applies also to actuaries). The regulator ordinarily requires antecedents, background and insurance experience of senior managers to be provided, particularly in the case of new companies seeking authorization.
Are there restrictions on outsourcing parts of the business?
There are no specific restrictions to outsource business areas. However, the regulation requires that a Project of Formation (regarding an insurance or reinsurance company) indicate the main outsourcing agreements. Risk equity and technical reserves shall follow the guidelines of the regulator’s directives and would not be possible to delegate to third parties.
How are sales of insurance supervised or controlled?
As stated above, all entities involved in the insurance activity have several reporting duties which include providing the Insurance Regulator information regarding the commercialisation of insurance, the types of insurance being commercialised, their distribution channels, etc.
This information is thoroughly reviewed by the Insurance Regulator, which may request any additional information it deems necessary to analyse an entity’s compliance with all insurance laws and regulations.
Insurance regulations also set forth rules regarding the contracting and commercialisation of insurance by different kinds of entities, and by means of different distribution channels.
The Insurance Regulator also supervises the commercialisation of insurance when receiving complaints from insureds. Upon receiving such complaints, the Insurance Regulator will most likely request the involved parties to provide all documentation evidencing the proper commercialisation of the insurance and, if a violation is detected, it may sanction the relevant insurer or insurance broker.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Norms pertaining to regulated insurance contracts and collective insurance described in No. 11 above, are applicable. There is a Consumer Protection Law enacted in 2004 to protect collective and diffuse interest of consumers, although its applicability to insurance policies has been disputed, since it is a matter highly regulated by special norms.
Are the courts adept at handling complex commercial claims?
Insurance matters are generally subject to arbitration, which is regarded as more appropriate for complex insurance litigation.
If the dispute is for an amount lower than UF 20,000 (approximately USD 453,000) the insured party may choose to litigate in courts.
Commonly appeals are heard by the Appellate Court (unless the parties have renounced to appeal or have designated an arbitral court to hear the appeal). Superior courts, such as the appellate courts and particularly the Supreme Court, have a high level of legal analysis although they are not adept in reviewing complex matters, particularly if they have been heard by an arbitrator in the first instance.
Is alternative dispute resolution well established in the jurisdiction?
Arbitration has been widely used since long ago to resolve commercial disputes, and since 2013, it is mandatory in insurance matters (with the exception noted in No. 17 above). Courts recognize and respect arbitration- They may intervene only if the parties have not waived their right to appeal to before higher courts. These courts may review and amend the arbitrator’s decision if they conclude that the decision breaches the law.
Mediation is not mandatory, but the parties may agree to mediate the dispute. Some institutional arbitration centres (such as the Santiago Chamber of Commerce, which is the most prestigious), have a panel of mediators and establish in its standard dispute resolution clause, that the parties shall mediate the dispute as a step previous to arbitration. However, courts have no power to compel the parties to mediate insurance disputes, which is entirely voluntary. Refusal to mediate entails no consequences.
What are the primary challenges to new market entrants?
New entrants may seek a niche or else have strong financial support. The actors are mainly international insurers and one local insurer related to a local financial group. There are a few domestic insurers which rely mainly on international support and reinsurance, and their risk retention is minimal.
Massive insurance requires distribution channels and so alliances with retail or banks may be necessary for success.
In respect of large risks, such as mining, forestry, or fishing, reinsurance facilities are indispensable in order to avoid levels of capitalization in excess of the size of this market.
To what extent is the market being challenged by digital innovation?
Digitalization has been a most relevant tool in facilitating and extending insurance activity. The law widely admits electronic signature for all kind of transactions. Insurance regulation encourages the use of electronic and digital mechanism and it is widely used by companies and all the channels of insurance distribution. The local market is flexible enough to adapt quickly to digital developments taking place in the main insurance centres.
Over the next five years what type of business do you see taking a market lead?
The local market will broadly follow international trends. Therefore, cyber insurance protection, and technology as a channel for insurance will lead the local market in the next years. However, particular importance will always have in this country coverage for catastrophe, particularly earthquakes, tsunamis and floods. This necessarily requires participation of the international insurance market or financial market through products such as cut bonds.
State-owned assets have traditionally been uninsured for catastrophes. Would this change in the future, this area ill certainly produce a major growth for the insurance and reinsurance markets.