Journal Issue

Chile: Selected Issues Paper

International Monetary Fund. Western Hemisphere Dept.
Published Date:
July 2014
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Chile’s Insurance Sector1

This chapter reviews recent trends, outlook and risks in Chile’s insurance sector.

A. Background

1. The insurance sector is a significant player in the Chilean financial system. Measured by total assets, insurance is the third largest sector in the financial system (next to banks and pension funds), accounting for 20 percent of GDP. In a regional context, Chile’s insurance business is well developed, with high insurance density (premiums to population) and penetration (premiums to GDP) relative to other countries. Nonetheless, Chile’s insurance market is expected to grow further, as density is at the lower end of OECD countries, and the market has been growing in tandem with GDP.

2. The sector is dominated by life insurance companies. Life insurance companies account for roughly 90 percent of the sector’s total assets and 65 percent of gross written premiums. Development in the life insurance sector (measured by the penetration rate) is not only high relative to the region, but also in line with the OECD median. Growth in the life sector reflects the inflow of funds from those retiring and converting their pensions into annuities. Chile has a mandatory, defined contribution pension scheme that requires workers to create individual savings accounts with pension funds that subsequently are converted into annuities at retirement. Pension funds, which are a large part of the financial system, will therefore eventually be converted into annuities, spurring the growth of the life insurance sector further.

Table 1.Chile: Financial System Structure(Assets as a share of system total and GDP; in percent)
(share of total)(share of GDP)Share of totalShare of GDP
Pension fund administrators 1/31.758.128.959.4
Insurance companies1120.110.020.5
Property and casualty0.611.12.3
Other fund administrators 1/2/6.912.68.717.8
Source: Superintendence of Banks and Financial Institutions, Superintendence of Insurance and Securities, Superintendence of Pensions, and Fund staff calculations.

Assets under management.

Includes mutual funds, investment funds, investment funds for foreign capital.

Source: Superintendence of Banks and Financial Institutions, Superintendence of Insurance and Securities, Superintendence of Pensions, and Fund staff calculations.

Assets under management.

Includes mutual funds, investment funds, investment funds for foreign capital.

Figure 1.Chile: Insurance Sector Development

3. Regarding its ownership structure, the Chilean insurance sector has a large foreign presence and a large presence in conglomerates. The market share of foreign controlled undertakings and branches of foreign undertakings in total domestic business is 45 percent for life and 65 percent non-life insurance. Life insurance companies are usually part of conglomerates,2 as companies belonging to conglomerates manage 95 percent of the assets in the industry. The Herfindahl Index (HHI) for life and non-life insurance are both below 1000 indicating that the degree of concentration is low according to the Department of Justice and Federal Trade Commission classification for the United States.3 The top five insurers account for 50 percent of the gross written premium in the life and 55 percent in the nonlife sector.

4. The products offered in the Chilean insurance sector are mostly traditional insurance products. Chile has the following statutory insurance obligations: (i) all credit operations require life insurance policy protecting the creditor; (ii) mortgage loans require fire, earthquake, and flood insurance; (iii) motor vehicles are required to have insurance for personal accidents; and (iv) pension funds are required to cover affiliates’ risk of death or incapacity. Non-life insurance sector is dominated by fire and earthquake, and motor vehicle insurance. Life insurance is dominated by annuities and life and health insurance. Annuities account for 80 to 85 percent of the technical reserve requirements for life insurance companies. In recent years, the International Association of Insurance Supervisors (IAIS) has highlighted the extent to which insurance companies perform “non-insurance/non-traditional” activities as an indicator of their potential systemic impact. Insurers engaged in traditional insurance activities are in general able to absorb their losses with no systemic impact. In contrast, insurance groups and conglomerates that engage in non-traditional or non-insurance activities can be more vulnerable to financial market developments and therefore more likely to contribute to systemic risk.4

Figure 2.Chile: Insurance Sector Products

Note: SOAP = personal accident insurance required for motor vehicles.

B. Investment and profitability

5. The insurance sector invests roughly 70 percent of its portfolio in domestic fixed income assets. Bank and corporate bonds account for 40 to 50 percent of life and non-life insurance companies’ portfolios. Non-life insurance companies favor more liquid investments, including cash, deposits and government bonds.5 Life insurance companies, make longer term investments, including real estate instruments (letras and mutuos hipotecarios) and real estate direct investments. The conventional approach that matched annuity (long-term and fixed interest rate) liabilities with long-term government bonds became impractical as the annuity pricing rate has exceeded the bond rate since 2001. In response, emphasis was first shifted to fixed-rate corporate bonds to capture higher yields. More recently, insurers have increased their exposures abroad and to real estate. These moves have enabled life insurance companies to seize higher yields but have increased the exposure to investments that are less liquid and with higher relative risk.

Figure 3.Chile: Insurance Sector Portfolio Composition

6. Profitability in the insurance sector appears healthy. It was negatively affected in 2011 but has recovered since then. Returns on investment are a key determinant of profitability in the sector. Return on investment for life insurers has been relatively high compared to non-life insurance companies due to life insurers’ investment in longer term assets. Returns on investment for both life and non-life insurers were negatively affected in 2011 due to the poor performance of variable income assets and investments abroad. Profitability for both sectors appears adequate, as returns on equity are roughly in line with the median for OECD countries.

Figure 4.Chile: Insurance Sector Profitability

C. Risks

7. There are two major sources of risk in the annuity business: longevity risk and reinvestment risk. Longevity risk would arise from unanticipated medical advances and/or diet improvements affecting the long term outlook for annuities payments. Following the 2004 FSAP recommendation, mortality tables have been updated and are now regularly reviewed to provide for future life expectancy improvements. In terms of reinvestment risk, Chilean life insurers with annuity liabilities show a systematic maturity mismatch of assets and liabilities, due to the scarcity of assets with similar durations as liabilities. With a lower average maturity for assets than for liabilities, life insurers stand to benefit from normalization in world monetary conditions.

8. In recent years, life insurers have increased their exposures to risks in the real estate sector. Direct exposures to real estate have increased as a share of total portfolio, in particular commercial real estate.6 In turn, commercial real estate activity has been dynamic in recent years. Price data for commercial real estate remain spotty, and the central bank has only recently commenced collecting such series. A substantial amount of office space is expected to come to completion in the near future, heightening the risks of a downward correction in prices and rents. As a mitigating factor, the securities and insurance superintendence (SVS) reports that accounting requirements for these assets are conservative.7 Results of SVS’ stress testing exercises, assuming a drop in real estate prices between 25 and 30 percent, also do not raise significant concerns.8 Nonetheless, the SVS should continue to monitor real estate-related asset structures and values closely.

9. Chilean non-life insurers have high exposure to catastrophic risk. The major natural catastrophe risk in Chile is earthquake and a tsunami caused by an earthquake as Chile is one of the most seismically active regions in the world. Over the last century, Chile has experienced more than a dozen major earthquakes. The performance of insurance companies and the SVS in the context of the latest major earthquake and associated tsunami of February 2010 was impressive.9 The country suffered extensive destruction of property, and the insurance industry settled 98 percent of the claims within seven months following the earthquake. Losses to local insurance companies were limited as the associated risk had been transferred to international markets via reinsurance. The SVS played a proactive role in informing homeowners of their insurance coverage and in monitoring the settlement and payment of property claims.

D. Capital analysis

10. Chilean insurance companies have a conservative approach to solvency and tend to accumulate more capital than required by current regulation. The securities and insurance superintendence (SVS) reports two variables to monitor solvency: a leverage ratio (debt to equity ratio) and a ratio of capital to required capital. Over the last years, the leverage ratio for non-life insurers has remained stable and has increased mildly for life insurers. The ratios for both non-life and life insurers remain well below their regulatory maxima (five and twenty, respectively). Also, both non-life and life insurers hold capital significantly above required capital levels.10 However, it should be noted that current capital requirements do not fully capture all risks confronted by insurers (market risk, credit risk, reinvestment risk and longevity risk). Moreover, insurers that opted to recognize in a deferred way the 2006 mortality tables of beneficiaries and disabilities (B-2006, MI-2006), were granted a twenty year period to implement them. Thus far, seventeen insurers have opted for that mechanism and are not recognizing an amount equivalent to 30 percent of their net capital. If those insurers were to recognize in a one-time such mortality tables, their leverage levels would be higher than reported in this note and, in a few cases, above regulatory minimum. The SVS is in the process of changing capital requirements to be based on risk (see next section).

Figure 5.Chile: Insurance Sector Capital Adequacy

E. Supervision and regulation

11. Keeping up with best practices in insurance supervision and regulation is crucial, given the key role played by life insurers in the Chilean financial system. The life insurance sector is currently the third largest financial sector (with assets around 20 percent of GDP) and is expected to continue growing as the number of retirees in the pension system increases. Its interconnectedness with the rest of the financial system is significant. Life insurers hold a large share of their portfolio in bank bonds and real estate financing instruments (letras and mutuos hipotecarios). Additionally, the sector plays an important role financing the Chilean corporate sector. In terms of ownership, life insurers tend to be part of financial conglomerates. Regarding exposures, over the last decade, they have increased their exposure to investments with lower liquidity and higher relative risk. Finally, there is an explicit government guarantee on annuities, therefore representing a fiscal contingent liability in case of insolvency of a life insurer.

12. Chile is in the process of introducing a risk-based supervisory system, including changes in solvency requirements. The project strengthens the supervisory process by distinguishing companies by their risk level and their risk management practices and corporate governance. The project is therefore in line with previous FSAP11 and OECD recommendations. In October 2012, the project was approved in the Deputies Chamber and is currently sitting with the Senate. Changes in capital requirements, investment regulation and corporate governance of insurance companies are expected with the passage of the bill.

13. The proposed system employs a two-pillar assessment of the financial strength of the companies.

  • In the first pillar, the level of compliance with new minimum solvency requirements is evaluated. The new minimum solvency requirements incorporate the notion of risk-based capital requirement, to better align capital charges with the associated asset risks.12 For example, capital charges on variable income assets and real estate investments are introduced, which are missing under the current regulatory framework. Additionally, requirements for longevity and reinvestment risks are tightened.

  • In a second pillar, the SVS will assign a rating to each company based on its evaluation of risk exposure, risk management practices, quality of corporate governance, and based on a qualitative assessment of capitalization.

The strength ratings for each pillar are then combined into an aggregate rating that guides SVS supervision and, depending on circumstances, allow SVS to require early remedial action by management. In addition, the project tightens limits on investments in related parties, which is relevant given the high degree of conglomeration in the Chilean financial sector.


Prepared by Nicolas Arregui (MCM).

While banks or insurance companies are not permitted to directly own another insurance company, conglomeration can be established between financial companies through a holding company. While life and non-life companies need to be individually licensed and a separate corporation established, if they belong to the same group, the same management and administrative system may be used in Chile.

In their guidelines, markets with a Herfindahl Index (HHI) below 1000 are deemed “unconcentrated,” those with an HHI between 1,000 and 1,800 are deemed “moderately concentrated,” and those with an HHI above 1,800 are deemed “highly concentrated.”

Examples of non-traditional and non-insurance activities include financial guarantee insurance, capital market activities such as credit default swap (CDS) issuance, transactions for non-hedging purposes, derivative trading or leveraging assets to enhance investment returns.

Mutual funds are a key investment for property and casualty insurers.

Regulatory exposure limits for housing are tighter than those for commercial real estate.

Real estate assets are priced at the minimum of two independent price sources and the amortized cost adjusted by inflation.

Another stress testing exercise conducted by SVS considers a drop in asset prices of 30 percent.

See IMF Chile FSAP Update 2011.

The lack of a global standard for capital adequacy in insurance does not allow for a cross-country comparison.

The 2004 FSAP conducted a review of the insurance sector that, among other issues, recommended a move to a more risk-based approach to supervision. The 2011 FSAP followed up on the recommendation.

At present the capital requirements (based on Solvency I) cannot be said to be sensitive to the size and risks of the insurers’ operations. The SVS is in the process of developing a standard formula for risk-based capital. To date, the SVS has published two methodological papers and is conducting its second quantitative impact study.

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