Over the past years, Latin America saw significant developments regarding solvency regimes. The latest Swiss Re Economic Research & Consulting Expertise Publication assesses this move towards economic risk-based solvency regimes and gives an overview of potential implications for the insurance sector in the region. Latin America is part of a global trend towards risk-based insurance regulation. These trends in the insurance industry have run broadly parallel to developments in the wider financial sector, with solvency regimes assuming ever greater scope and complexity. Among emerging markets, Asian countries have made significant progress in upgrading their solvency regimes. The Latin America region currently counts three countries that are in the advanced stages of implementing economic risk-based solvency regimes (Brazil, Chile, Mexico), with the remainder operating under regimes akin to the European Union' s (EU) Solvency I framework.
Global comparison of insurance solvency regimes Source: Swiss Re Economic Research & Consulting. Brazil, Chile, and Mexico are expected to adopt frameworks similar in design to the EU' s Solvency II over the course of the next one to three years. Brazil has a partial economic risk-based solvency model in place, while Mexico and Chile are expected to implement comprehensive solvency regimes by 2015 and 2016, respectively. Colombia, Costa Rica and Peru are laying the groundwork for more comprehensive regulatory reforms while simultaneously instituting certain risk-based capital (RBC) provisions, such as those covering investment and operational risks, in a piecemeal fashion. By contrast, Argentina, Venezuela, and most other countries in the region have taken few steps towards economic risk-based solvency regulation and none has made firm commitments to that end. The impact of the regulatory changes will vary from country to country depending on the final model designs. The Swiss Re study [http://media.swissre.com/documents/Insurance_solvency_regulation_in_Latin_America.pdf] finds four key implications of economic risk-based solvency regulation in Latin America. First, the addition of risk-based charges is likely to lead to higher overall capital requirements.Second, insurers will likely adjust their product and business mix in order to optimize their regulatory capital consumption. Third, the changes will affect insurers differently, smaller and less diversified insurers (both geographically and by line of business) will be unable to benefit from diversification effects or economies of scale. Finally, efforts to achieve capital savings are also likely to generate increased demand for reinsurance as it has been proven to be an effective capital management tool to help mitigate the impact of additional risk capital charges.