Adjustment Procedures, Claims Control and Cooperation Clauses, Reinsurance Contracts and Dispute Resolution under the new Contracts Act and Regulations. JAVIER CARVALLO PRESIDENT I CRAWFORD CHILE MAY 12, 2014 MIAMI, FL
INTRODUCTION: Key Facts about the Chilean Insurance Market
KEY FACTS ABOUT THE CHILEAN INSURANCE MARKET: 1. Insurance is a crucial part of the Chilean Economy; 2. The market is open to international insurance and reinsurance; and, 3. The legal framework is clear, but strict.
1. THE INSURANCE INDUSTRY AS A CRUCIAL PART OF THE CHILEAN ECONOMY In December 2013, investments held by Chilean Insurers totalled MM US$ 49,466, equivalent to 18,9% of Chile s Domestic Product.
1. THE INSURANCE INDUSTRY AS A CRUCIAL PART OF THE CHILEAN ECONOMY 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 7,735 7,497 6,983 6,053 5,058 3,713 3,902 3,103 2,694 2009 2010 2011 2012 2013 2013 The industry has grown continuously 42,2% over the last 4 years. Direct premium reached MM US$ 11.072 by December 2013 VIDA LIFE GENERALES NON-LIFE
1. THE INSURANCE INDUSTRY AS A CRUCIAL PART OF THE CHILEAN ECONOMY Insurance Companies are crucial to the Chilean Pension System. Insurers provide Disability and Survival Insurance and can also become Pension Plan Administrators. As a country with catastrophic risk exposure, insurance is essential in Chile.
2. A MARKET OPEN TO INTERNATIONAL INSURANCE AND REINSURANCE As a general principle, insurance activity is limited to Companies established in Chile. However, there are no restrictions on foreign Insurers and Brokers establishing themselves in Chile. In fact, of the 10 largest insurance groups, 5 are currently international corporations.
2. A MARKET OPEN TO INTERNATIONAL INSURANCE AND REINSURANCE There is no restriction on buying reinsurance abroad with authorized reinsurers. Lloyd s and its Syndicates have been authorised to operate in Chile, as a foreign reinsurance entity, since March 27th, 2002. Reinsurance may also be placed through Brokers - who must be registered and have E&O cover.
3. CLEAR, BUT STRICT, LEGAL FRAMEWORK Regulations apply to Public and Private sectors. The entity that supervises the market is the Securities and Insurance Superintendency. The involvement of the Supervisory Authority is based on the constitutional concept of Economic Public Order, because public confidence is involved.
3. CLEAR, BUT STRICT, LEGAL FRAMEWORK Supervision is based on two key concepts: solvency and market conduct, aiming to ensure that all market players are able to meet their liabilities and that the consumer receives fair and transparent treatment. Supervision applies to all market entities, including Insurers, Reinsurers, Brokers and Adjusters. It also extends to other participants, such as Banks, Department Stores and other service providers.
MAIN SUBJECT OF THIS PRESENTATION: Regulations intended to ensure good market conduct include those related to loss adjusting, reinsurance contracts and dispute resolution. These were recently modified via the following legal instruments: Supreme Decree Nº 1.055, which modified loss adjusting procedures, and came into effect on 1 June 2013; and, The new Insurance Contracts Act (Law 20667), which modified the Commercial Code and applies to the Insurance and Reinsurance Contracts. Becomed effective on 1 December 2013.
II. Loss adjusting under DS 1055
1. GENERAL Any loss affecting a policy issued in Chile must be adjusted in accordance with DS 1055. The only exception is the payment of the total amount claimed within 6 days. The loss may be adjusted by the insurer or through an external adjuster. In both cases DS 1055 will apply.
1. GENERAL CONSIDERATIONS The process concludes with a report that offers an opinion on coverage, the value of the damaged property and the amount payable, if appropriate. All losses are processed under this uniform procedure, which the Act deems to be known by all parties.
2. THE EXTERNAL LOSS ADJUSTER Considered an Insurance Industry Auxiliary, who is appointed and supervised by the Supervisory Authority. The regulations protect his independence and therefore: (a) Loss adjusting is an exclusive line of business ; (b) The claim file is available to the parties; and, (c) any breach of his duties may be sanctioned with a fine, suspension or even cancellation of license. The Adjuster is empowered by law to gather information from judicial, police or administrative authorities, which facilitates the investigation of cause and quantum.
3. ADJUSTMENT PROCEDURES AND CLAIMS COOPERATION AND CONTROL CLAUSES Time limits range from 45 to 180 days, depending on the type of policy and circumstances of the loss. However, in such cases where the Insurer s liability is not necessarily determined at the time of the event, the adjustment period will be computed from the moment the loss is established (e.g.: In Casualty or Business Interruption losses). These can be extended, provided that plausible reasons are given. The Insured may oppose a request for extension. In such cases, the Superintendency will access the file and may order the report to be issued.
3. ADJUSTMENT PROCEDURES AND CLAIMS COOPERATION AND CONTROL CLAUSES When the adjustment is completed, the Final Report is sent simultaneously to all interested parties, who have 10 to 20 days (depending on the policy type) to challenge its findings and conclusions If the report is not challenged, the Insurer must make the proposed payment within 6 days. If objections are partial, the undisputed amount must also be paid. The parties may agree on a longer payment period, provided they use a non-standard policy wording (i.e. negotiated between the parties).
3. ADJUSTMENT PROCEDURES AND CLAIMS COOPERATION AND CONTROL CLAUSES Claims Cooperation or Control Clauses can be enforced by Reinsurers. However, all requirements and/or instructions must be channelled through the cedant Insurer, within the applicable time limits. The Adjustment Report is considered a private instrument, but may constitute full evidence if the claim ends up in a litigation.
III. The reinsurance contract under the new act
THE REINSURANCE CONTRACT UNDER THE NEW ACT The legal system now regulates the reinsurance contract for the first time. Reinsurance is defined as an autonomous contract intended to protect the insurer s assets. The Act acknowledges that the terms and conditions of the reinsurance contract may be differ from those of the reinsured policy, and allows it to be construed in accordance with international custom and practice.
THE REINSURANCE CONTRACT UNDER THE NEW ACT Insurers are not permitted to defer payments because of reinsurance. This should prevent the inclusion of Available Funds Clauses, which have been widely used in the Chilean market. The Act allows Insurers to assign their rights in the reinsurance contract to the insured. In practical terms, this amounts to a blessing of the One Way Cut Through Clause.
IV. Resolution of conflicts in insurance and reinsurance
1. DIRECT INSURANCE The general rule is that disputes between insured and insurer must be submitted to arbitration. The arbitrator is appointed by mutual agreement - or by the Ordinary Courts if an agreement is not reached. Any kind of prior appointment is prohibited. This does not apply to losses under 10,000 Unidades de Fomento (approx. US$ 450,000), in which the Insured may opt to resort to the Ordinary Courts.
2. REINSURANCE a) Litigation on reinsurance matters is subject to Chilean Jurisdiction, and any agreement to the contrary is null and void. Arbitration may also be agreed, provided that the venue is Chile. b) Once a dispute has arisen, however, the Act allows the parties to agree to submit to international commercial arbitration, which may take place in another country. Chile adopted the UNCITRAL Model Law for International Commercial Arbitration in 2004.
? V. A final thought: is this legal framework beneficial?
A FINAL THOUGHT: Is it convenient to have a Legal Framework such as this one? This is a political question which goes beyond the scope of this presentation. Nevertheless, Chile s 2010 Earthquake and Tsunami provide a solid example that could help us answer this question.
THE FOLLOWING ARE SOME BRIEF INDICATORS 1 It was the 6th worst earthquake in recorded history: 8.8 degrees on the Richter scale
EQ 27/F 2010 2 75% of the Chilean population was affected. The earthquake was felt over an area of 165,796 square kilometers, which includes Chile s 6 main cities
EQ 27/F 2010 3 The Insurance Market received 222,416 claims. Of these, 190,299 were under home insurance policies and 32,117 were business and industrial risks
EQ/ 27F 2010
EQ 27/F 2010 4 Claim payments totalled MM US$6,600 an amount 9.31 times the total assets of Chilean Non-Life Insurance Companies.
EQ 27/F 2010 The performance of the insurance and reinsurance markets may be considered exceptional, because: At December 31, 2011 (only 22 months after the loss)
EQ 27/F 2010 Of the 190,299 home insurance claims, only 63 (0.034%) remained open
EQ 27/F 2010 Of the 32,117 commercial & industrial claims, 1,037 (3.22%) were still being adjusted
EQ 27/F 2010 Today: There are no claims pending adjustment. Less than 20 (0.009%) of the claims ended up in litigation, even though 72,302 claims (32.51%) received no payment. No Chilean insurer or international reinsurer defaulted or delayed payments, which is in itself evidence of a successful adjusting process.
EQ 27/F 2010 HOME AND COMMERCIAL 222,416 CLOSED WITH PAYMENT 150,114 CLOSED WITHOUT PAYMENT 72,302 IN LITIGATION 20 08-05-2014 MAY 12, 2014 MIAMI, FL 37
THE NEW CHALLENGE IS AD PORTAS IT IS CALLED EQ/ 1A - 2014 08-05-2014 MAY 12, 2014 MIAMI, FL 38
EQ/ 1A - 2014
To sum up, a reinsurer who does business in Chile will have the benefit of a transparent, predictable and serious legal framework and market, but will have to play by the book.
Thank You!! JAVIER CARVALLO I PRESIDENT