On May 3 2017 the securities and insurance regulator (SVS) published for comment the fifth version of its methodology for determining the risk-based capital of insurers: "Draft Methodology for the Determination of Risk-Based Capital of Insurance Companies, Exercise No. 5 of RBC Application". The initiative is part of its risk-based supervision scheme.

Risk-based capital is a method of determining the minimum amount of capital required for a reporting entity to support its business operations, taking into account its size and risk profile. It also establishes capital requirements for insurers based on the risks to which they are exposed, thus allowing them to mitigate those risks.

The latest version ‒ as well as the conceptual bases developed by the SVS for analysis, discussion and improvement ‒ includes the following changes from the previous version:

  • The capital requirement factor associated with the deferred tax asset account has decreased from 100% to 50% and certain requirements for its application have been established.
  • If the capital requirement causes an increase in deferred tax asset associated with unexpected losses, the insurer may use this to reduce the required capital, provided that it has previously demonstrated that future tax benefits will be available.
  • A correlation matrix calculated with a confidence level of 97.5% by geographical classification is included to incorporate the diversification effect into the share capital requirement.
  • In the case of the technical factors of general insurance, it was concluded that for the reserve risk, these factors should be maintained; in the case of the premium factors, for some lines of business these factors will be changed.

As in previous versions, the latest version instructs all insurers to carry out an exercise of application using the new methodology. These results will allow the standard formula and capital factors to be continually calibrated.

The latest version will be subject to public consultation until July 31 2017. The results of the fifth exercise of application of the risk-based capital methodology should be sent to the SVS by this date.

For further information on this topic please contact Santiago Montt Vicuña at Montt y Cia SA by telephone (+56 22 233 8266) or email ([email protected]). The Montt y Cia SA website can be accessed at www.monttgroup.com.