Enacted in December 2011, Law 20.552 contains new rules on mortgage insurance that is collectively offered by lending banks and other financial institutions. The new provisions will become effective on July 1 2012, along with additional rules that the regulator has yet to issue. The regulator has provided a draft regulation to the insurance sector for comments.

The new law applies to insurance associated with housing mortgage loans to protect mortgaged assets or debt payment due to fire and related risks (eg, earthquakes and tsunamis) and debtor's life insurance. Its main purpose is to prevent a mark-up in insurance premiums in favour of financial institutions. Payments or commissions associated with the procurement or management of such insurance are expressly prohibited by law, including the collection of premiums. In addition, the law seeks to increase competition among insurers by requiring an open bidding process for mortgage insurance.

The new law will apply in cases where the party contracting the insurance is an entity that grants mortgage loans. For this purpose, the credit entity must enter into a collective insurance contract on behalf of its debtors, following a bidding process to establish the basis of this insurance. All local insurers must be informed of the bidding process, in order to ensure that any qualified insurer interested in participating is able to submit a bid. Furthermore, notification must be published in a newspaper. Debtors may individually contract mortgage loan insurance, provided that the insurance cover complies with the minimum requirements established by law and equates to that provided under the collective contract. One of these requirements relates to the sum insured, which must be:

  • in case of total loss, equal to the value of the reconstruction, based on an objective parameter that excludes the value of the land; and
  • in case of partial loss, equal to the price of repair or reconstruction, taking into account the building materials and features, with no deduction for depreciation or age.

All interested insurers may participate, provided that they have a risk rating higher than BBB (or its equivalent). Reinsurers that have ceded these risks should have the same minimum risk rating.

The bidding should automatically be awarded to the insurer that presents the lowest price, including a commission for the broker. The technical requirements and capital to be required from participating brokers shall be established by the regulator. According to the draft currently in circulation, three years' experience is required in the mediation of collective insurance for amounts higher than the premium of the corresponding insurance under bidding. In addition to the roles established by the regulation, a broker may be engaged to:

  • collect the premium;
  • inform insured debtors of the contract's conditions;
  • assist the insurer with information required regarding possible amendments to the insured matter; and
  • channel insurance claims and the settlement process between filing of the claim and payment.

For further information on this topic please contact Emilio J Sahurie at Sahurie & Asociados by telephone (+56 2953 0708) or email ([email protected]).