An extract from The Insurance and Reinsurance Law Review, Edition 9

Introduction

Chilean insurance and reinsurance companies can be stock corporations as long as they provide these services only and comply with the special regulations established in the Chilean Corporations Act (companies subject to special regulations).2

The sale of insurance in Chile can be made by a general insurance company (first group) or a life insurance company (second group). The former covers the risk of loss or damage of goods or patrimony. Life insurance companies, on the other hand, cover risks of persons or guarantee, within or upon termination of a certain term, capital, a paid-off policy or income of the insured party or its beneficiaries. Exceptionally, personal risk and health can be covered by both types of companies. Risks related to credit can only be insured by general insurance companies having the sole purpose of covering this type of risk, which could also cover surety and fidelity.

Anyone is free to take out insurance in Chile. Taking out insurance abroad is not forbidden, but insured parties are subject to the legislation governing international charges and taxation. Insurance and reinsurance companies are allowed to underwrite risks arising abroad. Contracting insurance policies with foreign companies not established in Chile are subject to the same taxes applied to the insurance policies signed locally, notwithstanding other applicable taxes.

As regards reinsurance, this can be contracted with the following entities:

  1. national corporations whose exclusive scope of business is reinsurance;
  2. national insurance companies, which can only reinsure risks from the group for which they are authorised to operate; and
  3. foreign reinsurance entities, which are classified by risk-classification agencies approved by the regulator, the Commission for the Financial Market (CMF), and ranked at least within the BBB risk category or its equivalent.3

Reinsurance can be provided by the foreign reinsurance entities at (c) above either directly or through reinsurance brokers registered in the Registry of Reinsurance Foreign Brokers Registry, which is managed by the CMF.

In this respect, foreign reinsurance entities must designate an attorney-in-fact with broad powers to act on their behalf in Chile, including the power to serve and be served with court proceedings. However, it is not necessary to designate an attorney-in-fact if the reinsurance is made through a reinsurance broker registered with the CMF who is deemed to represent the foreign reinsurance underwriters of the reinsurance contract for all legal purposes.

Year in review

Law No. 21,210 of 24 February 2020 established that remote remunerated services provided by non-residents not domiciled in Chile, must pay value added tax (VAT) from 1 July 2020. This tax obligation is only for foreign taxpayers without domicile or residence in Chile who provide remote services to be used in Chile's national territory by natural or legal persons who are not VAT taxpayers.

As regards its impact on insurance contracts agreed outside Chile, the general position can be summarised as follows:

  1. Premiums paid for insurance contracts agreed outside Chile are subject to a 22 per cent withholding tax and exempted from VAT. However, under the new regulations, VAT would apply provided that the premium (1) is related to services rendered or used in Chile and (2) is exempted from the 22 per cent withholding tax because of the application of laws or treaties to avoid double taxation.
  2. The cases expressly exempted from the 22 per cent withholding tax remain the same, namely those related to premiums paid in connection with (1) hull and machinery (H&M) insurance, protection and indemnity insurance (P&I), freight and other insurance related to the maritime industry; (2) aircraft, freight, P&I and other insurance related to the air navigation industry; (3) insurance and reinsurance related to export credits; and (4) insurance and reinsurance related to guarantee payments of obligations towards third parties arising from the financing of concessionaires of public ports.
  3. Reinsurance remains subject to a 2 per cent withholding tax.30
  4. In addition to those at point (a) above, the cases expressly exempted from VAT remain the same, namely those related to premiums paid in connection with (1) import or export cargo insurance, H&M and risks for assets located abroad; (2) earthquake risks; (3) air navigations risks within Chile; (4) reinsurance; and (5) adjustable life insurance.

Given that the VAT changes are relatively recent and as yet there are no guidelines available, this summary proceeds from a conservative standpoint. In this respect, the IRS may in future issue resolutions or guidelines that help to clarify how these changes actually impact the insurance industry.

Outlook and conclusions

Owing to the October 2019 civil unrest in Chile, policies providing or excluding related risks, such as civil disturbance, civil commotion, looting or terrorism, among others, are being tested by local adjusters and courts. This also includes the testing of aggravation clauses, limits and sub-limits wording and deductibles. In addition, it remains to be seen how local policies will deal with the effects of the covid-19 pandemic, particularly in relation to business interruption.