adjustment procedures, claims control and cooperation clauses, reinsurance contracts...

CHILE INSURANCE DAY MAY 12, 2014 - MIAMI, FL

JAVIER CARVALLO

PRESIDENT I CRAWFORD CHILE

Adjustment Procedures, Claims Control

and Cooperation Clauses, Reinsurance

Contracts and Dispute Resolution under

the new Contracts Act and Regulations.



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.


5,058

6,053

6,983 7,497

2,694 3,103

3,713 3,902

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

2009 2010 2011 2012

VIDA GENERALES

♦ The industry has

grown continuously

42,2% over the

last 4 years. Direct

premium reached

MM US$ 11.072 by

December 2013 2013

7,735

2009 2010 2011 2012 2013


LIFE NON-LIFE


♦ 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.


♦ 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.

2. A MARKET OPEN TO INTERNATIONAL INSURANCE AND REINSURANCE


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.


♦ 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.

3. CLEAR, BUT STRICT, LEGAL FRAMEWORK


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.


♦ 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).



♦ 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”.


♦ 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”.

THE REINSURANCE CONTRACT UNDER THE NEW ACT


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.


It was the 6th worst earthquake in recorded history:

8.8 degrees on the Richter scale

1 THE FOLLOWING ARE SOME BRIEF INDICATORS


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

2 EQ 27/F 2010


The Insurance Market received 222,416 claims. Of these,

190,299 were under home insurance policies and 32,117

were business and industrial risks

3 EQ 27/F 2010

EQ/ 27F 2010


Claim payments totalled MM US$6,600 an amount

9.31 times the total assets of Chilean Non-Life Insurance

Companies.

4 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

CLOSED WITH

PAYMENT

CLOSED WITHOUT PAYMENT

IN LITIGATION

222,416

150,114

72,302

20

08-05-2014 37 CHILE INSURANCE DAY MAY 12, 2014 – MIAMI, FL

EQ 27/F 2010

08-05-2014 38 CHILE INSURANCE DAY MAY 12, 2014 – MIAMI, FL

THE NEW CHALLENGE IS “AD PORTAS” IT IS CALLED…

EQ/ 1A - 2014

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.


JAVIER CARVALLO I PRESIDENT

Thank You!!

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