Last week's release of a new framework for risk-based regulation of Chilean insurers represents a positive step toward the implementation of Solvency II principles.

We generally expect the adoption of stronger risk assessment rules to improve capitalization levels among Chile's insurers, while promoting a better understanding of the industry's financial position through better disclosure.

Chile's securities and insurance industry regulator SVS released the regulatory framework last week, beginning efforts to put risk- based capital standards into law. This process, which will require input from the Treasury and Congress, could require as much as two years to complete.

We regard the establishment of a strong risk-based regulatory framework as an important step at a time when the Chilean insurance industry has the potential to grow rapidly. The stability of the industry is critical given its role in safeguarding the country's savings and pension assets.

Based on our initial assessment of the new regulations, ratings of Chilean insurers are unlikely to be affected in the near term. A move toward stricter capital requirements and better risk management could support stronger credit profiles in the industry over time. However, any move toward higher leverage resulting from a view that risks are being measured more effectively would not necessarily improve the financial condition of the industry.

The outline provided by SVS seeks to define basic principles of risk-based supervision in the Chilean insurance market, while specifying approaches to the reporting of assets, liabilities and equity by regulated insurers.

The regulator has issued the preliminary guidelines in an effort to encourage dialogue with insurers during a period of public comment that will last until April 30. SVS seeks to refine upcoming regulations based on input from the Chilean insurance industry.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at fitchratings.com. All opinions expressed are those of Fitch Ratings.

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