On the latest episode of "The Standard Formula," host Rob Chaplin is joined by colleague Caroline Jaffer to continue the podcast’s world tour of prudential solvency regimes, this time focusing on the growing insurance sector in Colombia. They analyze the current state of the country’s regime and how it aligns with international standards, review Colombia’s approach to cross-jurisdictional reinsurance and examine how the nation’s insurance regulator is pursuing reforms, among other topics.
Episode Summary
Colombia's total gross written premium (GWP) is projected to reach $8.9 billion this year and grow to over $11.5 billion by 2028, signifying its rise as a significant and expanding insurance market. In this special additional episode of “The Standard Formula,” host Rob Chaplin is joined by colleague Caroline Jaffer explore Colombia's prudential solvency regime, building on their recent episodes focused on Central and Latin America. They examine the regulatory role of the Superintendencia Financiera de Colombia (SFC), Colombia's alignment with international standards through IAIS membership and the country's gradual shift toward a risk-based capital model. Rob and Caroline also discuss progress toward Solvency II adoption, technical reserve requirements and cross-jurisdictional reinsurance rules through the REACOEX registry.
Key Points
- Colombia's Insurance Regulatory Framework: Colombia's insurance sector is regulated by the SFC, which holds wide-ranging powers for licensing, supervision, consumer protection and regulatory enforcement. The Ministry of Finance also retains policymaking authority over the broader insurance sector.
- Shift Toward Risk-Based Capital: Since 2010, Colombia has been gradually shifting towards a risk-based solvency framework. Insurers now calculate required capital based on asset risks, underwriting risk and other exposures, with the minimum capital required to be comprised of paid-in capital, reserves and retained earnings.
- Progress Toward Solvency II Adoption: Colombia is working toward a more extensive adoption of Solvency II, encompassing not only quantitative capital requirements but also governance, risk management, reporting and transparency. One challenge has been the availability of data, leading the Colombian government to foster capacity-building within the insurance sector to ensure an ordered transition.
- Cross-Jurisdictional Reinsurance and the REACOEX: Domestic insurers may cede risk to foreign reinsurers, provided those reinsurers are registered in the REACOEX — the SFC's public registry for foreign insurers and reinsurance intermediaries.
Voiceover (00:01):
From Skadden, The Standard Formula is a Solvency II podcast for U.K. and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Rob Chaplin (00:18):
Welcome back to The Standard Formula podcast. This episode continues our global series on prudential requirements, forming part of our forthcoming encyclopedia of prudential solvency. Today is a special additional episode, following the success of our Central and Latin America series done last September. Welcome to our discussion of the prudential solvency regime of Colombia. Joining me today to navigate this regime is my colleague, Caroline Jaffer. Looking forward to discussing this fascinating jurisdiction with you, Caroline. Could you please start us off by giving us some background as to the prudential solvency landscape in Colombia?
Caroline Jaffer (00:55):
Thanks, Rob. Certainly. Before we begin, our thanks go out to our good friends at Posse Herrera Ruiz for their input and feedback on today's podcast. The insurance sector in Colombia remains modest relative to the size of the broader financial system, but it is growing. Colombia's insurance sector is regulated by the Superintendencia Financiera de Colombia, or SFC, which also regulates other financial institutions such as banks, pensions funds, securities and the stock market.
(01:22):
The SFC has wide-ranging powers, with responsibility for licensing and supervision, but also for consumer protection and regulatory development and enforcement. The Ministry of Finance also retains policymaking powers and is in charge of broader regulations applicable to the insurance sector. Colombia has increasingly aligned its supervisory and prudential systems to international standards in recent years.
(01:45):
The SFC became a member of the International Association of Insurance Supervisors, or IAIS, Multilateral Memorandum of Understanding in 2022. Accordingly, Colombian regulation follows all their guidelines specifically regarding prudential supervision, market conduct, corporate governance and risk management. The regulatory framework for the insurance sector in Colombia can be found in a single statutory regime, specifically the Estatuto Orgánico del Sistema Financiero, together with a unified set of decrees compiled by means of Decree 2555 of 2010. Total GWP in Colombia is projected to reach $8.9 billion this year. So not an insubstantial market, and it is projected to grow over $11.5 billion by 2028. In short, Colombia's a growing insurance market, has an active regulator pursuing reformatory opportunities and is gradually shifting towards a risk-based model.
Rob Chaplin (02:40):
Caroline, that's really interesting. We started to see a pattern develop on foreign reinsurers in jurisdictions. How does Colombia approach this issue?
Caroline Jaffer (02:50):
Colombia's approach to overseas insurers and reinsurers largely aligns with the market access conditions in other nations nearby. Colombian insurance regulation operates on the principle that only authorized and domiciled insurers may conduct insurance business within Colombia. Insurers operating in Colombia must be locally incorporated and must obtain a license from the SFC. Much like other jurisdictions in Latin America, foreign insurers cannot operate in the country without establishing a presence, either by setting up a subsidiary or by registering a branch, and require formal approval from the SFC to do so.
(03:22):
In practice, most foreign entrants form a subsidiary so they can operate locally. For any branches of foreign insurers, the underlying capital backing the relevant liabilities must be assets within Colombia. Regarding reinsurers, the SFC also maintains a public registry for reinsurers known as the Registry of Foreign Insurers and Reinsurance Intermediaries, or the REACOEX for its local acronym, that allows foreign reinsurers to conduct business in Colombia subject to their satisfaction of certain eligibility requirements. Currently, over 200 world reinsurers are part of the REACOEX.
Rob Chaplin (03:54):
Thanks, Caroline. Could you also please give us an overview of the Colombian regime? How much is it like Solvency II or not?
Caroline Jaffer (04:01):
Gladly. Since 2010, Colombia's insurance regulatory environment has been gradually shifting to a risk-based solvency framework. Insurers must show that their patrimonio técnico, equivalent of the minimum capital requirement, is at least equal to their patrimonio adecuado equivalent of the solvency capital requirement, taking into account underwriting assets and market risks and more recently operational risks.
(04:24):
The SFC initially applied fixed minimum capital requirements for insurers, which vary depending on the type of insurance business. However, in more recent years, Colombia has transitioned towards a more risk-based capital model. The move towards a risk-based model means insurers in Colombia are going to be able to calculate their required capital based on the risks they face, such as asset risks, underwriting risk and other exposures. The minimum capital for incorporation of insurers is set by statute from time to time, but is comprised of paid-in capital, reserves and retained earnings. There are certain applicable deductions.
(04:56):
This formula will no doubt begin to now be familiar to listeners. In respect to technical reserves, insurers must also maintain these covering ongoing risk and in-force liabilities, outstanding claims, premium deficiency and deviation. Currently, the insurance sector is working with the government to migrate to a more extensive adoption of Solvency II, not only regarding the quantitative requirements of financial strength of capital, but also focusing on Pillars 2 and 3 regarding governance, risk management, reporting and transparency. One of the challenges in the full adoption of Solvency II has been the availability of data to assess adequate capital requirements. To prevent risks associated with abrupt adoption, the Colombian government has fostered capacity-building within the insurance sector to ensure an ordered transition.
Rob Chaplin (05:40):
Thanks, Caroline. Presumably, there's also a provision for technical reserves?
Caroline Jaffer (05:44):
Absolutely. In accordance with recent regulations, such technical reserves must be calculated by insurers, established and adjusted on a monthly basis. In addition, Colombia has been introducing legislation to align its method of calculating such technical reserves with international standards. Recent regulations mandated that insurance companies adopt IFRS 17 in place of IFRS 4. These regulations were initially aimed to apply beginning January 2027, but in the month of March 2026, the Colombian government extended the adoption deadline to January 2028.
(06:17):
As of 2024, insurers are required to calculate such reserves on a monthly basis and adjust accordingly. The reserves themselves must be backed by appropriate assets pursuant to an investment policy adopted by the board of each insurance company. Specifically, under this framework, assets are weighted by credit risk and factors for underwriting volume with reserves also included in the calculation. The SFC's oversight ensures that an insurer's equity and qualifying subordinated debt cover this required capital.
(06:46):
The Colombian system also emphasizes stress testing as part of its regulatory practices, running regular solvency trusts to gauge the resilience of insurers and the financial system as a whole. While Colombia might not yet have a Solvency II-style model in full, it employs a tailored risk-based approach in practice, which is a significant shift.
Rob Chaplin (07:04):
Thanks, Caroline. As one final point, what is the approach to cross-jurisdictional reinsurance in Colombia?
Caroline Jaffer (07:11):
In Colombia, domestic insurers are able to cede risk to foreign reinsurers, but those reinsurers must be registered and listed in the REACOEX as previously described. Interestingly, if a Colombian cedent places reinsurance with a foreign reinsurer that is not registered with the SFC, then for regulatory purposes, the cedent cannot reduce its provisions to that ceded risk. Effectively, it must retain 100% of the risk. This creates a strong incentive to use registered reinsurers. Foreign reinsurers wishing to establish a local branch in Colombia must comply with prudential requirements similar to domestic reinsurers.
Rob Chaplin (07:44):
So, much to think about then for insurers looking to enter into cross-border reinsurance transactions.
Caroline Jaffer (07:50):
Absolutely. Overall, Colombia has made significant strides in strengthening its prudential framework over the years, and it is moving towards a more flexible framework seen in Solvency II.
Rob Chaplin (07:58):
Thank you, Caroline. It's been great speaking with you, and that brings us to the end of today's episode. We hope that you've enjoyed this episode, and please do reach out with any thoughts or questions. Until next time.
Voiceover (08:09):
Thank you for joining us on The Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future episodes. Additional information about Skadden can be found at skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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