Adjustment Procedures, Claims Control and Cooperation Clauses, Reinsurance Contracts and Dispute Resolution under the new Contracts Act and Regulations JAVIER CARVALLO I President

I. 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 2012, investments held by Chilean Insurers totalled MM US$ , equivalent to % of Chiles Gross Domestic Product.

1. THE INSURANCE INDUSTRY AS CRUCIAL PART OF THE CHILEAN ECONOMY. The industry has grown continuously - 47% over the last 4 years. Direct premium reached MM US$ 11,399 in December ,058 6,053 6,983 7,497 2,694 3,103 3,713 3,902 LIFENON-LIFE

1. THE INSURANCE INDUSTRY AS A CRUCIAL PART IN THE CHILEAN ECONOMY 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.

2. A MARKET OPEN TO INTERNATIONAL INSURANCE AND REINSURANCE. There is no restriction on buying reinsurance abroad with authorized reinsurers. Lloyds and its Syndicates have been authorised to operate in Chile, as a foreign reinsurance entity, since March 27th, Reinsurance may also be placed through Brokers - who must be registered and have E&O cover.

3. CLEAR, BUT STRICT, LEGAL FRAMEWORK Regulations apply to Public and Private sectors. The entity that supervises the market is the Securities and Insurance Supervisory Authority. The involvement of the Supervisory Authority is based on the constitutional concept ofEconomic Public Order, because public confidence is involved.

3. CLEAR, BUT STRICT, LEGAL FRAMEWORK Supervision is based on two key concepts :solvency andmarket 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.

MAIN SUBJECT OF THIS PRESENTATION: Regulations intended to ensure goodmarket 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. Becomes 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 The only exception is the immediate payment of a claim. 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 anInsurance Industry Auxiliary, who is appointed and supervised by the Supervisory Authority. The regulations protect his independence and therefore: (a) Loss adjusting is anexclusive 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 T ime limits range from 45 to 180 days, depending on the type of policy and circumstances of the loss. These can be extended, provided that plausible reasons are given. The Insured may oppose a request for extension. In such cases, the Supervisory Authority 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 days 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, theundisputed amount must also be paid. The parties may agree on a longer payment period, provided they use anon-standard policy wording (i.e. negotiated between the parties). 3. ADJUSTMENT PROCEDURES AND CLAIMS COOPERATION AND CONTROL CLAUSES

Claims Cooperation or Control Clauses, can be enforced through the 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. 3. ADJUSTMENT PROCEDURES AND CLAIMS COOPERATION AND CONTROL CLAUSES

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 insurers 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 withinternational custom and practice.

THE REINSURANCE CONTRACT UNDER THE NEW ACT Insurers are not permitted to defer payments because of reinsurance. This should prevent the inclusion ofAvailable 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 theOne Way Cut Through Clause.

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.

2. REINSURANCE This leads to a Question: Could two entities, such as Lloyds and the Chilean Association of Insurers A.G., agree in advance upon an international arbitration mechanism, before a dispute has arisen? This is perfectly possible, but it would not be legally enforceable.

V. A FINAL THOUGHT: Is this legal framework beneficial?

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, Chiles 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 Chiles 6 main cities. 2

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

Claim payments totalled MM US$6,600 an amount 9.31 times the total assets of Chilean Non-Life Insurance Companies. 4

The performance of the insurance and reinsurance markets may be considered exceptional, because: At December 31, 2011 (only 22 months after the loss)

Of the 190,299 home insurance claims, only 63 (0.034%) remained open.

Of the 32,117 commercial & industrial claims, 1,037 (3.22%) were still being adjusted

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/ 27F 2010 HOME AND COMMERCIAL CLOSED WITH PAYMENT CLOSED WITHOUT PAYMENT IN LITIGATION 222, ,114 72,302 20

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.

Thank you!! September 11, 2013 JAVIER CARVALLO