Brazil: New Reinsurance Rules – A Change In Course

Last Updated: 2 September 2015
Article by Joao Marcelo Dos Santos

When regulatory environments progress, they do so with uncertainty taking some steps forward, some back, and having periods of silence. The publication of National Council of Private Insurance (CNSP) Resolutions N. 321 and 322 (the last one was replaced by the CNSP Resolution No. 325) seem to duly fit this scenario.

In this context, to understand the impacts of the new rules and their relevance, we will make some comments about the Brazilian reinsurance regulation, including a brief historical introduction to the reinsurance activity in Brazil and information about the most important events since the opening of the Brazilian reinsurance market.

I. The Reinsurance Monopoly

The first major watershed for the Brazilian insurance market was the creation of the former Reinsurance Institute of Brazil (IRB) in 1939. That was a very important time for the country's economy in which strong industrialization and modernization of social relationships demanded a larger supply of insurance and reinsurance as instruments of protection.

Within this context, the IRB's operation as a regulator and monopolistic reinsurer was fundamental for the Brazilian insurance market and for strengthening the companies that operated on it. This occurred through the channeling of the state's efforts to encourage and direct insurance activities.

In 1967 an independent government agency was created whose function was to regulate and supervise the Brazilian insurance market, named SUSEP (in Portuguese "Superintendência de Seguros Privados"), the Private Insurance Oversight Office, while regulation of the reinsurance market remained with the IRB. Separation began between the functions of economic agent and those of regulatory agent and supervisor of private enterprise, though SUSEP had actually integrated into a structure in which state administration predominated.

By the 1980s, it became evident that change was necessary, because Brazilian society only had access to expensive products that were strictly regulated, even in terms of pricing. The negative effects were clearly felt of a closed insurance market both for the participation of foreign capital and for direct contact with the international reinsurance market.

At the end of the 1980s, the regulation underwent two major transformations. There was first a surge of deregulation (with the freeing up of premium charges and brokerage commissions, among other measures), SUSEP increased in importance, and the growing modernization of the insurance business became more evident (i) the archaic vision in which regulation was confused with state planning of economic activities, and (ii) the inadequacy of a reinsurance monopoly.

In fact, the legal framework and existence of a self-regulating monopolistic IRB represented an artifact from the time in which the state "was" the economy and occasionally allowed private agents to operate in partnerships and under its close supervision.

In this context, transformations accelerated the following changes:

  • 1997 – foreign capital was allowed on the insurance market;
  • 1999 – the first, unsuccessful, attempt to privatize IRB Brasil Resseguros SA, with the passage of Law 9932;
  • 2003 – the start of an intense process to adopt international regulatory and supervision standards, which ended with the passage of new rules for capital in 2006;
  • 2005 – a bill of law was sent to Congress to open the reinsurance market;
  • 2007 – Supplementary Law 126 was passed and its regulation finalized the first part of the history of an insurance market that was (i) strictly regulated, and (ii) closed off to foreign capital and to the international reinsurance market.

In 2008, finally the insurance market included the reinsurance business.

II. Opening of the Market

The opening of the Brazilian reinsurance market was based on the Supplementary Law No. 126/2007 and the legislation arising therefrom. Such rules, though not perfect, did the job of creating an environment reliable and attractive to international investments, and capable, to some extent, of fostering the local reinsurance market.

The structure established at that time was of Brazilian companies (local reinsurers) and foreign companies (admitted and occasional) operating in the same market. Under the rules published, local companies had the advantage of preferential offering (initially 60% of the risks ceded, currently 40%), while cessions to occasional reinsurers were limited. This resulted in a model that both attracted international groups to the local market and opened the doors for the reinsurance market to effectively became the driving force behind the development of the Brazilian insurance market.

Three years after the opening, naturally, imperfections and need for changes arose, and the response to it, which came up incorrect in its form, content and strength, was the enactment of CNSP Resolutions No.s 225 and 232.

Aiming at protecting the local reinsurance market, rules on market reserve (in replacement of the preference rules) were created and some strict limits were put to intra-group operations.

On December 10, the National Private Insurance Council - CNSP published Resolutions Nos. 224 and 225, among others. On account of their content and the deadline for their coming into effect, the impact of these new rules could not have been worse for Brazil's image in the local insurance and reinsurance market.

CNSP Resolution No. 224 prohibited the undertaking of any transaction between associate companies when the assignee is domiciled abroad, while CNSP Resolution No. 225 abolished the system of preferential offering to local reinsurers and effectively established a market reserve of 40% of all risks ceded in reinsurance.

Far more than a contradiction to a system that had been carefully discussed and designed, the new rules affected the positive image which the Brazilian insurance regulation authorities were then building up and made room to a number of more serious problems. We may mention, but not limited to, the costs with a complex structure of risk placement (known as "triangulations") and the discouragement towards long-term investments based mainly on reliability.

Brazilian regulation underwent troubled times with some positive and negative initiatives and, in all cases, with a very deficient communication that aggravated the feeling of lack of direction accentuated by the enactment of CNSP Resolutions No.s 225 and 232.

It is important to mention that, at this moment, there are 16 local, 36 admitted and 74 occasional reinsurers operating in Brazil.

III. CNSP Resolution No. 322/15 and CNSP Resolution No. 325/2015

Publication of CNSP Resolution No. 322 (replaced by CNSP Resolution No. 325) may be considered as an attempt to have SUSEP back reaching out for some rationality and safety in its actions.

Firstly, the intragroup risk placements will be progressively increased. Until December 31st, 2016, the limit of 20% of each cession will be maintained. This limit will be increased to 30% from January 1st, 2017, 45% from January 1st, 2018; 60% from January 1st, 2019 and 75% from January 1st, 2020.

Further, the market reserve was replaced by a dual system of (i) a preferential offer of 40% of the contracts to the local reinsurers and (ii) a progressive reduction of the market reserve (40% until December 31st , 2016, 30% until December 31st , 2017; 25% until December 31st , 2018; 20% until December 31st , 2019; 15% until December 31st , 2020.

The progressive reduction of the restriction to intra-group operations is worthy of praise. The 20% limit of operations between related companies was contrary to the market expectations. In fact, the regulation had been structured on the assumption that local subsidiaries could do business in Brazil supported, also with regard to capital and subscription capacity, by their parent companies.

The criticism to be made to the new rule is that keeping the restriction in the long run - even at a much lower percentage but still applicable to every coverage – forces the ceding companies to keep complex structures of risk placement.

The same can be said as to the reduction of the market reserve. If the regulation authority believes that the market reserve is not positive, notwithstanding the fact that some of the worst effects thereof were mitigated by publication of CNSP Resolution No. 241 (that regulates the lack of capacity or interest of the local market in each risk), then the ideal would be to annul it. Keeping market reserve along with the preference rule sets an additional control, among many others, to be kept by Brazilian ceding companies. The costs associated with such controls are not insignificant, both regarding their implementation as well as their maintenance.

The CNSP made a mistake. The Resolution CNSP No. 232 was revoked, but the Resolution CNSP 225 was the one supposed to be revoked. The express revalidation of the preferential offer rules was also necessary. The result is unclear interpretation of the rule and the revocation of the list of insurance lines not subject to the intragroup limitations, with important negative impacts.

In this regard, at least part of this mistake was fixed, with the publication of CNSP Resolution No. 325, which "confirmed the CNSP Resolution No. 322 with amendments", revoking the CNSP Resolution No. 232 and expressly maintaining the validity of CNSP Resolution No. 232.

It is important to mention that the same CNSP Resolution No. 322 created a Consulting Commission within the scope of CNSP in order to propose measures oriented to adopt the best world practices. Regardless of its practical results, it is clear the regulation authority's intent to listen to the market and its institutions, particularly the National Federation of Reinsurance Companies.

IV. Conclusion

Among some positive and negative aspects and doubts, the enactment of CNSP Resolution No. 322 indicates that SUSEP is willing to adjust the legislation, correcting mistakes and making progress in the implementation of reinsurance market rules compatible with international practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.