Brazil: Brazilian Reinsurance Market - Recent Changes

Last Updated: 14 December 2015
Article by André Alarcon and Bárbara Bassani

Ever since the implementation of Supplementary Law no. 126/07, which put an end to the reinsurance monopoly, the Brazilian market has been undergoing constant changes related to the rules on reinsurance placement and risk capital.  This scenario also includes rules on internal controls, risk-based supervision model, changes in the values of penalties and more thorough inspection by the Superintendence of Private Insurance [Superintendência de Seguros Privados – SUSEP], the Brazilian insurance regulatory agency.

The National Council of Private Insurance [Conselho Nacional de Seguros Privados - CNSP] Resolution no. 168/2007, which regulated the above-mentioned Law and provided for the reinsurance and retrocession activities and their intermediation, was recently amended with regard to the rules on market reserve for local reinsurers and intragroup cessions, by CNSP Resolutions no. 322/15[1], of 7/20/2015; no. 324/15[2], of 7/30/2015; and no. 325/15[3], of 7/30/2015.

The Brazilian cedents may transfer risks to local, admitted and occasional reinsurers.

If the cedent, reinsurer or retrocessionaire belongs to the same financial conglomerate or are related companies, any reinsurance or retrocession must be reported to SUSEP, and there are specific rules applicable to the intragroup transactions.

Prior to the publication of the new rule, the insurer or the local reinsurer could not transfer, to related companies or companies belonging to the same financial conglomerate based abroad, more than twenty percent (20%) of the premium corresponding to each coverage contracted. The new rule changed the maximum limits of the premium of each automatic or facultative contract, in the transfer of risks from the insurer or the local reinsurer to related companies or to companies belonging to the same financial conglomerate based abroad as follows:

I - 20% up to December 31, 2016;

II - 30% as of January 1, 2017;

III - 45% as of January 1, 2018;

IV - 60% as of January 1, 2019;

V - 75% as of January 1, 2020.

The limits are not applicable to the lines of warranty, export credit, agricultural credit, internal credit and nuclear risks, which have permission for cessions in reinsurance or retrocession to a related company or company belonging to the same financial conglomerate based abroad, subject to all other legal and regulatory requirements. Therefore, the lines excluded by the regulatory agency, for purposes of the percentage of related companies, remain the same as those provided for in the previous rule.

Thus, we may infer from the new rule that the limits allowed for related companies or companies belonging to the same financial conglomerates based abroad are gradually increasing, and, by 2020, they will reach a much higher percentage than that currently allowed. Such increase is in line with the intended market openness, which is expected since the publication of the Supplementary Law and has been looked at positively by the insurance and reinsurance market, even though the new rule was not previously discussed, as it was not submitted to public consultation by the regulatory agency for the key players to contribute to its wording, so much so that wording issues and other inconsistencies were soon identified, which led to the publication of a sequence of Resolutions within a few days, until the final version of CNSP Resolution no. 168/07 was consolidated.

It is worth noting that under art 14, par. 5, of CNSP Resolution no. 168/200, introduced by CNSP Resolution no. 232/2011 and later by CNSP Resolution no. 322/2015, ratified by CNSP Resolution no. 325/2015, a related company or a company belonging to a same financial conglomerate is a set of legal entities which are related, directly or indirectly, by stock ownership of 10% or more of the capital, or by effective operating control, defined by common administration or management or by operation in the market using the same trademark or trade name.

However, the concept of related company is different from that set in CNSP Resolution no. 321, published on 7/17/2015, which establishes, among other subjects addressed, the criteria for investments. Art. 2 of said rule defines that related companies are:

  1. affiliated or controlled companies or companies equivalent to affiliated or controlled companies;
  2. legal entities related by interest, direct or indirect, of ten percent (10%) held by the managers and their descendants of the first and second degree of one of the companies, jointly or separately, in the capital of the other company;
  3. legal entities related by interest, direct or indirect, of ten percent (10%) or more, held by controller members (in the case of nonprofit open private pension plan entities) or stockholders of one of the companies, jointly or separately, in the capital or shareholders' equity, as it may be the case, of the other;
  4. legal entities, whose management, in whole or in part, is the same as the management of the supervised one, except offices in collective bodies, under the bylaws or regulation of the company, and provided that those holding the offices have no management power;
  5. legal entities related by operation in the market using the same trademark or trade name.

The concept of related companies or companies belonging to a same financial conglomerate headquartered abroad, for the purpose of prohibition between companies in the same group was already different from the definition of related companies for the general rule set in CNSP Resolution no. 226/2010, which established the criteria for investments by insurers and local insurers so that the publication of new rules affirmed the small conceptual differentiation (CNSP Resolutions no. 321/2015, 322/2015, and 325/2015).

The wording is quite similar and contains common points.

Another change widely discussed in the market is the change in the rules on reinsurance contracts and preferential offering to local reinsurers by the insurers. The insurer's preferential offering of each cession of reinsurance to a local reinsurer remains at forty percent (40%) and it could not be different, given that Supplementary Law no. 126/07 itself provides in article 11 that the cedent will contract with, or make preferential offerings to, local reinsurers of at least 40%[4] of its reinsurance cession.

After the new rules have been issued, in regard to that portion that will be offered preferentially, each automatic or facultative contract must be made at following percentages:

I - 40% up to December 31, 2016;

II - 30% as of January 1, 2017;

III - 25% as of January 1, 2018;

IV - 20% as of January 1, 2019;

V - 15% as of January 1, 2010.

Such limits do not apply to cessions related to the following lines: (i) performance bond; (ii) export credit insurance; (iii) agricultural insurance; and (iv) domestic credit insurance; therefore the line exceptions were kept.

Under the new rules, IRB-Brasil Resseguros S.A. remains authorized to carry out its reinsurance and retrocession activities and qualified as local reinsurer; the deadline for adaptation in regard to nuclear risks was re-set for December 31, 2017, in view that adaptation until the previous deadline (December 31, 2014) proved itself impossible.

The changes introduced in CNSP Resolution no. 168/2007, in July and August, allow, as announced by SUSEP, a system to make the market more flexible, and this has been optimistically regarded, although it is undeniable that a "wave" of uncertainties was raised by the impact of a sequence of rules published in such a short time. In a certain way, this initially generated a period of legal uncertainty and even a temporary interruption to some transactions while the scenario is stabilizing, and this will take place shortly considering the positive aspects, in particular, in view of the deadlines set for the implementation of the new percentages for the cessions.

The rule that insurers and local reinsurers cannot cede, respectively in reinsurance and retrocession, more than fifty percent (50%) of the premiums issued for underwritten risks remains effective, considering their aggregate transactions in each calendar year, and this must be taken into account for risk placement structuring.

In addition to the more impacting changes mentioned above, CNSP Resolution no. 322/15 created an Advisory Commission to propose actions designed to correct any asymmetries between the Brazilian reinsurance regulation and the best global practices. Finally, it is accepted that the Brazilian market must be on the alert for the other markets and adjust whatever may be incompatible with the practices of more developed foreign markets.

Initially, that Commission would be formed by one representative of each body that form the CNSP, two representatives of the consumers and two representatives of the reinsurance segment, and would be presided over by the representative of the Ministry of Finance.

CNSP Resolution no. 325/15 changed the composition of the Commission and now it is formed by one representative of each body that form the CNSP, two representatives of the insurers and two representatives of the reinsurance segment, and will be presided over by the representative of the Ministry of Finance. The "representatives of consumers" were excluded from the composition of the Commission.

The regulatory agent was right at this point, as it is worth noting that, although every insurance contract is a contract to which two parties have to adhere[5], not every insurance contract is a consumer contract. In particular, when it relates to large risks[6], hardly will there be a consumer relation, and using terms that allude to a possible application of the Consumer Protection Code is totally unwise, as foreseen when the Commission was created.

Thus, according to the text of the rule, the National Confederation of General Insurance, Pension Plan and Life Insurance, Supplementary Health and Capitalization Companies will appoint their head and substitute representatives in the insurance segment, and the National Federation of Reinsurance Companies will appoint the head and substitute representatives in the reinsurance segment. At the Chairman's discretion, representatives of segments related to the subject may be invited to take part in the Advisory Commission, which will allow consumers to participate, if and when that is the case.

Changes of reinsurance are not final yet and the rules on formalization of the reinsurance contract are still to be issued, in view of a recent draft of SUSEP's Circular  no. 03/2015 submitted to Public Consultation[7], on 7/6/2015, which sets additional criteria related to art. 37, of CNSP Resolution no. 168/07.

Said article provides that reinsurance contracts must be formalized within two hundred and seventy (270) days from the initial date of coverage effectiveness, otherwise formalization will not be valid, for all purposes and intents, from the beginning. The reinsurer's acceptance, in the reinsurance proposal, is proof of the coverage taken out. The contract must state the proposal date, the acceptance date, the initial date of coverage effectiveness, and the place that will be used as reference to define the time the contract will start to be effective and will terminate.

For the last two years, SUSEP has conducted rigorous inspections of reinsurance contracts [8], and this topic has been discussed by the market many times. For example, some of these discussions refer to: (i) concept of contract formalization; (ii) how contracts are formalized; (iii) when a reinsurance contract is executed; (iv) whether the slip and the acceptance, together, represent the contract; (v) to which extent the reinsurance broker is responsible for such formalization. All of these issues could give rise to one single paper.

In this context and meeting the market expectations, the drafted text of the rule submitted to Public Consultation defines that contractual formalization is the execution of a reinsurance contract by a reinsurer, with date and stamp included. Moreover, the rule submitted to consultation not only seeks to define contractual formalization but also expresses great concern about the cedent.

Cedent's agreement with the terms and conditions of the formalized reinsurance contract must be proved to SUSEP, if it so requires. On defining the reinsurance contract, the draft comprises both reinsurance and retrocession and expressly states the possibility of an electronic or paper contract, also defining how documents will be safeguarded.

The draft also evidences that the cover note, issued by the reinsurance broker, does not replace the reinsurance contract. This issue is quite obvious and does not need to be described in the rule, unless if to completely avoid the misinterpretation by those who defend that the cover note is the contract itself.

Despite some practical difficulties imposed by the drafted text, such as the reference to the need of signature, date and stamp, for purposes of contract formalization, the issuance of the Circular in question is expected by the market, so as to ensure more safety regarding the subject, in view of the thorough inspection of reinsurance contracts over the past years and the different legal interpretations by legal practitioners and by SUSEP on the concept of formalization of reinsurance contracts.

The Brazilian market is heading towards the development and promotion of reinsurance, pursued since the end of the monopoly, with the transformation and consolidation of some concepts a bit vague until then.

In spite of the favorable scenario, new issues will certainly emerge, and only when the market gets used to the new rules and to the way by which the regulatory agency will supervise reinsurance operations, new paths will be pursued. For now, it is early to give an accurate forecast of the market movements.

[1] Such resolution was published on 7/21/2015 and basically provides for market reserve for local reinsurers and intragroup cessions.  The rule amends par. 4 of art. 14 and art. 15 of CNSP Resolution no. 168/2007 and revokes CNSP Resolution no. 232/2011. On 7/22/2015, another Resolution (no. 321) was published with the same wording as that in CNSP Resolution no. 322.

In view of the numbering mistake, CNSP Resolution no. 323 published on 3/23/2015 invalidated Resolution no. 321, published on 7/22/2015.

Thus, CNSP Resolution no. 321/15, published on 7/17/2015, remains in force, and CNSP Resolution no. 321/2015, of 7/22/2015, was revoked.

It is worth pointing out that CNSP Resolution no. 321/2015, published on 7/17/2015, addresses technical provisions, assets reducing the need for technical provision coverage, venture capital based on underwriting, credit, operational and market risks, adjusted equity, minimum capital requirement, solvency recovery plan, retention limits, investment criteria, accounting standards, independent accounting and actuarial auditing, and Audit Committee as regards insurers, open private pension plan entities, capitalization companies and reinsurers.

[2] Published on 8/3/2015, CNSP Resolution no. 324/15 amends art. 49 of CNSP Resolution no. 168/2007 and revokes art. 1 of CNSP Resolution no. 206, of December 17, 2009.

[3] Published on 8/3/2015 as well, CNSP Resolution no. 325/15 approves CNSP Resolution no. 322/2015, with amendments.

[4] Note that in the first three years of the effectiveness of the Law, that portion was sixty percent (60%).

[5] After all, the insurer adheres to the minimum mandatory clauses imposed by SUSEP as, without them, its product is not registered. In turn, the insured adheres to the clauses of the product registered by the insurer, and small changes can be made under specific conditions. With the end of "singular" insurance, the insurers' discretion increasingly becomes limited to the sphere of insurance.

[6] In this case, reinsurance is essential and, for this reason, usually purchased.

[7] At the time, suggestions and comments on the draft of the Circular regarding the formalization of reinsurance contracts could be sent until 8/12/2015.

[8] In most inspections, SUSEP seeks to impose a penalty as it believes that the contract was not executed within the deadline established in the rule or that there was no proof that reinsurance was taken out within the deadline, which gives rise to many discussions on whether it would be possible to use emails and other types of negotiations as evidence. If the contract is not formalized, the penalty will be the fine provided for in article 32, of CNSP  Resolution no. 243/11, ranging from R$ 10,000.00 to R$ 100,000.00.

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.

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