Brazil: Opening The Re-Insurance Market In Brazil

Last Updated: 13 February 2008
Article by Camila Goldberg Cavalcanti

On January 15, 2007, Complementary Law no. 126 ("CL 126") was enacted establishing, among other matters, new guidelines with respect to reinsurance and retrocession policies in Brazil. CL 126 represents a regulatory benchmark for the insurance market in Brazil: since 1996, the Brazilian Reinsurance Institute (Instituto de Resseguros do Brasil – "IRB") was the official reinsurance agency in Brazil and, in this capacity, held a monopoly over the local reinsurance market, pursuant to the Brazilian Federal Constitution.

Strictly speaking, on approval of Constitutional Amendment no. 13/1996, the reinsurance monopoly was extinguished. However, amending the Constitution did not establish the new rules that govern the reinsurance industry in Brazil. Law no. 9,932 was enacted on December 20, 1999 to establish the new rules applicable to reinsurance activities, in light of the changes introduced by the Constitutional Amendment. However, the validity of Law no. 9,932/1999 was soon questioned, based on the argument that under the Brazilian hierarchy of legislation a Complementary Law is required to deal with reinsurance matters, not ordinary legislation such as Law no. 9,932/1999, and several courts rendered decisions suspending the validity of certain requirements established by Law no. 9,932/1999.

In order to remedy this legislative defect, CL 126 was approved, overcoming the questions in the legal community as to Law no. 9,932/1999's validity. Although CL126 effectively ends the legal monopoly held by the IRB in the Brazilian reinsurance market, opening up the market to other local reinsurance companies, the IRB retains its authorize to operate in reinsurance and retrocession, without need for governmental approval, thus immediately being qualified as a local reinsurance company.

Another change introduced by CL 126 is that the IRB no longer supervises reinsurance and retrocession transactions, a role which will now be performed by the Office of the Superintendent of Private Insurance (Superintendência de Seguros Privados – "SUSEP"). Furthermore, certain provisions contained in CL 126 depend on additional regulations, to be issued by the National Private Insurance Council (Conselho Nacional de Seguros Privados – "CNSP"), which, together with SUSEP, has the authority to regulate reinsurance activities. It appears that until the required regulations are issued, the incorporation of a local reinsurance company will not be allowed, and, in practice, during the transition phase, the IRB will continue to be the sole Brazilian reinsurer.

As for reinsurance with foreign reinsurance companies, CL 126 continues to allow foreign reinsurance, but at the same time attempts to protect local reinsurance companies, since it provides that insurance companies which contract reinsurance, or reinsurance companies which contract retrocession, must contract (or give a right of first refusal) to local reinsurance companies for, at least, (i) 60% of its ceded reinsurance, during the first three years after CL 126 has come into effect; and (ii) 40% of its ceded reinsurance, after the first three years. Nonetheless, this is one of the issues on which SUSEP is required to issued regulations, as contemplated by CL 126.

CNSP has eased the transition phase by issuing CNSP Resolution no. 164 of July 17, 2007, which contains regulations that will govern reinsurance and retrocession until the definitive regulations to be issued by SUSEP and CNSP itself are issued and come into effect. CNSP Resolution no. 164 revokes all earlier regulations issued by the CNSP in connection with reinsurance activities.

Although the SUSEP had established regulations in connection with reinsurance under Law no. 9,932/1999, neither CL 126 nor CNSP Resolution no. 164 imported SUSEP's earlier regulations into the new system. Strictly speaking, then, there are no definitive regulations issued by the SUSEP in connection with the requirements established by CL 126, and, consequently, the market is waiting for SUSEP to act so that new local reinsurance companies can begin operations. The new rules should include requirements for admission into the reinsurance market and rules for preferential purchase of reinsurance from Brazilian reinsurance companies, among other terms and conditions to govern the functioning of the reinsurance market in Brazil.

Although there are a number of important issues must still be resolved before the changes consolidated by CL 126 become effective in practice, it is still true that the opening of the reinsurance market in Brazil is a moment of great importance for the Brazilian insurance market. The effective implementation of such changes will be a significant milestone in a new phase of maturity for an industry of undeniable importance to the Brazilian economy.

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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