Brazil: Major Insurance and Reinsurance Developments in 2008

Last Updated: 22 January 2009
Article by M. Machua Millett

Although all of the Latin American jurisdictions had notable regulatory and market developments in 2008, Brazil stands out as particularly significant given the size of the market involved and the fundamental nature of the developments seen there in the past year.

Reinsurance Explosion

Brazil is by far the largest insurance market in Latin America, representing approximately 44% of the gross written premiums in the region. That being said, with by far the largest population in South America, the 10th largest economy in the world by GDP, low insurance penetration rates and more than 81% of current insurance premiums concentrated in life, auto and fire insurance, the Brazilian insurance market still has tremendous growth potential (estimated by some to be the third best growth potential in the world, behind only China and India). Indeed, Fitch Ratings recently released a report finding that the Brazilian insurance market grew by 15% in 2007 and predicting that, given the country's low insurance penetration and favorable economic environment, the market will experience "consistent growth in the short and medium term . . . ."

Therefore, it came as little surprise that the opening of the Brazilian reinsurance market to competition in early 2008 brought a flood of attention and interested foreign reinsurers to the country.

1. Background: The Monopoly Comes to an End

After many years of debate and an "impending" opening that had lasted some ten years, on January 15, 2007, Complimentary Law No. 126 established a framework for ending the long-standing government monopoly on the reinsurance business in Brazil and opened the Brazilian reinsurance market to private foreign insurers. On December 17, 2007, SUSEP and the National Council on Private Insurance ("CNSP") issued Resolution No. 168, which implemented Complimentary Law No. 126 and established the requirements for foreign reinsurers wishing to underwrite reinsurance in Brazil. Resolution No. 168 became effective on April 19, 2008, effectively opening the doors to private reinsurers to obtain authorization to do business in Brazil.

Complimentary Law No. 126 and Resolution No. 168 established three categories of private reinsurers: (1) local reinsurers (resseguradores locales); (2) admitted reinsurers (resseguradores admitidos); and (3) occasional reinsurers (resseguradores eventuais). Local reinsurers are defined as reinsurers organized under Brazilian law as Brazilian corporations (sociedades anonimas). Admitted reinsurers are defined as reinsurance companies incorporated under the law of foreign jurisdictions that maintain a representative office in Brazil and are registered as such with SUSEP. Finally, occasional reinsurers are defined as reinsurance companies incorporated in foreign jurisdictions that do not have a representative office in Brazil, but are registered with SUSEP.

a. Local Reinsurers

A foreign reinsurer wishing to establish a subsidiary in Brazil to act as a local reinsurer must establish a Brazilian corporation under Brazilian law with the performance of reinsurance and retrocession activities as its sole business. Such a local reinsurer is subject to all local laws and regulations generally applicable to Brazilian insurers, except as otherwise excepted under Brazilian law. A local insurer must hold minimum capital of R$ 60 million (approximately US$ 28 million), plus appropriate risk-based capital as provided by law.

b. Admitted Reinsurers

A foreign reinsurer wishing to establish a representative office in Brazil must meet the following requirements:

  • Authorization in its country of incorporation to underwrite local and international reinsurance in the same lines as it seeks to underwrite in Brazil;
  • Solvency, and operation in its country of incorporation for greater than 5 years;
  • A minimum net worth/surplus of greater than US$100 million or the equivalent;
  • A permanent agent domiciled in Brazil, with broad powers of administrative and judicial representation.
  • The following minimum rating from the following rating agencies: Standard & Poor's (BBB-), Fitch (BBB-), Moody's (Baa3), AM Best (B+);
  • A bank account in foreign currency "linked" to SUSEP with a minimum of US$ 1 million for life reinsurers or US$ 5 million for general reinsurers;
  • A local representative office in Brazil that acts as an independent entity or branch of the company, with a head of the representative office that meets the various requirements to be an office of a local insurance company; and
  • Compliance with annual and continuing reporting requirements to SUSEP concerning, among other things, status, internal controls and supervisory fees.

c. Occasional Reinsurers

A foreign reinsurer not wishing to establish a representative office in Brazil, is permitted to register with SUSEP as an occasional reinsurer if it satisfies the following requirements:

  • Authorization in its country of incorporation to underwrite local and international reinsurance in the same lines as it seeks to underwrite in Brazil;
  • Solvency, and operation in its country of incorporation for greater than 5 years;
  • A minimum net worth/surplus of greater than US$150 million or the equivalent;
  • The following minimum rating from the following rating agencies: Standard & Poor's (BBB), Fitch (BBB), Moody's (Baa2), AM Best (B++); and
  • A permanent agent domiciled in Brazil, with broad powers of administrative and judicial representation.

2. Market Reaction: The Rush to Register

In the months following the opening in April 2008, the reinsurance authorization applications poured into SUSEP, often overwhelming the personnel that had been dedicated to processing these requests. Nonetheless, despite some delays and other minor issues, SUSEP was able to process the flood of requests with relative efficiency. By the end of the year, a total of 41 private reinsurers and some 30 reinsurance brokers had received authorization, with a significant number of applications still being processed. Of the 41 reinsurance companies, 5 received authorization as local reinsurers, 16 as admitted reinsurers and 20 as occasional reinsurers.

Given the market growth and development expected to be spurred in part by the newly admitted reinsurers, SUSEP recently stated that it expects the nation's insurance and reinsurance market to top R$ 100 billion (approximately US$ 62 billion) this year and to grow another 12-15% in the coming year. As discussed below, however, some have already begun to question whether the market can support such a high number of foreign reinsurers.

3. Remaining Issues: Regulatory and Market Limitations

Certain commentators and industry participants lobbied for a further postponement of the opening of the Brazilian reinsurance market on the basis that the country lacked the regulatory and market resources to supervise and support an open reinsurance market. Although these actors certainly had their vested interests in delaying the market's opening, certain questions do remain as to how and whether the Brazilian economy and authorities will be able to sustain and regulate a liberalized reinsurance. Furthermore, although SUSEP placed certain restrictions on the market liberalization in response to the expressed concerns, many of these restrictions have caused more controversy and confusion than comfort among industry players.

a. Restrictions on Liberalization

Although significantly liberalized by the new reinsurance statute and regulations, there should be no mistake that Brazil is not yet an entirely free market, instead having opted for an "orderly opening of the market" reflected in several significant limitations on the role of foreign reinsurers.

1. "Right of First Refusal"

Ceding companies must offer local reinsurers the right of first refusal on at least 60% of the premiums ceded until January 16, 2010 (and 40% for at least three years thereafter). This vetting requirement permits a ceding company to first obtain quotes from foreign reinsurers and then present a quote to local reinsurers, who will have either 5 days (facultative reinsurance) or 10 days (treaty reinsurance) to match such quote. The vetting requirement will be fulfilled when local reinsurers either accept 60% of the risk or when all local reinsurers have refused or partially refused to match the foreign reinsurer's quote.

It is the sole responsibility of the local insurer, not the reinsurer, to comply with this vetting requirement. How this requirement can and will be enforced has been the source of considerable debate among commentators and market participants.

2. Cession Limits

Cessions to occasional reinsurers by a Brazilian insurer may not exceed 10% of the insurer's total annual premiums ceded to reinsurers. Furthermore, no Brazilian insurer or local reinsurer may cede more than 50% of the risk it underwrites annually to admitted or occasional reinsurers. Compliance with this requirement is also the sole responsibility of the local insurer or reinsurer and has likewise caused significant debate as to its manageability and enforceability.

3. "Tax Haven" Restriction for Occasional Reinsurers

No foreign reinsurer may register as an occasional reinsurer if it is incorporated in a "tax haven," a term defined to mean any jurisdiction in which income tax is levied at less than 20% and/or where reinsurance companies are subject to excessively strict rules of confidentiality regarding their constitution and composition. This limitation clearly applies to companies domiciled in Bermuda and poses some concern for companies located in other jurisdictions that might be found to satisfy the definition of "tax haven," such as Delaware. That being said, international companies may use companies organized in acceptable jurisdictions, so long as they meet the other requirements for registration as an occasional reinsurer, and then retrocede to companies based in Bermuda or other "tax havens."

b. Growing Pains and Market Uncertainties

Although business prospects for foreign reinsurers that can negotiate these regulatory hurdles appear bright, a number of significant market issues also remain, including the following:

  • Is the Brazilian reinsurance market, even if it grows as predicted, of a size sufficient to support the recent influx of foreign reinsurer?
  • Will the restrictions discussed above be progressively loosened, remain the same or be further tightened as foreign participation in the Brazilian reinsurance market grows?
  • How, if at all, will admitted and occasional reinsurers be taxed by Brazilian authorities?
  • Will admitted and occasional reinsurers be permitted to resolve disputes with ceding insurers in foreign arbitration or be required to litigate or arbitrate disputes within Brazil?
  • What role will the IRB now play in the Brazilian reinsurance market? Should the further extension of the IRB's right to retrocede to non-registered foreign insurers be seen as a method of smoothing the transition to an open market or a warning sign that the IRB will likely continue to receive favorable governmental treatment?
  • Can enough qualified personnel be found in Brazil and/or brought in from abroad to properly staff branch and representative offices of foreign reinsurers?

Conclusion: Cautious Optimism

Trends in the Latin American economies generally and insurance markets specifically indicate that insurance and reinsurance companies with a dedicated strategy and experienced advisors can take advantage of tremendous opportunities in the region. On the other hand, however, the undertaking of activities in the region without a coherent plan or full understanding of the local regulations and markets can lead to unprofitable operations and significant potential enforcement issues with local regulators.

Given the sorts of local idiosyncrasies that exist in many of the Latin American markets, and the frequent fundamental changes such as those seen in the past year in regulatory requirements, failure to understand and closely monitor market and regulatory developments can impact both a company's profitability and its continuing right to conduct business in the region's jurisdictions. It is therefore imperative that insurance and reinsurance companies operating or considering expansion into the region obtain the assistance of experienced and knowledgeable advisors.

If you would be interested in learning more about these issues and/or insurance and reinsurance developments in other Latin American countries in 2008, we would like to invite you to our free webinar on January 21, 2009 entitled "(Re)emerging Mercados: Significant Recent Developments in the Latin American Insurance and Reinsurance Markets." To view an invitation and register for this event, please click here: http://www.insurereinsure.com/BlogHome.aspx?entry=1279.

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”

Related Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions