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:

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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