On October 17, 2007, Brazil’s federal agency for private insurance (Superintendência Nacional de Seguros Privados – “Susep”) submitted for public discussion draft regulations for the Brazilian reinsurance market. The reinsurance regulations had been expected since the beginning of the year, following the enactment of a law in January that opened the Brazilian reinsurance market to competition and ended the nearly seventy-year old monopoly of the state-owned reinsurer, IRB-Brasil Resseguros S/A. Comments on the drafts may be submitted to Susep until November 14, 2007. The regulations will likely enter into force by the end of this year or early next year.
The proposed regulatory framework foresees three types of reinsurers: “local”, “admitted” and “occasional”. Local insurers have been given a significant competitive advantage under the draft regulations, as they are granted a right of first refusal to 60% of the premiums ceded by Brazil’s direct insurers under each reinsurance agreement until January 16, 2010, and to 40% of such premiums thereafter. The premiums subject to the right of first refusal may not be ceded to admitted and/or occasional reinsurers unless the retention capacity of local reinsurers has been exhausted, or the local reinsurers have refused or have shown no interest in the business. In addition, only local reinsurers are allowed to reinsure a certain type of life insurance and private pension plans.
The draft regulations set forth a maximum retention limit per risk equivalent to 3% of the local reinsurer’s adjusted net worth. They also provide that the local reinsurer is not allowed to cede under retrocession agreements more than 50% of the premiums that it collects annually. In order to comply with these rules and at the same time fully enjoy the benefit of the right of first refusal, local reinsurers must be well capitalized.
Under the proposed regulations, a “local reinsurer” is a company headquartered in Brazil and incorporated with the sole purpose of conducting reinsurance and retrocession businesses. The minimum capital required to establish a local reinsurer is R$60 million (approximately US$30 million), plus additional capital that varies according to the risks underwritten by the reinsurer. In addition, local reinsurers are required to comply with the regulations applicable to direct insurance companies, which include, inter alia, guidelines for establishing technical reserves, the duty to submit periodic reports to Susep, and guidelines for the investment of technical reserves and other funds.
An “admitted reinsurer” is a foreign reinsurer with representative offices in Brazil that is registered with Susep. In order to obtain the registration, the reinsurer must provide evidence to Susep that it has net assets worth at least US$100 million. It is also required to open a foreign currency bank account at a bank in Brazil with a minimum balance of US$5 million, which will serve as a guarantee fund for its obligations in Brazil. Finally, a reinsurer must provide evidence that it has been rated by a rating agency acknowledged by Susep at least one level above “investment grade” level.
In order to secure a registration, reinsurers must also comply with a variety of documentary requirements, such as providing a power of attorney to a local representative and establishing that the reinsurer is admitted to conduct reinsurance activities in the country where it is headquartered.
Foreign reinsurers with no representative offices in Brazil may register with Susep as “occasional reinsurers”. Several requirements apply to the registration, two of which are particularly noteworthy. First, the reinsurer must provide evidence to Susep that it has net assets of at least US$150 million. Second, the reinsurer must demonstrate that it has been rated by a rating agency acknowledged by Susep at least three levels above the “investment grade” level.
The requirements applicable to occasional reinsurers are less burdensome than the ones applicable to admitted reinsurers (e.g., the occasional reinsurer is not required to open a foreign currency bank account at a bank in Brazil). On the other hand, occasional reinsurers are subject to two important limitations. First, the Brazilian government will set a maximum annual volume of business that direct insurers may cede to occasional reinsurers. This limit – yet to be determined via Presidential decree – will likely be 10% of the total annual premiums ceded by each direct insurer under reinsurance agreements. Further, reinsurers headquartered in tax havens – defined as jurisdictions that feature income tax rates below 20% or that provide for secrecy as to corporate structures or share ownership – are not eligible to be occasional reinsurers.
The draft regulations address a variety of other issues as well, such as reinsurance contracts payable in foreign currency, the reinsurer’s ability to pay an insured party where the insurer has become insolvent, and the ability to submit reinsurance disputes to arbitration.
Thus far, the IRB is the only reinsurer authorized to conduct business in Brazil: the draft regulations state that the IRB shall continue to conduct its activities as a local reinsurer. No other reinsurer is mentioned by name in the drafts, except for the Lloyd’s of London. Given Lloyd’s unique legal status, Susep specifically addressed the possibility of Lloyd’s becoming an admitted reinsurer on behalf of all of its syndicate and underwriter members, a list of which must be submitted to Susep. Under the regulations, Lloyd’s will be liable in the event that any of its members default on payments due to Brazilian insurers.
Brazil’s insurance regulators hope that reinsurers will invest in Brazil. The proposed regulations seek to prevent foreign reinsurers from using fronting partners or incorporating local reinsurance subsidiaries that are undercapitalized in order to benefit from the right of first refusal provisions. Now it is for foreign reinsurers to say if the reinsurance market created by the regulations is sufficiently attractive to justify investing in Brazil.
Marcelo Vieira Rechtman
Marcio Dias Soares