Opening of Brazil’s Reinsurance Market

01/11/2004

Law No. 9,932 of December 20, 1999, which establishes the fundamental rules governing the opening of Brazil’s reinsurance market after the 1996 break-up, via constitutional amendment, of the IRB-Brasil Resseguros S.A. ("IRB") reinsurance monopoly, has just entered into force.  The entry into force of the law had been suspended by Brazil’s Supreme Federal Court in response to a constitutional proceeding brought by Brazil’s Workers Party in June 2000.

The principal argument made by the Workers Party in the proceeding was that the law violated Article 192 of Brazil’s Federal Constitution.  In 2003, the constitutional article in question was amended, causing the Supreme Court to dismiss the proceeding without ever reaching the merits, the Workers Party proceeding having been premised upon a challenge to the old wording of the article.  It is possible that a new proceeding will be brought against the amended constitutional provision, but the law will remain in force barring a new challenge.

The principal innovations found in Law No. 9,932/99 are: (i) conferring general rule-making authority over the reinsurance industry to the Conselho Nacional de Seguros Privados ("CNSP"); (ii) transferring to the Superintendência de Seguros Privados ("Susep") authority to regulate and monitor the reinsurance industry; and (iii) conferring a preference upon domestic reinsurers for the two-year period immediately following the privatization of the IRB for 60% of all reinsurance transactions in Brazil that insurers undertake.  On the basis of these provisions, the CNSP and Susep have issued a series of resolutions and circulars to guide reinsurance industry activities.

The most notable feature of the new law is the protection of domestic reinsurers, which are those established in Brazil with not less than Brazilian Reals $50 million in liquid assets.  Foreign reinsurers are also required under the new law to provide written guaranties in their contracts with local insurers, a requirement that is not imposed in contracts featuring domestic reinsurers.

The opening of the reinsurance market in Brazil will only be complete upon the privatization of the IRB, and when privatization will occur is not known.  Until such time, local insurers can directly obtain reinsurance by contracting for domestic reinsurance, while reinsurance obtained outside of Brazil must be effectuated by the IRB until the privatization is completed. Because the IRB remains the only domestic reinsurer, it retains a de facto monopoly over reinsurance in Brazil.

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