Opening of the Brazilian Reinsurance Market

01/06/2000

Constitutional Amendment No. 13, of August 21, 1996, did away with the federal monopoly on the reinsurance market, which had been in effect since 1939, under the regime of President Getúlio Vargas. The end of this monopoly was accompanied by a series of measures intended to guarantee free competition in the reinsurance market and to allow internationalization of the sector.

The first measure taken was the enactment of Law No. 9,932, of December 20, 1999, which effected the following changes in the insurance legislation: (i) the National Private Insurance Board (CNSP) was authorized to issue general norms for the reinsurance market; (ii) the functions of regulating and monitoring the reinsurance market were transferred to the Private Insurance Agency (SUSEP), a role which had previously been attributed to the Reinsurance Institute of Brazil (IRB); and (iii) for a period of two years as of the privatization of the IRB, local reinsurers have the right of preference to 60% of all reinsurance operations carried out by direct insurers, that is, the firms which have direct contact with final consumers.

CNSP, in turn, issued a number of new resolutions on reinsurance, the most important being Resolution No. 1, of January 14, 2000, which provides the general rules for the functioning of the market after being opened to free enterprise. This resolution provides for three different types of reinsurers, namely, local, admitted, and incidental. The main characteristics of each are described as follows:

a) Local reinsurers have their principal place of business in Brazil and their capital and net worth must be at least R$ 50 million; the same rules apply to them as those in effect for direct insurers;

b) Admitted reinsurers are those with their principal place of business abroad and registered with SUSEP, authorized to install a representation office in Brazil. Their net worth may not be less than US$ 85 million. This minimum requirement is accompanied by various rules for transparency intended to guarantee the solidity of the insurance market as a whole. In addition, admitted reinsurers must present certain guarantees, the most important of which being a joint bank account with SUSEP, having a minimum balance of US$ 5 million;

c) Finally, incidental reinsurers are companies with their principal place of business abroad but not registered with SUSEP. They are subject to virtually the same rules as those which govern admitted reinsurers, but there is a greater degree of rigidity involved.

Besides opening the market to free enterprise, one of the main objectives of the new regulations is to attract investments to the country and strengthen the domestic reinsurance market. A clear example of this policy is the establishment of the right of preference to local reinsurers for a period of two years, a measure which is intended to strengthen the IRB at the moment of its privatization.

The presence of new local and international companies in this market is expected to lead to a quantitative and qualitative increase in the offer of services to direct insurers. As a consequence, it is expected that these insurers will be able to increase their insuring capacity and provide better services. The final result is expected to be the increased development of the insurance market as a whole.

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